SEBI issues advisory on SME stock investments amid surging IPO demand

The Securities and Exchange Board of India (SEBI) has issued an advisory urging investors to exercise caution when investing in securities of companies listed on the Small and Medium Enterprises (SME) segment of stock exchanges. This warning comes in the wake of recent SME initial public offerings (IPOs) seeing unprecedented demand, raising concerns about speculative investing.

In its press release dated August 28, 2024, SEBI emphasized that the SME segment is intended for informed investors who have the financial capacity to bear higher risks associated with investing in such companies. The regulator highlighted several key points for potential investors to consider:

• SME stocks typically have lower liquidity compared to those in the main board, potentially making it difficult to exit positions.
• There may be higher price volatility in SME stocks due to their smaller market capitalization and trading volumes.
• Many SME companies have limited track records, making it challenging to assess their future prospects.
• The regulatory framework for SME-listed companies is relatively relaxed compared to main board listings.

SEBI's advisory comes after a series of SME IPOs have seen overwhelming subscription numbers. A notable example is Resourceful Automobile, which recently saw its IPO oversubscribed by 400 times, attracting Rs 4,800 crore against an IPO size of just Rs 12 crore. This level of demand has raised eyebrows and concerns about potential market froth.

The SME platform, launched to provide funding alternatives for emerging businesses, has raised over Rs 14,000 crore in the past decade. Notably, Rs 6,000 crore of this total has been accumulated in the last fiscal year (FY24) alone, indicating a significant acceleration in SME fundraising activity.

Such markets also exist in overseas stock exchanges, and play a role in helping small and medium enterprises -- typically small manufacturing, real estate and service firms -- raise funds at lower costs and scale their operations.

Market observers attribute the surging popularity of SME stocks to several factors. Recent multibagger returns from some SME listings have caught investors' attention, while high market liquidity has fueled a broader appetite for riskier assets. However, this trend has also led to concerns about speculative investments, with some retail investors potentially overlooking the inherent risks of these smaller, less-established companies.

The regulator's warning also comes against a backdrop of buoyant global equity markets, with many indices near lifetime highs. This global rally has been fueled by a tide of cheap money from major central banks, including the US Federal Reserve and Bank of Japan, in response to economic challenges posed by the COVID-19 pandemic and its aftermath.

Recently, the US central bank has said that it is considering cutting interest rates as inflation seems to be under control. This has again sent global stock markets to record highs, with the Indian market considered to be among the most expensive.

Since early 2020, central banks worldwide have injected trillions of dollars into financial markets through quantitative easing programs and maintained ultra-low interest rates. This flood of liquidity has boosted asset prices across the board, from blue-chip stocks to more speculative investments like SME shares and cryptocurrencies.

SEBI's advisory serves as a timely reminder for investors to conduct thorough due diligence and understand the risks involved, especially when considering investments in smaller, less-established companies.