Retail Investors Sustain SME IPO Frenzy As Subscriptions Cross 1,800 Times

Market debuts of small companies have garnered immense investor interest of late, reflecting a dynamic shift in the investment landscape. These offerings are significantly oversubscribed, indicating a new found investor interest despite a significantly large ticket size of Rs 1 lakh.

As per regulation, the minimum application as well as trading lot size shall not be less than Rs 1 lakh for IPOs on SME segment of National Stock Exchange and BSE.

The current minimum ticket size for SME IPOs is set at Rs 1 lakh, a threshold established in 2012. "This figure needs to be revised upward. The whole idea was to keep small investors out of this segment because these are very small companies and the investment risk is very high," said Pranav Haldea, Managing Director, Prime Database Group.

After factoring basic inflation, this figure should at least be made Rs 2 lakh if not more, according to Haldea.

The average number of oversubscription rate for SME IPOs in calendar year 2024 stood at approximately 200 times, Haldea said.

This trend underscores a robust investor appetite, and has continued to rise. For instance, HOAC Foods' IPO was oversubscribed 1,834 times, while Magenta Lifecare's offering was oversubscribed 932 times. These figures highlight a notable deviation from the norm, with SME IPOs frequently receiving subscription multiples far exceeding the average.

A key driver behind this trend is the increased participation of retail investors. “In 2019-20, average number of retail applications per SME IPO was just 408. Fast forward to the current fiscal year, and this number has surged to 213,000 applications per IPO, on an average" said Haldea.

Despite the high oversubscription figures and initial listing gains, there is a notable trend of prices falling shortly after listing. Many SME IPOs experience a significant price drop within days of their debut, which raises questions about the initial IPO applicants, market dynamics and the potential for price manipulation. According to Haldea, potential for manipulation remains high in SME IPOs given the low liquidity.

According to some market experts, there are concerns that promoters and brokers, along with their networks, are creating a frenzy around IPOs by inflating subscription numbers. This leads to high initial oversubscription and attracts many retail investors. After the IPOs list successfully, these stocks are often sold off to the retail investors who bought in during the hype. Regulators are now examining the profiles of investors and the aftermath of these IPOs to address these issues, Haldea explained.

Another primary reasons for the rise in SME IPOs is the current state of abundant liquidity in the market. In times of ample liquidity, investors are more willing to commit capital, creating a favourable environment for companies looking to go public.

"SMEs obviously would look at capitalising on this abundant market liquidity (retail/HNI both) to raise capital with relatively lower promoter's dilution" said Mataprasad Pandey, vice president at Arete Capital Services Pvt.

"The present bull run has heightened this trend, as both mainstream and SME IPOs benefit from the increased availability of funds. This liquidity surge provides a golden opportunity for SMEs to capitalise on the favorable conditions, thereby improving their chances of a successful IPO," Pandey said.

When the market is experiencing high valuations, companies can benefit from better pricing for their IPOs. This scenario allows them to dilute their stake less, as the high market prices can lead to a higher valuation of the company. For SMEs, this means that they can achieve a successful IPO with a lower dilution of equity, which is advantageous for the promoters, Pandey explained.

In the current environment, interest rates are at their peak, making debt financing more expensive. For SMEs, borrowing from financial institutions has become costly, and the high interest rates can negatively impact their debt-to-equity ratios. Consequently, raising capital through equity, particularly through IPOs, becomes a more attractive option. This shift helps companies manage their financial structure more effectively and avoids the pitfalls of high debt costs, as per Pandey.