Initial public offerings: Why retail investors should be wary of SMEs

The SME segment has attracted the interest of retail investors but experts say there is reason to be cautious

- Akshat Rohatgi

On Monday, market regulator Securities and Exchange Board of India (Sebi) launched new investor protection measures covering small and medium enterprises (SMEs). It extended the applicability of Additional Surveillance Measure (ASM) and Trade for Trade (T2T) regulations to the SME segment, following consultations with stock exchanges. These measures were previously limited to mainboard stocks—those listed on the primary market.

To be sure, ASM involves implementation of enhanced pre-emptive surveillance methods from time to time to control price volatility. T2T is a regulatory framework that is used to monitor and control the trading of stocks considered to be highly speculative or illiquid. The new measures, which are effective Tuesday, shines the spotlight on SME initial public offerings (IPOs).

The SME segment has seen an impressive 135 listings so far this year, compared to just 33 in the primary markets. The capital raised through SME IPOs has been the biggest this year since their introduction in 2012.

Industry experts say several SME stocks are seeing remarkable growth, but pinpointing the driving factor can be challenging—be it authentic market optimism or potential market manipulation. SMEs often thrive in specialized markets, showcasing innovative business models or offering distinctive products and services, which can create opportunities for substantial returns on investments.

Incorporating SME IPOs into a portfolio can introduce diversification, spreading risk across various sectors and industries. Notably, the standout performers of 2023 have been Krishca Strapping Solutions and Exhicon Events Media Solutions, both enjoying an impressive surge of nearly 350%, more than quadrupling their initial issue prices. Sungarner Energies’ IPO witnessed a remarkable triple-digit increase on its listing day.

Frenzy for SMEs