Recent SME IPOs saw sharp listing gains, quick reversal: RBI study

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A study authored by the staff of the Reserve Bank of India (RBI) reveals a trend in recent SME IPOs, wherein there are sharp listing gains followed by negative returns within a short period. This decline is even more pronounced in initial public offerings (IPOs) that attracted strong interest from retail investors.

 

The inability of many SMEs to sustain positive returns post-listing coupled with sharp listing gains following increased interest from retail investors in these stocks has prompted the markets regulator Securities and Exchange Board of India (SEBI) to initiate regulatory measures aimed at restoring stability in the SME IPO segment

 

“High demand for certain stocks, combined with limited allotment, often leads to inflated prices as investors compete to acquire shares,” the study authored by Bhagyashree Chattopadhyay and Shromona Ganguly explained, adding that retail investors, drawn by the potential for quick listing gains, often overlook fundamentals, leading to inflated valuations.

 

According to the study, a comparison of the price-to-earnings ratios of 100 SMEs listed in the financial year 2024 (FY24) and FY25 to their respective industry averages reveals signs of overvaluation in some of these stocks. Around 20 per cent of these stocks have price-to-earnings ratios in excessive multiples when compared to their industry peers, it added.

 

“SME IPOs may offer impressive gains in favourable conditions but carry higher volatility and risk during downturns, making due diligence indispensable. Investors should carefully evaluate the company’s fundamentals, growth prospects, and risk factors before committing capital,” the study said.

 

The SME IPO market in India witnessed a strong surge during FY24 and FY25, driven by retail participation, and favourable market sentiment.

 

Data quoted by the study shows, since its inception, both BSE and NSE SME segment witnessed a broadly rising trend of activities except a brief bout of downturn noticed during 2018-2021. Listings grew from ₹7.25 crore in FY12 to ₹824.64 crore in FY17. In FY18, there was a significant increase in issuances totalling ₹2,213.39 crore. There were fluctuations in subsequent years, with lower activity in FY20 and FY21 owing to the pandemic.

 

However, in sync with the post-pandemic economic recovery, there was a surge in SMEs entering capital markets. In FY24, there was a sharp rise with 204 issues opening up and fundraising to the tune of ₹5,971.19 crore.

 

Among the major reasons behind exuberance in SME IPO is the strong interest from retail investors.

 

“Indian stock market is now dominated by young investors, aged below 30 years. In March 2019, this age group accounted for only 22.6 per cent of the total investor base. By July 2025, their share had grown significantly to 38.9 per cent, reflecting a rapid rise in the participation of young investors in the stock market”, the study revealed.

 

Another notable trend the study highlighted is that in the SME IPO market in FY24 and FY25, reveals that in both the years, the issue of fresh capital dominates, comprising over 90 per cent of the total issue. This indicates that companies are raising funds for growth and operational needs rather than allowing existing shareholders’ exit.

 

According to the study, the primary reason for fundraising by SMEs in FY24 and FY25 was capital enhancement or working capital needs. This indicates a focus on improving liquidity and ensuring adequate funds for operational requirements, the study said, adding that the second-largest purpose was expansion, new projects, or investment in plant and machinery, reflecting an emphasis on growth and capacity building.

 

Funds allocated for general corporate purposes provided flexibility for miscellaneous business needs, while a smaller yet notable portion was used to reduce financial leverage, highlighting efforts to diversify funding sources, it said.