SME IPO frenzy: The red flags that investors shouldn't ignore

livemint.com:

SME IPOs are selling like hotcakes with dramatic oversubscriptions even as Sebi’s warnings about malpractices in some listed companies raise red flags.

Resourceful Automobile's IPO, for instance, attracted ₹4,800 crore in bids for a ₹12 crore issue, and Travels & Rentals offer received ₹7,075 crore for a ₹12.4 crore issue. HOAC Foods India and Magenta Lifecare saw 1,963 and 1,002 times oversubscription, respectively, earlier this year, even as their issue size was just ₹5.10 crore and ₹6.64 crore.

While investors are making bumper listing gains, one never knows when the tide will turn.

In FY25, 104 companies raised ₹3,396 crore through IPOs by August, compared to ₹5,971 crore raised by 204 firms in FY24, according to Primedatabase.

“An increased activity in the IPO market is a sign something may go wrong. We haven’t seen any major fall since 2015 except the covid-19 crash of 2020. SME IPOs have offered an avenue to make quick bucks in this uptrend. Be wary of it," says S. Ravi, Former Chairman of BSE. “Retail investors must do complete research before subscribing in the SME segment. Fundamentals of the company and the business model must be evaluated before subscribing."

There are multiple examples of SMEs getting listed and fetching huge gains but eventually turning into penny stocks. Investing in these without fundamental research is a recipe for disaster, even as it appears a dessert unless you know when to exit.

“I am aware of a lot of companies where promotors get their companies listed and establish a private limited company. They raise money and put it in the private ltd by extending loans. The private limited company would be shown as getting insolvent and the listed company would write off the loan," says Basant