The year 2025 witnessed an unprecedented rush of small and medium enterprises (SMEs) to the stock markets, setting new fundraising records. However, this boom has been accompanied by increasingly fragile returns, posing significant risks for the retail investors who have flocked to these offerings.
A Record Year with Bitter Aftertaste
Buoyed by abundant liquidity and a strong equity market sentiment, SMEs have made a historic dash for capital. Data from Prime Database reveals that 257 SMEs raised a staggering ₹10,965 crore in 2025, marking an all-time high for the segment. The surge in retail participation has been phenomenal, with average applications per SME IPO skyrocketing from 297 in 2020 to 1.8 lakh in 2024, as noted by Pranav Haldea, Managing Director of Prime Database.
Yet, this overwhelming demand has failed to guarantee profits. The data presents a sobering picture: out of the 250 SME IPOs listed in 2025, a worrying 129 are currently trading below their issue price. Market experts like Deepak Jasani point out that a large proportion of these stocks typically fall below their offer price within six months to a year of listing.
Lighter Rules, Heavier Risks for Investors
The SME platforms of BSE and NSE were established to ease capital access for smaller companies by relaxing the stringent norms required for a mainboard listing. The differences are substantial. For a mainboard IPO, a company must demonstrate an average operating profit of ₹15 crore over three years. In contrast, SME issuers need to show profits of just ₹1 crore in two of the last three years.
Disclosure requirements are also less rigorous. SME-listed firms publish financial results only twice a year, compared to the quarterly disclosures mandated for mainboard companies. While promoters must still hold a 20% stake for three years post-listing, the risk of price manipulation remains high due to typically low liquidity. "Prices can easily be influenced by vested interests," Haldea cautioned, noting that the allure of sharp listing gains can trap retail investors.
This caution is reflected in the numbers. The average listing day gain for SME IPOs has been declining, standing at 12.55% in 2025. The inherent uncertainty in projecting future performance for smaller companies with lighter disclosures adds another layer of risk, Jasani explained.
Sebi's Warning and Investor Safeguards
The Securities and Exchange Board of India (Sebi) has actively voiced concerns. Chairman Tuhin Pandey warned that the attractive capital gains in this segment "may look temporarily very attractive... but they actually may not be true." In August 2024, Sebi issued an advisory highlighting that some SME promoters use public announcements and corporate actions like bonus issues to paint an unrealistic picture of operations and inflate stock prices, facilitating an exit at high valuations.
Given this environment, analysts urge investors to conduct rigorous due diligence. Scrutinizing the Draft Red Herring Prospectus (DRHP) is non-negotiable. Key checks include:
- Financial Health: Debt levels, debt-to-equity ratio, and consistency in profit growth. Sudden profit spikes of 30-60% pre-IPO are a red flag.
- Business Fundamentals: The company's products, customer concentration, pending litigation, and the credibility of its business model.
- Valuation & Use of Proceeds: Never compromise on valuation. Favor companies raising funds for capacity expansion over those primarily seeking working capital or debt repayment, advises Jasani.
G. Chokkalingam of Equinomics stresses that investors must study the business model and avoid speculative bets based on hype.
The Pragmatic Path Forward
With evolving governance standards and limited disclosures, retail investors are advised to be exceptionally pragmatic. "If you’re not confident about a company’s long-term prospects, you may be better off avoiding it," Jasani stated. The consensus among experts is clear: while the SME IPO market has created opportunities for listing pops, the risks currently far outweigh the potential rewards. For the average retail investor, avoiding this high-stakes segment until greater stability and transparency emerge might be the most prudent strategy.
