'Froth' lies in expectations too, says Deepak Shenoy on SME IPO rush

Investors need to be 'far more aware' of the investing landscape, and should be doing more due diligence.

There is a case for greater disclosures to be sought from the SME IPOs, however, the 'froth' also lies in the expectations of investors in the SME space, Deepak Shenoy of Capitalmind PMS said on CNBC-TV18, during a conversation on September 3.

Investors need to be 'far more aware' of the investing landscape, and should be doing more due diligence, Shenoy said, adding that people must read disclosures and cannot bet purely based on the Gray Market Premium (GMP) of the public issues alone. "The guardrails should be about the investors understanding the companies."

Shenoy also added that regulations need to support more and frequent disclosures from the SMEs looking to tap the IPO route. Promoters should be fined for poor disclosures, Shenoy suggested.

On the frenzied interest in IPOs, Shenoy said, "Its a procedural problem, as this is was the SME system was designed for", implying the SME IPO exchange was designed for smaller enterprises to find ways to raise growth capital, and not a platform for outsized bids for public issues.

Market regulator Sebi's whole-time member Ashwini Bhatia had hinted at the need for caution in this space, speaking at an event on September 2. "Nobody is actually saying no. I am a banker, and we were taught to say no when necessary." Bhatia added that unfortunately, this rigorous approach is sometimes lacking in the current (SME) ecosystem, including among chartered accountants, merchant bankers, and exchanges.

The regulator is now planning to soon come out with a consultation paper on the listing process in the SME space. Currently, the approval process for the SME IPOs rests with stocks exchanges, which have to do the due diligence and seek disclosures for the applicants. Deepak Shenoy hoped that the exchanges do not tighten too much or seek SMEs to put forth greater Free Cash Flow. "A lot of companies in general do not generate FCF, as they need to re-invest substantially in capex. So, it may not be right for the SME market to demand that."

The market regulator had shared a survey on September 2, which suggested individual investors in IPOs sold shares within a week of listing, in cases where there were gains to be made. This rush for public issues also stems from a trend of rise in demat accounts that were created after Covid-19.

"Many investors are putting money into IPOs just with the intention to make a quick buck,” Bloomberg quoted Vineet Arora of NAV Capital Emerging Star Fund. The buoyant demand for public issues has seen a very strong interest from the retail segment of the market.

Veteran market investor Vijay Kedia too is finding the SME space frothy, and has said that he is not ready to invest in such a market for IPOs or pre-IPOs, preferring the comfort of his earlier investments. "In this kind of market, I will not invest. I am just sticking to my old investments, and I am comfortable. When there is a typhoon, the best thing would be to stay calm," Kedia told CNBC-TV18 during a conversation on September 2, referring to the frenzy in the unlisted or SME space and the pre-IPO placement. "This is clear euphoria, and I would like to stay away," he added, in response to a question regarding the unlisted space and the rush for public issues.

This is just months after Kedia called the frenzy in F&O trading as beginning to 'appear like a stampede'.