Are SME IPOs Safe Or Scam?

Scam

Many believe that SME IPOs are a surefire path to quick riches. However, amidst the hype, there’s a growing concern that some investors might be falling for what could be a financial scam in the making.

An IPO (Initial Public Offering) is when a company offers its shares to the public for the first time. It’s like when a private company decides to “go public” so that anyone can buy a small part of the business, usually to raise money to grow or expand. Investors can buy shares, which means they own a tiny piece of the company, and if the company does well, the value of those shares may increase.

An SME (Small and Medium Enterprise) refers to smaller businesses that aren’t as large or established as big corporations. These businesses might have fewer employees, lower revenue, or smaller operations. 

When an SME launches an IPO, it’s usually to gather funds to grow but without the same level of scrutiny or requirements that big companies face when they go public. 

The NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are two major stock exchanges in India where people can buy and sell shares of companies. Think of them as marketplaces where investors trade stocks.

When a company launches an IPO, it chooses to list its shares on either the NSE, BSE, or both. Once listed, the shares of that company are available for trading on these exchanges. Investors buy and sell these shares through the NSE or BSE, depending on where the company is listed.

Stellar Returns On SME IPOs

2023 proved to be a landmark year for Small and Medium Enterprises (SME) IPOs in India. A record 179 SMEs made their debut in the stock exchanges, setting an all-time high for such listings. 

With many of these IPOs delivering stellar returns – some surging over 400% – it’s easy to see why retail investors are flocking to them in search of high profits. The S&P BSE SME IPO index itself skyrocketed by 98%, adding to the excitement. 

But beneath this impressive performance, some crucial facts often go unnoticed. Are SME IPOs the golden ticket to extraordinary returns?

The Reality Behind the Numbers

While the headline figures for SME IPOs in 2023 may look dazzling, the full picture tells a more complex story. Out of the 179 SMEs that went public, 47 are currently trading at a loss, meaning nearly one in four IPOs is underwater. 

Not only that, but many of these underperformers are witnessing double-digit losses, showing just how risky this space can be. In stark contrast, the mainboard IPOs had far fewer companies in the red, with just four listings registering losses, all of which were capped within single digits.

This disparity underscores the volatility associated with SME IPOs. While there are certainly some standout performers, the risk of significant losses is real, especially for retail investors who might get caught up in the hype of bumper returns. It’s important to recognize that the SME market operates under different rules compared to the mainboard.


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Lower Barriers, Higher Volatility

One of the key reasons for the heightened volatility in SME IPOs lies in the relatively lower regulatory scrutiny these companies face. Unlike mainboard companies, which undergo rigorous evaluation by SEBI, SMEs are primarily vetted by the stock exchanges themselves. Their Draft Red Herring Prospectus (DRHP) doesn’t go through the same stringent checks, leading to a less transparent listing process.

Additionally, the size of the companies entering the SME market is much smaller, with post-issue paid-up capital ranging between ₹3 crore and ₹25 crore. The prerequisites for listing are even more lenient in the NSE, further contributing to the volatility. 

With such small ticket sizes, SME stocks become easy targets for market operators who can manipulate prices with just a few large transactions. This can result in sharp price swings, making it risky for retail investors who may not be able to predict or react to these movements in time.

Liquidity Concerns and Financial Transparency Issues

Another challenge facing SME IPOs is the lack of liquidity in their stock markets. Since the investor pool for SMEs is smaller, sudden buying or selling activity can cause drastic price changes, leaving retail investors exposed to the possibility of being unable to exit their positions when needed. Low liquidity can make it difficult to cut losses, increasing the financial risks associated with these IPOs.

Moreover, SME companies are not required to follow the same stringent financial reporting standards as mainboard companies. This lack of transparency makes it harder for investors to assess the true financial health of an SME before investing. Without detailed and regular financial reports, retail investors are often left in the dark about the company’s actual performance, further adding to the risks involved.

While the high returns of some SME IPOs may be tempting, the risks should not be overlooked. From limited regulatory oversight and volatile stock prices to low liquidity and opaque financial reporting, SME IPOs present significant challenges for retail investors. 

The key is to approach them with caution and a thorough understanding of the potential pitfalls. For those willing to take the risk, there may be rewards, but it’s essential to weigh those against the very real possibility of losses.


Sources: Money Control, Economic Times, FinShots

This post is tagged under: SME IPO, IPO 2023, Stock Market, NSE, BSE, Investing In India, Financial Markets, SMEs, Investment Tips, IPO Analysis, Stock Market India, Retail Investors, High Risk , High Reward, Market Volatility, Stock Trading

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