Last week, Sebi Chair Madhabi Puri Buch raised concerns over signs of price manipulation in SME IPOs and said the regulator is now looking to mandate additional disclosures for listings of such companies.
Of the 7 debuts that took place after the comments from Buch, 6 were positive, and 4 of them listed with over 40% gains. The highest return went as high as 100% (Signoria Creation) on the D-day.
Even though the SME IPO index crashed in the immediate panic aftermath of Sebi’s cautious note, the yardstick barometer for newly listed SME companies more or less stabilised. In the last 5 days, the index rebounded 0.6%, quashing the traditional views, who forecast the crash to last much longer.
The investor demand was also unruffled as all the issues sailed through and at least two companies received subscriptions of over 300 times. Unsurprisingly, much of the demand was led by robust retail participation. Of the 7 IPOs since Buch’s comments, 5 of them saw the retail category getting subscribed over 20 times.
So, are retail investors the rock behind the SME segment? Analysts said while retail participation can be a positive force in any market, there are concerns about their role in SME IPOs.”Liquidity, or the ease with which a stock can be bought and sold, is often low in this segment. This can lead to high volatility and difficulty exiting an investment once made. Historically, many SME IPOs have listed with significant gains (40-50%), but these gains haven’t always been sustained, and some companies may have been overpriced at listing,” said Arpit Jain, Joint MD, Arihant Capital.One other possible reason behind the resilience of SME IPOs is the persistence of the grey market premium (GMP) business. GMP refers to the unofficial premium, investors expect a stock to trade at after listing. This can entice retail investors seeking quick gains, even if the underlying fundamentals of the company aren’t as strong.
Notwithstanding the broader market sentiments, the demand for an IPO ultimately boils down to the business model, future growth potential and sound fundamentals.
“SME companies with good business prospects and sound promoters will continue to find takers in the market. On the other hand, companies with weak prospects will find it difficult,” said Atish Matlawala, Sr Analyst, SSJ Finance & Securities.
Smaller mainboard IPOs suffer
Sebi scrutiny appears to be having a more pronounced effect on smaller IPOs in the mainboard segment. Unlike SME IPOs, these offerings haven’t seen the same level of post-listing gains. In fact, the last 5 mainboard IPOs have listed at a discount or barely above their issue price.
“This suggests that investors are becoming more cautious about valuations, particularly when compared to the potentially inflated valuations seen in some SME offerings,” Jain said.
What’s ahead?
Analysts believe the additional disclosures for SME companies will lead to greater transparency and ensure investors make an informed decision.
“Our advice is to invest only in those companies which have sound business models and a good history of promoters. Avoid investing in SME to make quick money,” Matlawala noted
Given the increased scrutiny and potential for manipulation, investors may need to be highly selective when considering SME IPOs.
With the regulator’s focus on transparency and disclosures, the SME segment, according to Jain, may evolve to become a more reliable investment option in the long run. However, for now, caution and careful analysis are essential.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
