Mindless pursuit for stellar returns is pushing investors to bid for SME IPOs, some of which are getting subscribed 100-1,000 times. Listing gains from some of these IPOs have been very high, but these returns are not based on fundamentals. The short-term notional listing gains may not always end up in happy situations for investors. Many SME stocks listed last year are trading 50-70 percent below their IPO prices.
There are stocks that are trading with healthy gains as well, but investors must be aware that liquidity in these shares is low, and one cannot easily exit at will. Most of the companies listed on SME platforms of the exchanges have very small operations, generating revenues of a few crores and very little profit. However, the ease of listing and lower compliances allow smaller companies to raise funds from the markets through listing of shares on exchanges. For investors who usually cannot get allocation in IPOs on the main board of the exchanges, try their luck in the SME section. The SME IPOs are also benefiting from the general IPO frenzy in the market.
However, the greed for better returns by investors, especially by retail investors, is turning the SME public issues into a sort of Ponzi scheme. The capital markets regulator—the Securities and Exchange Board of India—has already issued advisory against MSME promoters whipping up euphoria around the public issues. The regulator has admitted that SME promoters hitting the primary markets are unscrupulously projecting unrealistic pictures of their operations and inducing investors to purchase their IPOs. While the advisory is timely, it may not be enough to check the irrational investor behaviour towards IPOs.
Investors should be made aware on a regular basis the pitfalls of such irresponsible investment decisions and unscrupulous promoters must be dealt with strict actions. There must be some checks and balances to curb the frenzy around IPOs. Since Indian markets are in a bull run, all kinds of promoters are trying to cash in on the euphoria. Investors are now so used to ‘astronomical’ returns from any kind of IPOs, they are unmindful of the fact that when tables turn, things can get ugly.