Moneycontrol Pro Panorama | SME frenzy

Since the start of the year, the NSE SME Emerge Index has gained 71 percent while the small-cap index has gained 28 percent.

Dear Reader, 

Mid-cap and small-cap stocks have had a dream run in the past six months, beating the bigger companies by a wide margin. However, we will be even more surprised when we dive deeper and look into even smaller companies under the SME segment. Since the start of the year, the NSE SME Emerge Index has gained 71 percent while the small-cap index has gained 28 percent over the same time frame. The Nifty, on the other hand, has given a return of 8.6 percent.

Shares in the SME segment are trading in a world of their own. Broader market sentiments or the company’s fundamentals have little to do with the share price. No wonder, smaller companies are rushing to get themselves listed in this segment. Retail investors are dancing to the tune as long as the music is on.

According to reports, the BSE SME IPO index has gained nearly 1,900 percent since the end of 2019 while the average return from listed SME IPOs in 2023 is over 80 percent. To capitalise on the momentum, 13 more IPOs are planned in the next 10 days. According to the exchange data, a record 135 SMEs tapped the primary market in 2023.

SEBI has warned investors against the frenzy in the segment and introduced measures like increasing their margin for trading or putting them under surveillance, but the rally continues. The regulator has now decided to tighten monitoring of the SME platform by imposing short-term Additional Surveillance Measures (ASM) on SME stocks from October 3. As per the measure, if any share’s price changes by + or – 25 percent in five trading days or some clients dominate the trading in that particular scrip, the exchange can charge up to 100 percent margin for trading such shares.

Frenzy in the SME segment despite strict measures by SEBI suggests either that there is a lot of value left in these stocks despite the regulator raising the warning flag or we are in a bubble situation, where the investor has thrown caution to the wind.

There are some stocks in the SME segment where one can find value, and these companies have strong fundamentals, but there are others where this is not the case. Investors need to be careful in such stocks. When the bubble bursts and investors look for an exit, they will have no shoulder to cry on as SEBI has already given them enough warning to exit. Such investors will have no one to blame but themselves.

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Shishir AsthanaMoneycontrol Pro