Mitu Bhardwaj & Kuldeep Thareja

Small and Medium Enterprises (SMEs) have fuelled a sharp surge in Initial Public Offerings (IPOs) on dedicated platforms such as BSE SME and NSE Emerge. In 2025, as many as 268 SME IPOs collectively raised ₹12,111.55 crore, with a significant proportion of these issues coming toward the end of the year. This marks a substantial expansion from just 43 SME IPOs in 2015. Over the same period, funds mobilised have increased more than forty-fold, from about ₹260 crore in 2015 to over ₹12,111 crore in 2025.

Growth of SME IPOs in India

Source: Chittorgarh (2025 figures provisional)

Despite this impressive growth trajectory, the SME IPO segment has been increasingly marred by weak post-listing performance, rising regulatory scrutiny, and several instances of fraud and misuse of funds. While the segment provides a crucial capital-raising avenue for growing enterprises, inflated valuations, poor governance standards, and opaque disclosures have resulted in significant investor losses. Nearly 65% of SME listings in 2024 and around 57% in 2025 are currently trading below their issue price,  signalling a clear shift from listing-day exuberance to more sobering market realities.

Key Issues Facing SME IPOs

Overvaluation and Post-Listing Underperformance

A large number of SME IPOs have entered the market at hype-driven valuations, but haven’t been able to sustain the post-listing gains. In 2025, nearly 37% of SME IPOs closed below their issue price on the very first day of trading, compared with only about 9% in 2024. Further, unlike 2024—when close to 30 SME IPOs delivered extraordinary listing gains in the range of 100%–300%—such outcomes were far less common in 2025.

Several factors have contributed to this trend:

• Investor over-optimism and low awareness: Retail participation, often influenced by greymarket premiums and momentum trading, has not always been backed by adequateunderstanding of underlying business models. As regulatory scrutiny tightened, unrealisticpricing assumptions were  quickly exposed.
• Excessive valuations: Many issuers accessed the SME platform during periods of broader market  euphoria, with IPO pricing frequently ignoring fundamentals such as revenue sustainability,  profitability, and cash-flow strength.
• Market weakness: Secondary market volatility and global economic uncertainties highlightedthe  fragility of weaker business models, leading to rapid erosion of listing gains.

Market Manipulation, Misuse of Funds, and Fraud

Governance failures have emerged as a serious concern in several SME listings:

• Misuse of IPO proceeds: Funds raised for expansion and growth are often diverted through related- party transactions (RPTs) or shell entities. Nearly one out of two listed SMEs reports RPTs exceeding ₹10 crore, raising concerns of circular transactions and inflated financial statements.
• Misleading disclosures: Inadequate or misleading disclosures, including inflated revenues and undisclosed pre-IPO arrangements, have significantly undermined investor confidence.
• Suspensions and liquidity stress: Approximately 10–12% of SME-listed companies on BSE and  NSE face trading suspensions due to non-compliance, leaving investors trapped in illiquid  securities with minimal trading volumes.

Promoter Dominance and Governance Gaps

SME issuers are typically characterised by high promoter shareholding and limited institutional oversight. This concentration of control often enables promoters to exercise disproportionate influence over corporate decisions, sometimes prioritising personal liquidity over long-term business growth. Prior to recent reforms, Offer for Sale (OFS) components were frequently large, allowing promoters to partially exit at the IPO stage without materially strengthening the company’s balance sheet.

Broader Economic and Structural Risks

• Low liquidity: Thin trading volumes exacerbate volatility and make orderly exits difficult for  investors.
• Higher vulnerability to shocks: SMEs are more exposed to supply-chain disruptions, competitive  pressures, and economic downturns than larger firms.
• Restrictions on debt repayment: SEBI regulations limiting the use of IPO proceeds for debt  reduction often compel SMEs to continue servicing high-cost borrowings, constraining financial  flexibility.

Tightening of the Regulatory Framework

SEBI approved a series of reforms in December 2024 through amendments to the SEBI ICDR and SEBI LODR Regulations, after considering public feedback on its consultation paper which to a great extent tries to address these concerns. Key measures include:

• Profitability requirement: SMEs are required to demonstrate a minimum operating profit of ₹1  crore in at least one of the preceding three financial years.
• Cap on Offer for Sale: The OFS component in an SME IPO has been capped at 20% of the total  issue size, and no single selling shareholder can offload more than 50% of their pre-issue shareholding on a fully diluted basis.
• Stricter promoter lock-ins: A minimum promoter contribution of 20% is locked in for three years, with excess holdings released in a phased manner (50% after one year and the balance after two years).
• Enhanced oversight of RPTs: Material related-party transactions—exceeding 10% of turnover or ₹50 crore—now require approvals broadly aligned with main-board norms.
• Measures to curb speculation: A 90% listing-day price cap (introduced in July 2024) and a 20% pre-open price floor (effective August 2025) aim to reduce excessive volatility and speculative spikes.

SEBI is also reviewing further changes to the ICDR framework, including a proposal to mandate a separately hosted and concise “Summary of the Offer Document” on the websites of the issuer, stock exchanges, and SEBI. Such a summary would enable investors to quickly grasp key risks, financials, and use of proceeds, which are otherwise embedded in lengthy offer documents.

Way Forward

While recent regulatory interventions are a positive step, their effectiveness will ultimately depend on robust enforcement and stronger gatekeeping by market intermediaries. Merchant Bankers and Book Running Lead Managers (BRLMs) must significantly enhance their due diligence standards, as investors often place considerable reliance on the reputation and credibility of these intermediaries when evaluating SME IPOs. Greater accountability for issuers and intermediaries, improved quality of disclosures, and heightened investor awareness are essential to restore confidence and ensure that the SME IPO market develops into a transparent, credible, and sustainable capital-raising platform for genuine growth-oriented enterprises.

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Authors work for NISM and views are personal.

Author: Mitu Bhardwaj, DGM, CCC, NISM & Kuldeep Thareja, DGM, CCC, NISM