India leads the global IPO bandwagon

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Indian investors are now making a strong beeline for primary markets, on the back of secondary markets breaching record heights. With BSE Sensex jumping 9.96% over the last 6 months and NSE Nifty inching up 9.29% between January-June 2023, India’s primary markets are also seeing a flurry of new, resilient activity. 

The tell-tale signs are there. The number of active demat accounts crossed 12 crores last month, a 24% y-o-y growth. SIP investments in mutual funds stood at over Rs 14,000 crores.

In fact, such is the spurt that the IPO activity on both NSE and BSE combined made up for 13% of all global IPOs that happened up till June 2023. In terms of funds raised, it contributed 3% to the overall IPO figure. Moreover, experts hint towards an even more buzzing IPO market for the second half of 2023.

India’s IPO pipeline currently has around 44 issues that aim to raise around Rs 49,000 crores. Additionally, 26 more companies are awaiting SEBI approval. Some of the major names in this category include NSDL, Muthoot Microfin, TVS Supply Chain and more. 

Should you invest?  

Experts attribute this uptick largely to the resounding debuts of small and medium enterprises (SMEs). Market data from IPO tracker Chittorgarh suggests that the 81 SME IPOs have hit NSE and BSE in 2023, as against just 12 on the mainboard. But the question is, should you invest your hard-earned money in these companies, or is investing in SME IPOs a fad you should stay away from? 

Says Ravi Singh, market expert, “SME IPOs are a good option to invest as they offer better returns in promising sectors. However, due to lower volumes, higher liquidity and smaller market capitalization, SME stocks are more suitable for high risk appetite investors”. 

Pune-based financial planner Nema Buch agrees. “The ultimate challenge is to earn a consistently superior return on investments in these inherently risky SME businesses. So, the investor should research well about the SME business and do proper due-diligence , right from the industry, ideas and people”. 

But for some like financial planner Sanjeev Dawar, small investors can altogether buck the IPO trend. “Investors have a false notion that any IPO irrespective of sector or company will deliver superior returns.. Currently, IPOs are never offered at face value.. The premium is already inbuilt in the offer price. This makes them think that the business in which they intend to invest will deliver promising returns in the expected timelines”. 

The key thing for the investor to remember is that their core investment must follow asset allocation aligned with life stage and life goals. “Rest can be invested in the satellite portfolio portion, which includes IPOs, while keeping in mind the risks involved”, he notes

What should you look for?

One of the reason retail investors are asked to stay away from SME IPOs is due to their illiquidity and volatility. Since these companies are not well-known, their shares may see muted buyer demand. Also, most SMEs do not have the financial wherewithal to battle a financial or market downturn.

“Despite the risks, SME IPOs can also be a good investment opportunity. SME companies are often growing rapidly, and they have the potential to generate high returns for investors. If you are looking for an investment with the potential for high returns, and you are willing to accept the risks, then SME IPOs may be a good option for you”, says Mumbai-based financial planner Viral Bhatt.

Here are some tips for investing in SME IPOs:

Before you invest in any SME IPO, it is important to do your research and understand the company. Read the prospectus carefully, and understand the risks involved.

Invest only in a company with good corporate governance and track record. Do not let the promise ofh high returns overshadow lack of disclosures, if any.

SME IPOs are a relatively new investment option in India, and there is still a lot of uncertainty about the market. It is a good idea to start with a small investment and gradually increase your exposure as you get more familiar with the market.