Small and medium-sized companies have raised more funds from initial public offers in the first seven months of 2024 than in the whole of 2023.

Analysts are worried over the quality of issues and investor frenzy for these stocks, marked by high oversubscriptions. Between January and July 2024, 141 SME companies raised ₹4,886 crore through IPOs against 179 companies raising ₹4,821 crore in the 12 months of 2023, according to Sebi data.

The trend continued in August, with 25 companies going for IPOs and listing on the SME exchanges.

Some of the IPOs have staggering oversubscription numbers: Delhi-based flour maker HOAC Foods India had a subscription of 1835.55 times on an issue size of ₹5.54 crore floated in May. Gujarat-based mattress maker Magenta Lifecare, which raised ₹7 crore in June, had a subscription of 1079.83 times.

In August, Delhi-based two-wheeler dealership — Resourceful Automobile, with eight permanent employees and two showrooms — saw subscription of 418.82 times for its ₹12 crore IPO.

“By any conventional measure, the SME IPO phenomenon raises serious questions about the rationality of the current market sentiment and the potential risks for retail investors. Are we witnessing a bubble in the making, fuelled by social media hype and fear of missing out?” said Dhirendra Kumar, founder and CEO, Value Research.

“As the frenzy continues, investors must exercise caution and conduct thorough due diligence before jumping on the SME bandwagon,” Kumar said.

“There are a few things that the retail investor must take into account before investing in SME IPOs — how the company is performing and its performance relative to larger peers. An investor must also make a distinction between a trading company and a manufacturing company. The latter cannot realistically give large returns over
a short period of time, especially if they are expanding,” said Arun Kejriwal, founder of Kejriwal Research.

In an advisory last month, Sebi said some SMEs and/or their promoters were projecting unrealistic pictures creating positive sentiment among investors, which induced them to purchase such securities presenting an opportunity for promoters to offload their holdings at elevated prices.

Sebi is also reportedly planning to come up with a discussion paper tightening the norms governing SME IPOs. Some of the tweaks could focus on better monitoring and tighter scrutiny of auditors.