SME IPOs: Steer clear unless you have deep insight into company

Small size, limited disclosures, and lower scrutiny make them risky bets for retail investors

- SANJAY KUMAR SINGH & KARTHIKJEROME

The BSE recently halted the listing of shares of Trafiksol ITS Technologies, whose initial public offering (IPO) received bids worth ₹10,000 crore and was subscribed 300 times, following investor complaints to the market regulator. At a Confederation of Indian Industry (CII) summit held recently, Ashwani Bhatia, a whole-time member of the Securities and Exchange Board of India (Sebi), voiced concerns about manipulation and fraud in small and medium enterprise (SME) IPOs. He highlighted issues such as promoters inflating their balance sheets and insufficient due diligence by auditors and the market ecosystem. These developments raise the question: Should retail investors invest in SME IPOs at all?

What's driving the SME IPO boom?

Many SME IPOs have been heavily oversubscribed over the past year. Investors who have not joined this gold rush experience FOMO (fear of missing out). "When they hear of colleagues or neighbours making money from SME IPOs, they feel compelled to jump on the bandwagon, throwing caution to the wind," says Deepak Jasani, head of retail research, HDFC Securities.

In an environment where most SME IPOs list at a premium, investors believe there is potential for significant upside if they get an allotment, while the downside is limited. Investors also take cues from the grey market, where premiums suggest these IPOs are likely to perform well.