Five most overbought SME IPOs of 2024 see 1100x demand amid frenzy

Bets exceed Rs 65,000 crore even as these firms looked to raise a cumulative Rs 60 crore

The IPOs by small and medium enterprises (SMEs) are witnessing an unprecedented frenzy, with investors clamouring to get a piece of the action. The numbers tell the story—the five most overbought SME share sales of the year have seen cumulative bids exceeding Rs 65,000 crore—over 1100x the Rs 59.3 crore these companies were aiming to raise.

The 10 most subscribed SME IPOs of all time have seen subscriptions ranging from 733 times to a staggering 2,014 times. Remarkably, all of these have taken place between December and now.

The smallest first-day gain was 35 per cent (Magenta), while GP Eco Solutions saw a meteoric rise of 394 per cent. The trend is clear—most IPOs are seeing significant listing day gains, fuelling the frenzy.

The Rs 7-crore IPO of advertising firm Maxposure in January saw bids totalling almost Rs 20,000 crore.

Some say the amount riding on small SME IPOs does point to a frenzy, but the high subscription levels are a function of demand and supply.

“When a Rs 10 crore IPO generates bids for Rs 10,000 crore, it doesn’t mean that the company can raise Rs 10,000 crore. It just signals that investors are scrambling to get an allotment. Given the ease of IPO application and the fact that the IPO application amount doesn’t leave the bank account, investors simply apply based on the grey market premium,” said an investment banker.

But what's even more astonishing is that companies without large-scale operations are also joining the IPO bandwagon. A recent instance is Resourceful Automobile, which operates just two bike showrooms in Delhi, yet garnered over 400 times subscription. Another is Broach Lifecare, which runs a 25-bed hospital in Bharuch, Gujarat. The frenzy has raised doubts not just about the rationale behind such IPOs but also about the heightened investor enthusiasm surrounding them.

Such exorbitant demand for SME IPOs comes at a time when there has been no dearth of mainboard IPOs—or the larger size IPOs, which are considered to have gone through better regulatory scrutiny around their financial statements and corporate governance structure.

Notably, investor sentiment towards SME IPOs has not been hit even as the market regulator has passed strictures against some SMEs for siphoning off funds, manipulation by promoters, and fictitious financial statements.

Experts said while there will be some bad apples, the SME listing route has opened the door for equity fundraising for small-scale businesses, which otherwise have to rely on borrowing at high interest rates.

“(These are) small companies, raising small amounts of money. For most VCs, a Rs 12 crore cheque wouldn’t even qualify for a meeting. It's small and tiny. Wouldn't we rather have such companies listed on the SME platform and be transparent? Rather than take on more debt, or try raising from private investors whose only focus seems to be AI and more AI? Listed markets are a better place,” wrote Deepak Shenoy, founder, Capitalmind, on X.

Both the NSE and BSE have separate platforms for listing SMEs. The exchanges also have their own eligibility conditions set for granting approvals for SMEs to list and have tied up with several state governments to onboard SMEs from small cities.

The fund mobilisation by SME IPOs stood at one-fifth of the funds raised by IPOs on the mainboard in July on the National Stock Exchange (NSE), with 22 SME IPOs on NSE Emerge raising Rs 1,030 crore.

As per data on the BSE SME platform, a total of 185 SMEs have migrated to the mainboard. The total market capitalisation of the companies on the BSE SME stood at Rs 67,958 crore.

The inclination of SMEs to list is also visible through the number of filings, which in July neared 30, compared to single-digit monthly filings a year ago. So far in August, BSE SME has received draft documents from 15 SMEs for listing.

For the last year, both the exchanges and Sebi have stepped up vigilance and tightened the listing norms on financials and track records. The exchanges have also imposed a cap on the listing gains for SMEs at 90 per cent.

In the recent past, however, several SMEs have also been caught manipulating financials, engaging in fraudulent pump-and-dump schemes, flouting regulatory norms to profit promoters, and using the platform as an easier route to migrate to the mainboard. This has raised concerns that several investors may be blindly following the frenzy without doing much due diligence on the companies they invest in.

"Compliance for SMEs needs to be increased and the exchanges should firm up evaluation of draft documents, increase surveillance and regulations. Sebi should also step up on the quality of merchant bankers. Further, only individual investors and HNIs should be allowed for subscription while the QIB and anchor portion needs to be done away with," said Arun Kejriwal, founder, Kejriwal Research and Investment Services.

“There are many companies which are eligible for migrating to the mainboard but cannot owing to the high valuations they are currently traded at. Once they migrate, this price will come crashing down," he added. 

Scale of Frenzy

While most SME IPOs have done well amid the market frenzy, concerns persist over froth build-up

Subscription (x)    Issue size (Rs cr)    Bids generated (Rs cr)     Day one price change (%)