BSE SME IPO index sheds over 13%; enters 'correction' zone over quality, regulatory concerns

Analysts say concerns over inflated valuations and potential manipulation have shaken confidence, with investors fearing regulatory action against companies with questionable IPO practices.

Despite the frenzy around small and medium-sized enterprise (SME) IPOs, the secondary market has delivered a sobering reality check. The BSE SME IPO index has plunged 13 percent in just over a month, slipping into correction territory.

A correction is defined as a decline of 10 percent or more from a recent peak in a short span of time.

After hitting an all-time high of 1,14,991.49 on August 28, the BSE SME IPO index has dropped over 13 percent, shedding around 16,000 points to a low of around 98,290 points on October 7. So far this year, BSE SME IPO jumped 111 percent while in last one year it gained 171 percent.

Analysts say concerns over inflated valuations and potential manipulation have shaken confidence, with investors fearing regulatory action against companies with questionable IPO practices.

Many SME IPOs that were till recently trading at high multiples driven solely by sentiments are now being re-rated, causing profit-taking and price corrections. Market sentiment has turned cautious as investors reassess risks, especially in IPOs with weak fundamentals even as global uncertainties further fuel the sell-off, say experts.

“The recent rally in these indices is largely driven by liquidity and bullish market sentiment. While Nifty and Sensex surged in September, broader market indices lagged, indicating weakening market breadth, which also impacted the SME index,” said Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities.

Incidentally, the BSE SME IPO index has more than doubled when compared to the March lows while BSE SmallCap index is up by 34 percent. Even the mainboard IPO index is up around 32 percent since March.

Meanwhile, the fall in the BSE SME IPO index appears to have accentuated after capital markets regulator Securities and Exchange Board of India (SEBI) warned investors of risks in SME IPOs, despite their strong gains.

Starting August 13, stock exchanges expanded the Enhanced Surveillance Measure (ESM) framework to include companies with a market capitalisation of up to Rs 1,000 crore, up from the previous limit of Rs 500 crore. Introduced in June last year to curb small-cap stock volatility, the ESM now applies to firms with significant price fluctuations.

On August 30, Sebi whole-time member Ashwani Bhatia said new SME IPO regulations are expected by year-end, emphasising that it's too easy for merchant bankers to raise funds and exit.

Sheth believes that going forward, geopolitical tensions and high valuations will likely keep investors cautious, favouring large-caps over small-caps, micro-caps, and SME stocks. A shift in preference towards larger, more stable companies is expected.

Some analysts argue that while the index is correcting, not all SME stocks are overvalued or manipulated. They advise investors to focus on companies with solid financials, growth potential, and strong corporate governance. Despite short-term corrections, India's SME sector still offers significant long-term growth opportunities. For those who can handle the volatility, this dip may present a chance to buy quality SME stocks at better valuations, they say.

Narinder Wadhwa, Managing Director & CEO of SKI Capital said the correction may continue in the short term if regulatory concerns persist and more companies come under scrutiny. Additionally, liquidity in SME stocks tends to be lower, so sharp price movements can exacerbate corrections.

However, once the market digests the regulatory concerns and valuations return to more reasonable levels, the correction may stabilise. Quality companies with solid fundamentals may begin to attract long-term investors again, potentially leading to a recovery, said Wadhwa.

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