SME IPO frenzy disconnected with fundamentals and reflects the 'power of money', says Nilesh Shah

"The SME exchange does not have the best fundamentals to justify current prices or valuation," Nilesh Shah said

The frenzied 400x over-subscription of SME IPO Resourceful Automobile has once again put the question of fundamentals versus liquidity before market participants.

The enormous investor interest and anticipation of quick returns from the BSE's index of Small and Medium Enterprises (BSE SME) is beyond comprehension, and reflects the 'power of money', according to Nilesh Shah, Managing Director, Kotak Mahindra Asset Management, who believes fundamentals will prevail once this tide of money subsides.

"We have seen the power of money in the early 90s, and 2000. But we have also seen once money power goes, fundamentals prevail," Nilesh Shah said in a conversation with CNBC-TV18, referring to the stock market boom of the 1990s, when internet-based companies pushed valuation of technology stocks sky high, and internet IPOs created pockets of severe over-valuation.

Resourceful Automobile, which operates only two Yamaha showrooms in New Delhi and employs just eight people, received a staggering 400 times subscription on its final day of bidding, August 26.

"The SME exchange does not have the best fundamentals to justify current prices or valuation," Nilesh Shah said, underscoring the fact that the BSE SME IPO index has seen a 1.4x growth this year. "There is momentum going on, there'll be few (SME IPOs) who will be good, but majority at this valuation are unlikely to meet investors' expectations."

"I could never imagine the kind of issues would be able to list, let alone get so much of money," said Nilesh Shah.

Nilesh Shah cited the example of OTC Exchange Of India - an exchange set up in 1990 under the Companies Act - with which he was involved during his first job at ICICI Bank. OTCEI was tasked to give capital market access to small and medium companies, and was recognized as a stock exchange, but subsequently collapsed.

Calling the SME IPO index the world's best equity index, Nilesh Shah said it has delivered a CAGR return of 66 percent for last 10 years. Jokingly, Nilesh Shah cited a comparison that the SME IPO index started three decades after Sensex, but has already pipped Sensex in terms of crossing the one lakh milestone, driving the point of the ongoing liquidity rush.

The founder of Capital Mind, Deepak Shenoy, meanwhile, has taken a contrarian view on the SME IPO of Resourceful Automobile, which saw a stupendous subscription that sparked an animated debate on social media.