SME IPO wave: High subscriptions and quick listing gains mask deeper risks

Long hampered by limited access to formal credit and high monitoring costs, India’s small and medium enterprises (SMEs) have traditionally depended on informal sources of finance. Banks often view them as risky because of information gaps and an absence of collateral. Against this backdrop, fundraising through the equity market, via an initial public offering, or IPO, has emerged as a viable alternative, offering firms a chance to scale up, innovate, and professionalise. As the Reserve Bank of India’s October 2025 Bulletin notes, SME IPO listings on the BSE and National Stock Exchange (NSE) platforms surged more than 87 per cent between FY23 and FY25, while the issue size grew 52.7 per cent. India even recorded the highest number of IPOs in Asia last year, reflecting investor appetite and entrepreneurial confidence.

 

The surge in IPO listing has been fuelled by a resilient domestic economy, enabling government policies such as simplified listing norms, and the integration of digital payment systems such as Application Supported by Blocked Amount and Unified Payments Interface has made participation easier for smaller issuers and investors alike. State governments, particularly Maharashtra, Gujarat, Tamil Nadu, and Rajasthan, have played an active role in encouraging SME listing by promoting industrial diversity, formalisation, and ease of doing business. Sectorally, manufacturing continues to dominate, but newer areas such as clean energy, information-technology services, logistics, and education are rapidly gaining ground. India’s retail-investor boom also remains an important factor. The investor base has become younger and more digitally connected, with those below 30 now accounting for nearly 40 per cent of stock market participants. In fact, the median age of investors in the stock market reduced to 33 in July from 38 in March 2019. The result has been that subscription levels in SME IPOs routinely exceeded 100 times the issue size. The promise of quick listing gains has added to the frenzy.

 

Yet, the RBI study flags significant overvaluation in several SME issues, with the price-to-earnings ratio often far above that of industry peers. While close to 90 per cent of SME IPOs list at a premium, many fail to sustain their post-listing performance. The pattern of sharp debuts followed by steep corrections suggests a market driven more by sentiment than by fundamentals. With institutional investor participation still limited, retail exuberance has become the main engine, and also the main risk.

 

Recognising this, the Securities and Exchange Board of India (Sebi) did well to initiate reforms last year, requiring a public disclosure of the draft prospectus, increasing the lockin period for minimum promoter contribution in SME IPOs to five years, a 20 per cent cap on the “offer for sale” portion, and tighter limits on general corporate spending. They remain vital to restoring balance. The profitability threshold and quarterly disclosure norms are expected to further enhance transparency. While the SME IPO boom is both a sign of financial democratisation and a critical financing lifeline for firms that have long struggled to access credit, unchecked exuberance can erode credibility in the long term. For the market to sustain, valuation discipline, investor education, and robust due diligence must complement the current enthusiasm.