Boom in SME IPOs and Regulatory Changes

July 5, 2024

Chances are you have heard about SME IPOs a lot over the last couple of years. Since April 2020, India has seen close to 500 Small & Medium Enterprise (SME) IPOs that have raised about ₹12.5k crores. This sounds like a win for SMEs in the country. 

Here’s a look at how these SME IPOs have fared:

The above numbers may suggest that SME issues are performing well – in some cases, better than mainboard issues. You can also see the chart above that shows the listing gains for all SME IPOs since April 2020. But all might not be rosy. 

Yesterday, i.e., 04 July 2024, NSE introduced a 90% cap in the pre-open price discovery session for SME IPOs. BSE already has this limit in place.

Pre-open Session

On the day of listing, an hour-long pre-open session is conducted to determine the listing price. For mainboard IPOs, the listing price can be anything, irrespective of the issue price. However, now the maximum difference between the issue price and the listing price will be 90%.

Impact on SME IPO Performance

Does this mean SME IPOs will perform more poorly now? The cap on price discovery during the pre-open session ensures that these stocks are not manipulated or exposed to volatility that can attract retail investors only to hurt them later. The price circuits that normally apply during the day—2%, 5%, or 10%—will remain unchanged. These are based on the size of the issue.

Reasons for the Change

SEBI has concerns about price manipulation in SME issues and has introduced several other changes to act as guardrails.

Other Changes

  • Validation of PAN: Duplicate applications will not be allowed by the exchange.
  • Pre-screening Eligibility: Special categories like employees or shareholders will have their eligibility screened at the exchange level.

Existing Validations

Haven’t these validations always existed? Yes, they have. Registrars & Transfer Agents (RTAs) validate applications to check for duplicates or ineligible bids, and allotments are not made to these applications. Now, the exchange ensures these applications are not accepted at all, so they never show up in the IPO subscription numbers, which may incite more interest from investors.

Previously, the modus operandi to generate interest involved applying with, say, 100 duplicate applications. If the money is blocked, the exchange displays all as valid. Retail investors see more interest in these IPOs and apply. The person who has blocked their 100 applications doesn’t have to take up any allotment since the RTA will reject the applications.

These changes aim to create a fairer and more transparent environment for SME IPOs.

VP, IPOs & Payments, Zerodha

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