SME IPO Market Faces Volatility With Sharp Listing Gains Followed By Quick Declines: RBI Study

New Delhi, Oct 22 (KNN) A Reserve Bank of India (RBI) study has highlighted growing volatility and signs of overvaluation in India’s small and medium enterprise (SME) initial public offering (IPO) market, even as the segment experiences a sharp rise in activity driven by retail investors.

The study, authored by Bhagyashree Chattopadhyay and Shromona Ganguly, notes that several SME IPOs have delivered strong listing gains followed by negative returns within a short period. 

This pattern, particularly pronounced in offerings that witnessed heavy retail subscription, has prompted the Securities and Exchange Board of India (SEBI) to introduce regulatory measures aimed at restoring stability in the segment.

“High demand for certain stocks, combined with limited allotment, often leads to inflated prices as investors compete to acquire shares,” the study said, adding that retail investors seeking quick listing gains often overlook fundamentals, resulting in inflated valuations.

A comparison of 100 SME IPOs listed in FY24 and FY25 with their industry averages revealed that nearly 20 percent were trading at excessive price-to-earnings multiples, suggesting overvaluation. 

The authors cautioned that while SME IPOs can deliver substantial short-term gains, they also carry higher risk and volatility, underscoring the need for investor due diligence.

The SME IPO market in India has expanded sharply over the past two financial years, supported by buoyant retail participation and favourable market sentiment. 

According to the study, listings rose from Rs 7.25 crore in FY12 to Rs 824.64 crore in FY17, before surging to Rs 2,213.39 crore in FY18. After a brief slowdown during the pandemic years, the segment rebounded strongly, with 204 issues in FY24 mobilising Rs 5,971.19 crore.

The study found that over 90 percent of SME IPOs in FY24 and FY25 comprised fresh issues, reflecting companies’ focus on funding expansion, working capital, and operational requirements rather than providing exit routes for existing shareholders. 

The primary objectives of fundraising included capital enhancement, liquidity improvement, and capacity expansion.

Retail participation, particularly from younger investors, has been a major driver of the SME IPO boom. 

Data from the study show that investors below 30 years accounted for 22.6 percent of the total investor base in March 2019, rising to 38.9 percent by July 2025. 

The growing presence of young, tech-savvy traders has amplified demand and volatility in SME stocks, especially in the absence of stringent lock-in norms.

The study also underlined the pivotal role of merchant bankers, noting that IPOs managed by reputed intermediaries typically attract nearly double the subscription levels compared to others, underscoring the influence of credibility and market expertise on issue success.

Maharashtra led SME listings over the past two years, followed by Gujarat and Delhi, reflecting strong industrial ecosystems and supportive state-level policies. 

States such as Tamil Nadu and Gujarat have also launched schemes to encourage SME fundraising through public markets, promoting formalisation and entrepreneurship.

The RBI’s October 2025 Bulletin, released alongside the study, observed that the Indian economy remains resilient amid global uncertainty and weak external demand. 

High-frequency indicators point to a revival in urban activity and robust rural demand, while headline inflation eased in September to its lowest level since June 2017.

The bulletin also noted continued improvement in corporate balance sheets. Net profits of private corporations rose to Rs 7.1 trillion in FY25 from Rs 2.5 trillion in FY21, with profit margins improving to 10.3 percent. 

Debt-to-equity ratios and interest coverage for manufacturing firms showed further strengthening, indicating enhanced debt-servicing capacity.

Meanwhile, the RBI cautioned that while SME IPOs have opened new avenues for capital formation, their post-listing performance underscores both opportunities and risks.

It emphasised the need for greater investor awareness and prudent valuation practices to ensure the long-term sustainability of the SME capital market segment.

The paper concludes that although India’s SME exchanges have made significant progress in facilitating capital access for smaller enterprises, sustained policy attention is essential to address liquidity and valuation challenges, enabling these markets to evolve into reliable platforms for entrepreneurial growth and investor confidence.

(KNN Bureau)