SME IPO mirage: Debut dazzle, long-term damage

India’s SME IPO market, with far lighter listing requirements than the mainboard, has rarely lacked takers. How else can one explain frenzied bidding for a two-showroom motorcycle dealer, a regional chakki atta maker or a farming business deriving most of its revenues from pomegranates? Even repeated instances of fund diversion, mismatched accounts and untraceable entities have barely dented investor appetite.

The lure is simple: spectacular listing gains. That appetite has endured despite a challenging market. Amid geopolitical uncertainty and weak sentiment, just 27 mainboard IPOs have hit the market this year. SME platforms, however, have seen more than three times that number. No mainboard IPO has delivered a 50 per cent listing gain in the past six months. By contrast, eight SME IPOs have achieved the feat, including three that nearly doubled on debut in the past month alone — making even Phir Hera Pheri‘s famous “25 din mein paisa double” promise look conservative.

Yet, beneath the listing-day fireworks lies a sobering reality: nearly half the SME companies listed over the past decade now trade below their issue price. A bl.portfolio analysis of Capitaline data show that 518 of the 1,052 companies listed on the BSE and NSE SME platforms since January 2016 — or 49 per cent — are currently below their offer price. For investors who bought at the offer price and held on, those are uncomfortably close to coin-toss odds. Contrast this with the mainboard where a much lower 36 per cent are in the red.

The numbers expose the gap between the SME market’s fundraising boom and its promise of long-term wealth creation. While new issues have multiplied, post-listing performance has often disappointed, even over longer holding periods.

The return profile of SME IPOs is highly polarised. While some companies have created spectacular wealth, many more have delivered disappointing returns. Of the 1,052 SME companies listed since January 2016, 377 (36 per cent) have fallen more than 25 per cent from their issue price, including 80 that have lost over three-fourths of their value.

At the other end of the spectrum, 259 companies (25 per cent) have more than doubled from their IPO price, including 131 that have generated returns of over 250 per cent. However, only 63 companies — just 6 per cent of the total universe — have delivered multibagger returns exceeding 500 per cent.

Heavy oversubscription, meanwhile, proved no substitute for due diligence. Of the 294 SME IPOs subscribed more than 100 times, 134 (46 per cent) now trade below their issue price. As many as 102 (35 per cent) have fallen more than 25 per cent. Yet returns remain sharply polarised: 28 per cent have more than doubled, 21 have delivered returns above 500 per cent, and 10 have crossed the 1,000 per cent mark.

Resourceful Automobile exemplifies the phenomenon. Its ₹12-crore IPO was subscribed 396 times, despite the company operating just two Yamaha dealerships with a workforce of eight. It listed flat and now trades 51 per cent below its issue price.

The sectoral break-up paints a similar picture. Among sectors with meaningful representation, Trading has been one of the weakest performers, with 42 of 74 stocks (57 per cent) trading below their issue price and 25 companies losing more than half their value. IT-Software presents a mixed bag. While 42 of the 76 companies trade below their issue price, the sector has also produced 17 stocks that have more than doubled. Textiles, with 51 listings, has also disappointed investors, with 61 per cent of its companies in the red, including 16 stocks that have more than halved.

On the wealth creation side, the Capital Goods sector led with 25 stocks with attractive returns from a universe 54 companies, followed by IT-Software (17 of 76), Trading (15 of 74), Infrastructure Developers (11 of 55) and FMCG (11 of 49).

For years, the SME IPO market was seen as a hunting ground for quick listing gains rather than long-term inves...