SME IPOs are Highly Risky: Investors Should Make Informed Decisions, Warns NSE’s Chauhan
In the rapidly growing segment of Small and Medium Enterprises (SMEs) initial public offerings (IPOs), caution is essential. Investors should make informed decisions rather than rely on tips or market hype, according to Ashishkumar Chauhan, Managing Director & CEO of the National Stock Exchange (NSE). Speaking at an event organized by NSE to celebrate Moneycontrol Pro reaching one million subscribers, Chauhan emphasized that while the regulators and exchanges are working to address concerns in the SME IPO segment, the responsibility ultimately lies with the investors.
“It’s your money as an investor. Study hard, and don’t invest just because of tips,” Chauhan warned, urging investors to carefully assess the risks before investing in SME IPOs. He highlighted that recent SME listings have not always provided high returns, with several even underperforming. “Last few SMEs haven’t gone up even 5 percent. Many have gone down 5-10 percent,” Chauhan noted, pointing out that blind reliance on market tips without proper research could lead to financial losses.
The Role of Exchanges and Regulators
According to Chauhan, exchanges like NSE and regulators such as the Securities and Exchange Board of India (SEBI) play an essential role in facilitating and regulating the SME market. However, the final decision and responsibility rest with the investors themselves. “It’s your choice, it’s your money. You need to study well,” Chauhan said, adding that the media also has a crucial role to play in educating investors about the risks involved in SME IPOs.
Recent concerns about the SME IPO segment have drawn the attention of both investors and regulators. SEBI has recognized these issues and is actively working to address them. At a recent conference, Ashwani Bhatia, SEBI’s whole-time member, confirmed that SEBI is drafting a discussion paper to explore concerns in the SME market. “The way retail participation is happening, the number of times IPO issues are oversubscribed, the way market making happens, the way underwriting happens, obviously we do not feel very comfortable about what is going on,” Bhatia said. His remarks reflect SEBI’s focus on ensuring that the SME segment does not become a breeding ground for price manipulation, irrational exuberance, or fraudulent trade practices.
Bhatia further explained that both SEBI and the stock exchanges are closely monitoring SME listings to prevent such issues. This includes reviewing how IPOs are oversubscribed and ensuring that the market operates transparently and fairly for all participants.
Historical Context and Risks
Chauhan also took a historical perspective on SME participation, recalling the 1990s when many small companies raised funds through IPOs and then vanished, leaving investors in the lurch. “Old-timers would recall 1993-1994 when a lot of small companies came, raised funds, and then disappeared,” he said, referring to these companies as “vanishing companies.” This period prompted stock exchanges to halt accepting prospectuses from small companies in the late 1990s.
The SME IPO market was eventually reopened in 2012 after a government committee recommended allowing small companies to raise funds again. Initially, there was reluctance from the exchanges, but both NSE and BSE launched the SME segment to provide smaller businesses with a platform to raise capital. Since then, the SME segment has grown significantly, with over 1,000 companies listed on the SME boards.
Despite the growth, Chauhan cautioned that SME investments are still highly risky. Many of these companies lack stable business models, making them susceptible to failure. However, Chauhan also highlighted that some SMEs could yield substantial returns for investors willing to take the risk. He cited Infosys as an example, noting that even though it started as a small company and struggled initially with its IPO, it later became one of the most successful tech companies in India.
Recent Data and Market Outlook
According to Prime Database, in 2024 (up until September), around 205 SME IPOs were launched, collectively raising about ₹7,000 crore. This surge in SME listings reflects the growing interest from both companies and investors. However, Chauhan reiterated that while some SMEs may offer larger returns, they remain a highly volatile segment. The performance of these companies is unpredictable, and investors should be prepared for potential losses as well as gains.
In conclusion, Chauhan’s message is clear: SME IPOs can be an attractive option for those seeking high returns, but they come with considerable risks. Investors must conduct thorough research, understand the risks involved, and not depend solely on market tips or trends. Exchanges and regulators are doing their part to ensure a fair and transparent market, but the responsibility of making informed decisions ultimately lies with the investors.