The acid test for BSE SME IPOs is here amid stock market cracks

As of 24 January, all the 64 share indices of the Bombay Stock Exchange (BSE)—spanning sectors, capitalisation and themes—were trading below their highest value for the past year. The question is by how much. 

The bellwether BSE Sensex was down 11.4% over its 1-year high. As many as 53 indices fell by a greater amount, including the BSE IPO, the key index to measure IPO returns. But excluded from this set was the BSE SME IPO, the index for IPOs by smaller companies that chose to list on the ‘SME board’ rather than the ‘main board’ so they are subject to fewer conditions and less scrutiny.

In the past three years, the BSE SME IPO index has grown six-fold, diverging from the BSE IPO index. Part of this variance is because of their respective constructs. As of 24 January, the BSE IPO index had a free float—shares with non-promoters and available to the public—of about ₹1.6 trillion. By comparison, the BSE SME IPO index had a free float of a mere ₹4,000 crore, or about 2.5%.

Tale of extremes

This difference in free float impacts liquidity. On 24 January, the 91 stocks in the BSE IPO index registered a cash turnover of ₹340 crore on BSE, while the 74 BSE SME IPO stocks registered a cash turnover of ₹88 crore. Several BSE SME IPO stocks saw only a few hundred to a few thousand shares change hands. A lower entry bar for an IPO and thin liquidity can be a recipe for market manipulation by promoters and operators.

Also read | tier-II companies are likely to drive India’s IPO boom in 2025

Low liquidity accentuates both rises and falls in share price. The exceptional performance of SME IPOs, as reflected in the index spurt, is concentrated. An analysis of all IPOs since 2017 shows that, as of 24 January, a greater share of IPOs on the SME board had doubled in value than on the main board (35% versus 28%). However, a greater share of SME IPOs was giving negative returns over the issue price than on the main board (41% versus 33%).

Raising the bar

The Securities and Exchange Board of India has been worried about the numbers being racked up on the SME board. In December, Sebi raised the entry bar for companies looking to go public via the SME board, including on fund usage, profit criteria, and promoter lock-in. It remains to be seen whether that will curb excesses, increase liquidity, and improve issue quality.

Also read | Mint Explainer: Sebi’s latest reforms for SME IPOs, merchant bankers, and mutual funds

Over the long run, and as a set, IPOs on the main board have preserved capital better than those on the SME board. For instance, since 1 January, 2017, the BSE Sensex has trebled in value. But even in this period that has lifted all boats, only 67% of main board IPOs and 59% of SME IPOs have yielded positive returns. Further, even when split by years in which an IPO was issued, the main board has fared consistently better than the IPO board.

Pipeline prospects

Amid the market’s stumbles, another question is what happens to the pipeline of new issues. The lure of multi-bagger returns in quick time has drawn retail investors to IPOs. That expanding collective has encouraged companies, of many hues, to go public. That growing pulse is reflected in the pattern of filings of draft red herring prospectus (DRHP)—the document filed with Sebi by companies looking to go public.

Over the last six months or so, monthly DRHP filings have moved to a higher trajectory. Thus, the monthly average of DRHPs shot up from about 7 in 2022 to 9 in 2023 to 13 in 2024. For the last six months of 2024, the monthly average was 18. January has seen no let-up, with 23 DRHPs having been filed till 24 January. This was the second-highest number in the past three years, after 25 in October 2024. As the market realigns to new realities, so could this number.

Also read | India IPO share sales rise to record in 2024

www.howindialives.com is a database and search engine for public data