We will look at what is up with SME IPOs, (i.e. IPO for Small & Medium Enterprises). Is it a disaster in the making?

The story

Delhi-based Resourceful Automobile, which operates just two Yamaha showrooms, filed for an IPO to raise ₹12 crore. Surprisingly, it received a bid of ₹4769 crore! Many other SME IPOs have also seen overwhelming investor response. In 2024 so far, 177 SME IPOs have raised over ₹6400 crore, already surpassing last year’s total.

SME IPOs

Small & Medium Enterprises (SME) IPOs are those companies that have paid-up capital of between ₹1 crore and ₹25 crore. And because they carry a higher risk than the main board IPOs, the minimum investment required to apply for these IPOs is ₹1 lakh. Unlike regular shares, these stocks are traded in fixed-size lots set during the IPO. You can’t buy or sell individual shares—only whole lots.

What’s driving the hype?

After strong interest from high-ticket investors, retail investors gradually joined in, boosting demand further. High demand, combined with limited supply, drove up the prices of many IPOs.

The result? Two-thirds of these IPOs opened at least 50% above their issue price, with several doubling on the first day. Sounds great? Here’s the catch: nearly half of SME stocks listed in 2024 are now trading below their listing-day close, with losses reaching up to 69%.

Lack of transparency

For smaller companies, you mostly rely on their own published information—and no company speaks poorly of itself.

At worst, these companies could be just another local business raising public funds. While not all are bad, the risk of manipulation or fraud is high. The kind of response these companies are getting got even regulators to worry.

NSE’s new regulation for SME IPOs

NSE now mandates that a company must have positive Free Cash Flow to Equity (FCFE) for at least 2 of the last 3 financial years.

In simple terms, after covering all the expenses, including reinvestments, the company should be left with a positive cash balance, known as FCFE.

To conclude

As the quote goes, even a duck looks like a swan in a bull market.

Better stay cautious or keep it simple by investing in small-cap or even micro-cap mutual funds if you want to go for high-risk and high-reward investing.

Let the fund manager do the hectic job of finding good companies for you.