SME IPO: Retail Demand Surges 400x Amidst Market Liquidity and Speculation Concerns

The debate over the sky-high subscription figures and massive listing gains for SME IPOs continues, with the latest buzz surrounding Resourceful Automobile’s IPO, which received an overwhelming response of over 400 times the amount sought.

Record-Breaking IPO Response

Resourceful Automobile aimed to raise around ₹12 crore through its public offer, but the IPO attracted bids worth over ₹4,800 crore, surprising many in the market.

SME IPOs have been a hot topic lately, thanks to the heavy interest from retail investors. Almost every SME IPO launched this year has seen the retail category fully subscribed. Non-institutional investors aren’t far behind either, with some SME IPOs being oversubscribed by several hundred times.

Surging Subscriptions and Multibagger Listings

So far this year, more than 25 SME IPOs have received subscriptions over 500 times, and even more have crossed the 200x mark. The listings have also seen phenomenal success, with some SMEs delivering returns of over 300% on the first day. This surge led the NSE to introduce a 90% price cap on listing prices to curb speculation in the unlisted market. Sebi has also issued multiple warnings about the risks of froth in the segment, urging investors to be cautious.

Liquidity, FOMO, and Retail Participation Drive the Market

Analysts attribute the recent surge in SME stocks and their strong listing gains to three main factors: liquidity, FOMO (fear of missing out), and retail participation.

Vaibhav Porwal, Co-founder of Dezerv, explained that high market liquidity has driven exaggerated price movements in smaller, less liquid SME stocks, as investors chase high returns without considering the risks. The increased involvement of retail investors has further boosted interest in the SME segment. However, Porwal cautioned that while this trend might continue in the short term, risks like market corrections and regulatory interventions could slow down the frenzy.

Over-Subscription Doesn’t Always Mean Success

Market expert Deepak Shenoy, founder of Capitalmind, commented that the high demand for these IPOs doesn’t always lead to actual capital being raised by the companies. Using the example of Resourceful Automobile, Shenoy pointed out that investors often keep their money in the bank and bid, knowing that if they don’t get an allocation, the money will be released and they’ll still earn interest. This means that the oversubscription numbers can be misleading.

Sebi’s Warning

Earlier, Sebi issued a warning to investors about promoters presenting an overly optimistic view of their operations post-listing. The regulator noted that some SME companies and their promoters have been engaging in practices that create an unrealistic picture of their business.

A Positive but Cautionary Development

V K Vijayakumar of Geojit Financial Services remarked that while SMEs play a crucial role in India’s GDP and employment, their access to the capital market is a positive development. However, he warned that the recent surge in IPOs of SMEs with little track record and financial strength, driven by retail investors chasing listing gains, could lead to excesses that need to be controlled. History shows that such speculative excesses often end in disappointment.