India’s primary market has been abuzz with activity this year, with small and medium enterprises (SMEs) taking center stage as their Initial Public Offerings (IPOs) become highly sought after by retail investors. Once overlooked, SMEs are now drawing significant attention, reflecting a dramatic shift in investor sentiment and highlighting the growing importance of these businesses in the equity capital market.
In 2024, the enthusiasm surrounding SME IPOs has reached unprecedented levels. By April, 73 companies had raised a substantial Rs 2,323 crore through listings on platforms such as BSE SME and NSE Emerge. This amount represents half of the total raised in all of 2023, a year that itself set new records. Notably, 16 of the top 20 most oversubscribed SME IPOs in history occurred this year, with companies like HOAC Foods India and Magenta Lifecare experiencing demand that exceeded their offerings by over 1,000 times. The five most oversubscribed IPOs alone saw bids totaling over Rs 65,000 crore, far surpassing the initial target of Rs 59.3 crore.
One of the standout examples is Resourceful Automobile, a modest bike dealership with a small workforce and limited showroom presence. When it launched its IPO, the response was overwhelming, with bids amounting to Rs 4,800 crore, vastly exceeding the company's goal of Rs 12 crore. This stark oversubscription has raised concerns among market experts about the speculative nature driving these investments.
Experts like Vaibhav Porwal, Co-founder of Dezerv, suggest that high market liquidity, the fear of missing out (FOMO), and increased retail participation are key factors behind this surge in SME stock investments. Porwal warns that while the current trend might persist in the short term, potential market corrections and regulatory changes could temper this frenzy. He advises investors to exercise caution and focus on the underlying fundamentals of these companies, as speculative excesses could lead to sharp corrections if market sentiment shifts.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, views the rise of SMEs in the capital market as a positive development for India’s GDP and employment but also highlights the risks associated with this trend. Vijayakumar points out that many SMEs with limited track records and financial stability are experiencing oversubscription, driven by investors seeking quick listing gains. Such speculative excesses, he notes, often lead to unfavorable outcomes.
Similarly, Prashanth Tapse, Senior VP of Research at Mehta Equities Ltd, emphasizes the risks posed by high liquidity and FOMO, cautioning that many SME stocks might become illiquid after their listing. The recent demand for Resourceful Automobile's IPO, in particular, raises concerns about potential market overheating and the need for regulatory scrutiny to protect retail investors from potential losses.
On the other hand, Sunil Shah, Group CEO at Khambatta Securities Ltd, offers a more balanced perspective. Shah acknowledges that IPOs have delivered substantial returns in recent years, driven by a bullish market and robust liquidity. He argues that retail investors are participating in these IPOs alongside other investors and stresses that SMEs contribute significantly to India’s GDP. Shah views the influx of SMEs into the capital market as a sign of economic growth and diversification, suggesting that liquidity, while a factor, is not the sole driver of the SME IPO boom.
The broader IPO market in India is also experiencing exceptional growth. Mainboard IPOs in 2024 have already raised Rs 52,018 crore, surpassing last year's total with several months still remaining. This expansion reflects a vibrant market environment, characterized by both excitement and opportunity.
However, amid the excitement surrounding the IPO boom of 2024, investors must maintain a long-term perspective and avoid being swayed by the hype. The surge in SME IPOs is as much about the thrill of participating in new opportunities as it is about genuine investment prospects. As retail investors navigate this dynamic market, the challenge will be to make informed decisions and avoid getting caught up in speculative bubbles. Only time will reveal whether the current enthusiasm will translate into sustained gains or if it will lead to unforeseen pitfalls.
