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SME IPO Fundraising in Early 2024 Reaches Rs 3,000 Cr

June 14, 2024

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Record-Breaking Fundraising in First Half Since SME Platform Launch

In the first half of 2024, fundraising through initial public offerings (IPOs) of small and medium enterprises (SMEs) has achieved a significant milestone, reaching Rs 3,095 crore by June 13. This amount is approximately two-thirds of the total Rs 4,686 crore raised throughout 2023, marking the highest fundraising in the first six months of a calendar year since the SME platform’s inception.

The surge in SME IPOs is primarily driven by strong retail investor interest, spurred by impressive post-listing performance. Initially, high net-worth individuals (HNIs) and experienced investors were drawn to SME IPOs due to their solid returns. The BSE SME IPO index, which tracks the stock prices of companies listed on the BSE’s SME platform, increased by 79.6% in 2024, 96% in 2023, and 42% in 2022.

“SME IPOs are largely driven by retail and HNI investors. The increasing number of dematerialized accounts across the country shows that more retail investors are participating directly,” said Pranjal Srivastava, partner in investment banking at Centrum Capital.

The SME segment is designed for smaller enterprises raising lower amounts, while the mainboard caters to larger, more mature companies. Launched in 2012, the SME platform operates independently from the mainboard with distinct regulations. The minimum application size for SME issues is around Rs 1 lakh, compared to Rs 15,000 for mainboard issues.

The growing demand for SME IPOs has raised concerns about potential manipulation in trading and stock issuance, prompting the Securities and Exchange Board of India (Sebi) to address these issues. Stock exchanges have introduced additional surveillance measures for SME stocks and tightened the criteria for migration to the mainboard.

“Merchant bankers need to be more diligent in selecting suitable companies. We might see policy adjustments for SME IPOs concerning minimum thresholds or enhanced oversight of the secondary market,” commented a banker.

Despite these concerns, market analysts emphasize the need for Sebi to take concrete steps to prevent significant fluctuations in SME IPOs, given the ongoing interest from both issuers and investors. “In SME IPOs, rapid gains on Day One and quick allotments have increased turnover. Investors often ignore warnings when returns are strong, unless some of these companies fail despite oversubscriptions,” observed Ambareesh Baliga, an independent equity analyst.

The higher ticket size, intended to deter retail investors, is no longer a barrier, as many investors are comfortable with bids exceeding Rs 1 lakh. Experts believe this threshold is unlikely to increase. “I don’t foresee much increase in the minimum lot size, which is already six times that of a mainboard IPO. A slight rise in the minimum application fee is unlikely to deter investors,” added Baliga.

Baliga advises investors to thoroughly understand a company and its prospects if they plan to hold shares for the long term.

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