Structured model of SME IPO is taking its toll

It was the year 2012 when SME platform was formed by BSE and we witnessed SME IPOs entering the capital market. Well at that time since the platform and the IPO guidelines were new it took some time for the investors at large to understand. Perhaps due to this, some hand in glove operations took place in many IPOs where the market prices after listing surged with leaps and bounds and tempted investors to opt for SME IPO participation. As the minimum lot size was of Rs 100000, any surge in market price post listing gave mind boggling returns. This was the reason for heavy oversubscriptions for many SME IPOs during 2016-2018 periods.

With grand successful promotion of SME platform in 2012, BSE also started Startup platform in August 2019 with similar guidelines that of SME IPOs. Against this, NSE ventured into SME Emerge platform in 2015 and has yet to take a call on Startup platform. Due to early formation, BSE SME is leading with number of listed entities compare to NSE SME Emerge.

The game played by vested interest reached to an optimum level and a final saturation point despite forming AIF (Alternate Investment Fund) for investments in SME IPOs. Even funding by institutions like SIDBI and few banks surged for SMEs which was missing before. But then, game played by vested interests coming to an end and most of the investors including AIF stuck with dead investments turned helpless. Many Lead Managers, Market Makers and even Promoters failed to live up to the confidence and also failed in their promises.

Having burnt their fingers, retail masses preferred to stay away from such offerings and hence a different modus operand started for SME IPOs in the form of structured model. Here the issue size was fixed, Lead Managers/Market Makers and Promoters planned arranging at least one time subscription commitments and then only they started bringing the SME IPOs.

Here again, where promoters were bringing the funding, they used Lead Managers in the form of Rubber Stamp to get the IPO documentation clearance from regulators and they were paid their legitimate fees for such work. Where Lead Manager, Market Maker was involved for even fund arrangements, we witnessed over 15% spending for such SME IPO process. Following is the lists of recent IPOs where issue expenses are indicative of such arrangements and fall outs.

From the above table, one can see the spending for IPOs expressed in red. Secondly many SME/Startup IPOs around Rs 1 or 2 crore are not likely to migrate to main board as they have lower capital and may take long to reach to minimum paid up capital norms to qualify for migration to main board.

As the closed club, AIF and the investors back up are stuck with dead investment, many front running Lead Managers are currently seating on the fence. According to SME Market operators, many of them are now on the verge of diversifying for activities like main board mandates, rights issue, Offer for Sale, Buybacks etc. This is the reason why we are missing any SME IPOs from top five lead managers. Guiness Capital Advisor, which had to its credit highest subscription SME IPO of Jhandewala Foods and a mega primary offer from MMP Industries is currently out of picture as the group is under regulatory suspension. It has transferred some of its mandates to other active Lead Managers. In this list main board proposed IPO of Harenba Industries is included. IDBI Capital which broke the ice for NSE SME platform with the mandate of Thejo Engineering is lying dormant with no activities at present on SME IPO front. Two old and front running Lead Managers are currently laying dormant with no activities on SME IPO front since long.

According to primary market operators, besides above modus operand of Structured IPOs for SME, this segment also facing lukewarm support from broking community who are not allowing their clients any investment via secondary market for SME shares. On the contrary, they advise their clients that they will help them if they want to sell SME shares. Thus SME platform is again back to square one and we might see dry spell in primary market due to this. They opine that this is the high time for regulatory body to take the reins for SME IPO in their hand as we have witnessed some cases of IPOs with just few months working being allowed to bring their floats.

Seasoned secondary market operators say while SME IPOs are back to square one with its structured model IPOs and issues faced post listing with many broking houses not allowing free trades in this segment, hand in glove operations by vested interests in GMP sphere keeps main board in limelight. All this is happening at this juncture is sure to go against the true market play and the investors' response going forward. They remind us one old saying 'Every body cannot be fooled every time'.

If regulator cannot curtail GMP activities, then let make it an official GMP platform wherein, trades will generate additional income for bourses and also the exchequer in the form of taxation on short term gains and GMP cannot provide any long term perspective trades.