A Rs 12 crore IPO sparked a Rs 2,700 crore frenzy last year. Now, the stock is down 50%

Synopsis

An SME IPO saw over 400x subscriptions last year but later plunged 50%, raising concerns over sustainability. Sebi introduced stricter norms, capping OFS at 20% and mandating profitability criteria. IPO proceeds can't repay promoter loans, reducing misuse. SME IPO subscriptions have since dropped sharply, curbing grey market activity.

Last year sometime in August, an SME IPO created a storm on social media after getting a subscription of over 400 times. However, strong subscription was not alone the bone of contention as many SMEs would usually see a large investor interest due to their quick return potential. The issue was that the company is just two showroom dealers of Yamaha and had just 8 employees at the time of the IPO.

The amount it raised was also meagre at Rs 12 crore. The bids it received amounted to Rs 2,700 crore.

This investor frenzy has also baffled many Dalal Street veterans with some arguing for strict regulations, while others advocated a gentle nudge from policymakers.

Nearly seven months down the line, the shares are down over 50% from the IPO levels, casting doubt on the sustainability of offers that thrived in the bull market. The issue was priced at around Rs 117 apiece for investors.

The staggering IPO subscription numbers for SMEs was not a new phenomenon as retail and non-institutional investors' went many hundred times as against the shares on offer.

For instance, last year, over 15 SME issues received subscriptions of 400 times or more and the highest figure went as much as over 2000 times.

Such staggering numbers led to regulators bringing in necessary checks. SMEs currently planning to go public must now meet stricter profitability criteria.

Companies must have recorded operating profits (EBITDA) of at least Rs 1 crore in two of the last three financial years. Additionally, Sebi has capped the offer-for-sale (OFS) component in SME IPOs at 20% of the total issue size. Selling shareholders are also restricted from offloading more than 50% of their existing holdings.

The regulator has also clamped down on the use of IPO proceeds. Companies can no longer use funds to repay loans taken from promoters, directors, or related parties. This is aimed at stopping any misuse of funds and ensuring the capital raised is used for the intended purposes.

The strong measures brought in by Sebi started paying dividends. SME IPO subscriptions have fallen drastically this year and there is a near wipe-out in grey market activity. The highest subscribed IPO in the last two months was around 44x.

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