The IPO Fever: SME Segment Fires Up India's Primary Market; D-Street Records 31 New Issues In July, 22 SMEs

The Indian IPO market is heating up each month as companies increasingly seek to raise funds from investors for business expansion, debt repayments, and new product launches. This surge in activity has transformed the market into a launchpad for companies and a lucrative opportunity for investors.

Investors are notably enthusiastic about IPOs, particularly those from small and medium enterprises (SMEs), which have attracted considerable attention and interest. Many of these SMEs, which entered the public market in the past year, have received overwhelmingly positive responses from retail and non-institutional investors.

In July alone, 31 stocks were listed on Dalal Street, with 22 coming from the SME segment. Out of these, 13 stocks (including both mainboard and SME) are trading over 100% above their issue prices, indicating sustained activity in the secondary market.

Among the top gainers, Nephro Care India is currently trading at Rs 179.6, a premium of 300% above its IPO price of Rs 90 per share. Effwa Infra & Research, another SME stock, is trading 273% above its IPO price, according to Trendlyne data. Other SME stocks, such as Sahaj Solar, Ganesh Green Bharat, Prizor Viztech, Kataria Industries, Aelea Commodities, Divine Power Energy, and Shivalic Power Control, are trading between 150% and 190% above their issue prices.

A factor driving the current IPO surge is the increased financial prudence among promoters. Historically, small companies relied primarily on bank loans to fund expansion and working capital needs. However, heavy debt can burden a business and dampen its appetite for risk-taking.

As a result, promoters are now turning to IPOs as a more attractive alternative for raising capital, allowing them to mitigate debt-related constraints and pursue growth opportunities more aggressively.

Additionally, private equity (PE) and venture capital (VC) investors have taken advantage of favourable secondary market conditions to exit their investments, with offer-for-sale (OFS) transactions surpassing fresh capital issuances.

On the demand side, strong interest from retail investors has continued to grow, with equity inflows sharply rising, particularly after COVID-19. Many investors are drawn to smallcap and penny stocks due to their lower prices, hoping for rapid gains if the companies are fundamentally strong and well-positioned within their industries. While some stocks have indeed rewarded investors with significant growth, others have remained stagnant.

This shift in focus has led investors to favour the lower-priced IPOs of SME companies, which are seen as attractive investment opportunities.

The enthusiasm shown by retail investors for SME IPOs has attracted significant attention from both SEBI and the stock exchanges. In response, the National Stock Exchange has introduced a price control measure, capping listing-day gains at 90% above the issue price for SME IPOs. This new regulation is designed to prevent excessive initial surges in stock prices.

In FY24, the number of initial public offerings (IPOs) surged by 66%, rising from 164 in FY23 to 272. The capital raised through these IPOs also saw a 24% increase, climbing from Rs 54,773 crore in FY23 to Rs 67,995 crore, according to the Economic Survey 2024 report.

The survey highlights that SME platforms experienced a surge in activity during FY24. The number of IPOs and follow-on public offers (FPOs) for SMEs increased by 1.6 times, from 125 in FY23 to 196 in FY24, with the funds raised more than doubling from Rs 2,333 crore in FY23 to Rs 6,095 crore in FY24.

According to the E&Y Global IPO Trends report cited in the survey, Indian exchanges led the world in IPO listings. India's global share of IPO listings grew steadily, reaching 17% in 2023, up from 6% in 2021 and 11% in 2022.