India's Small IPOs Underwhelm Investors Eyeing Post-Listing Gains

The frenzy in small and medium segment of India's primary market may just be limited to listing days. Counters tend to drop right after debut as impatient investors rush to sell with eyes on quick profits in the wake of stellar listings.

After delivering multifold gains on debut, almost half the SME companies listed this year were trading below their listing day price, as per data available on exchanges. Nineteen out of the 41 IPOs on the BSE SME segment this year are trailing behind the gains made during their listing.

Further, the per-share value of eleven SME issues was below their issue price despite benefitting from a stellar listing, BSE data shows.

Some companies experience post-IPO share price declines, and this trend varies by company, according to Kresha Gupta, director and fund manager at StepTrade Share Services Pvt. The high investor enthusiasm, initially often driven by FOMO, or fear of missing out, led to oversubscription and inflated share prices, Gupta said.

Many investors who missed out on the IPO would buy shares on listing day, sometimes driving prices without solid fundamental backing, Gupta said. "As a result, prices eventually fell when there were insufficient buyers."

All except one had a positive listing after their fundraiser, with 11 companies seeing a nearly 100% surge on their listing day. This has attracted the Securities and Exchange Board of India's attention, which resulted in capping the listing day gains at 90%.

The large initial lock-in period for investing in SME IPO could also be another reason for quick exits, but not the only reason, analysts said. The minimum application and trading lot size is Rs 1 lakh for retail investors and Rs 5 lakh for non-retail investors.

While substantial capital can be tied up in IPOs, investors generally sell shares when they perceive satisfactory returns or when the share price is justifiable, Gupta said. "Therefore, capital lock-up is not the sole or primary issue."

Rising SME Frenzy In Primary Market

The total amount raised via initial public offering in the SME space doubled in the first six months, compared to the same period last year with 117 companies participating, a surge of over 60%.

In terms of the number and the total funds raised, the first quarter of the current financial year is the highest in the last five years with 50 companies raising Rs 1,632.3 crore, according to data from Prime Database.

Concerns Brew Around Unusual Listing Activity

The primary market of the fifth-largest economy has been under the regulator's scanner for unusual activity and potential malpractices leading to abnormal gains during the scrip's debut. The space has been assuming significance for some time, given the high subscription rates and the early gains made.

In a move to address this issue, the National Stock Exchange has placed an overall cap of 90% on the issue price of SME IPOs. During the special pre-open session, the exchange sets the overall capping to standardize the opening price discovery or equilibrium price across exchanges.

This measure aims to make the initial pricing process fairer and more consistent across stock exchanges, Gupta said.

The markets regulator had previously said that it would look into additional disclosures due to patterns of manipulation in small and medium enterprises' IPOs.

"We do see patterns of price manipulation and certain patterns. The market has advised us on what to do to identify such cases and deal with them," the Securities and Exchange Board of India's Chairperson, Madhabi Puri Buch, said earlier. "The objective is to protect and mitigate the risk of price manipulation."