SME IPO index crashes 18% from 52-week highs; is the 'microcap' party over?

Small and medium-sized enterprises (SME) have been hammered hard lately after strict commentary from the Sebi chairperson Madhabi Puri Buch. The euphoria in the SME space has been condensing lately, but some big-ticket SME issues are pushing their way ahead. However, the froth has not entirely fizzled out.

Sebi chief said that the capital markets regulator intends to impose more disclosures as a primary step regarding SME IPOs. The market watchdog has also flagged concerns about price and subscription manipulation in the SME space, safeguarding the interest of retail investors, who were seeing this space as the shortcut to make a quick buck.

The vision with which the SME IPO market started is far from achieved, said Kush Gupta, Director at SKG Investments & Advisory, who expects consolidation in the SME space. Like any other investment cycle, super normal profits are followed by saturation and investors get cautious, he said.

"SMEs offer a platform for profitable companies to access capital for growth, attracting increased equity participation and providing investors with diversification opportunities. While SEBI's protective measures prioritize investor safety, concerns over valuation will likely normalize with profit booking and corrections, fostering sustained growth and stability," Gupta said.

Sebi aims to simplify SME company listings while enhancing investor safety. This entails stricter norms, potentially reducing SME IPO flow initially. However, increased Sebi oversight is expected to improve quality and promote best practices among stakeholders, say market experts.

As the SME IPOs are oversubscribed by a wide margin and usually have stellar listing gains exceeding several times the IPO price, SEBI is intently watching the pattern in the space which is highly suggestive of rampant price manipulation in these companies, said Amit Goel, Co-Founder and Chief Global Strategist at Pace 360

Market regulators are planning to provide investors with a clear framework for understanding the risks that come with investing in these segments to stop the practice of price manipulation, he said. "Further, they are planning to collect feedback from the market participants for the identification of manipulative practices."

On one side, the biggest SME IPO of KP Green Engineering of Rs 189.50 crore is all set to hit Dalal Street, while the BSE SME IPO index has crashed more than 18 per cent from its 52-week highs, hit in February end 2023. The index has tumbled 12 per cent in a week and it is down more than 5 per cent on Wednesday. However, the index has surged 105 per cent in the last one year.

Not only KP Green, Baweja Studios, WTI Cabs and Aplex Solar have raised between Rs 75-97 crore each through their primary offerings in 2024. A total of 43 SME companies have raised a total of 1,477 crore in the current calendar, with no unsuccessful issue. Interestingly, the last failed SME IPO was seen in the year 2019.

In 2023, 183 firms raised about Rs 5,000 crore via their SME issues, while 2022 saw 109 SME companies raising Rs 1,980 crore. However, the euphoria can be sensed when SME fundraising has crossed Rs 1,000 crore mark in just two and a half months of 2024. Interestingly, 951 SME IPOs have raised a total of Rs 15,309 crore via IPO since 2012, with only 8 failures.

However, some experts believe that one should see the positive side of SME space as well. They are seconding the notion of transparency and investor protection are important, but the SME exchanges have proactively enhanced disclosure norms in the offer documents. They suggest investors to maintain confidence in the potential of high-quality SMEs with a word of caution.

While SEBI has raised concerns about potential price manipulation in the SME segment, it's important to not lose sight of the positives that this sector offers. SME Capital markets represent an important opportunity for smaller companies to access equity capital, a critical resource that was previously challenging to secure, said Manick Wadhwa, Director at SKI Capital.

"These enterprises, despite their smaller IPO sizes, have shown resilience and potential, with several noteworthy companies making successful debuts on SME exchanges. While the smaller size of SME IPOs does make these companies more susceptible to market manipulation, it's crucial to highlight the broader context of opportunity and growth," he added.