SME IPOs deliver sharp listing gains but struggle to sustain performance

SME IPOs deliver sharp listing gains but struggle to sustain performance

A study of the aftermarket performance of small and medium enterprise (SME) stocks that debuted in the past two financial years FY24 and FY 25 shows that while many of these issues recorded sharp listing gains, their post-listing performance has been highly volatile and, in several cases, unsustainable. As per the findings of a RBI study on the topic of ‘Fundraising by Indian Small and Medium Enterprises through IPO: Recent Trends and Developments’ by Bhagyashree Chattopadhyay and Shromona Ganguly.

The study reviewed return distributions of SME IPOs across four-time horizons — one week, one month, three months, and six months — and compared them with those of mainboard IPOs listed during the same period. The findings highlight striking differences in risk and return between the two segments.

In the first week after listing, returns for both SME and mainboard IPOs are largely centred around zero. However, SME issues show a much wider and flatter distribution, indicating significantly higher volatility. By the one-month mark, both segments show positively skewed distributions — while most companies register losses, a handful of SME IPOs post very high gains, narrowing the gap between the two categories.

Over a three-month horizon, the divergence becomes clearer. Mainboard IPOs display a narrow and predictable range of returns, whereas SME IPOs show a broad spread, including a few extreme outliers with exceptionally high returns. At six months, the contrast is even sharper, mainboard IPOs maintain stable, modestly positive returns, while SME IPOs display a long tail of high-return outliers alongside a large number of zero or negative-return cases.

The study says, “The inability of many SMEs to sustain positive returns post-listing coupled with sharp listing gains following increased interest from retail investors in these stocks prompted SEBI to initiate regulatory measures aimed at restoring stability in the SME IPO segment” noted the RBI study.

Study further says, high demand for certain stocks, combined with limited allotment, often leads to inflated prices as investors compete to acquire shares. Retail investors, drawn by the potential for quick listing gains, often overlook fundamentals, leading to inflated valuations. A comparison of price-to-earnings (P/E) ratios of 100 SME IPOs listed in FY 2023–24 and FY 2024–25 with their respective industry averages shows that about 20 per cent of these stocks are significantly overvalued.

In response to the growing volatility and speculative behaviour in the SME segment, SEBI has initiated regulatory measures aimed at improving price stability and ensuring that valuations better reflect business fundamentals.

RBI study indicates rising speculative participation in SME IPOs, driven by retail investors chasing quick gains. NSE data show that investors under 30 now form nearly 39 percent of the market, up from 22.6 percent in 2019, reducing the median investor age to 33 years. The influx of young, tech-savvy traders and absence of lock-in norms have amplified demand and volatility in SME stocks.

Study says merchant bankers play a pivotal role in SME IPOs, acting as intermediaries and mandatory market makers post-listing. IPOs managed by reputed merchant banks attract nearly twice the demand compared to others. Their credibility, market expertise, and investor networks enhance confidence and drive oversubscription. This underscores how a merchant bank’s reputation significantly influences IPO success.

As per the Maharashtra led SME listings in the past two years, followed by Gujarat and Delhi. The dominance of Maharashtra and Gujarat reflects strong infrastructure, industrial diversity, and supportive state policies. Several states, including Tamil Nadu and Gujarat, have launched schemes to incentivise SME fund-raising through IPOs, promoting formalisation and entrepreneurship.