PP Waterballs IPO Effect: SME IPOs Are Making A Buzz In The Indian Securities Market; Some Genuine, Some Fake, Leaving Investors Thinking Deeply About Their Stake!
Remember PP Waterballs IPO by famous character Jaspal Bhatti- khud apni company banao, public issue nikalo, logo ka paisa ikatta karo, apna business chalao……..
There is nothing wrong with the procedure of obtaining public money for business operations; however, whether the public money is directed at the right end becomes the question of objection!
Recently, the IPO of a New Delhi-based bike showroom has drawn attention to Dalal Street. Investors procured over ₹4,700 crore on Resourceful Automobile‘s ₹12-crore IPO, which includes only two Yamaha shops in New Delhi, employing only eight people: three in finance and legal, two in sales and marketing, one in HR, and two in operations.
The issue, classified as a Small and Medium Enterprises (SME) IPO, received roughly 400 times the number of subscriptions on the last day of bidding; nevertheless, upon listing, it debuted flat at the IPO price, despite the 400x subscription. Many people have been furious on social media after the news broke about investors’ responses to a company’s IPO. People have contributed more than INR4,800 crore to a company’s coffers when all it requested was INR12 crore.
What was the point of virtual discussion on various social media platform is the rush of SME IPOs, their credibilities, the reactions of the apex regulator SEBI and the investor’s greed to consider these SME IPOs as jinnies to make a quick buck.
The rush of SME IPOs and their credibilities.
A week ago, similar cases were seen when the shares of Broach Lifecare Hospital were listed on the BSE SME platform with a 90% premium, and the shares of Saraswati Saree Depot debuted on the exchanges with a premium of 25%. In this year only, HOAC Foods India was the most oversubscribed SME IPO in 2024, with subscriptions of nearly 1,963 times when it launched in May 2024. Magenta Lifecare, launched in June 2024, was also oversubscribed, with subscriptions of nearly 1,003 times. These instances depict that the behaviour of staggering IPO subscription numbers for SME IPOs is not a new phenomenon as retail and non-institutional investors’ biddings go into many hundred times as against the shares on offer.
To be fair to the companies, no one is claiming that the issuer is (are) lying and exaggerating the prospects for their own business. At the moment, there appear to be no allegations of violating securities laws.
2024 is not the first time such excitement has occurred, and it will not be the last. Crowds flock to everything and everything on sale at a specific hour, which has been a typical occurrence throughout the years. Developed as an alternate means of generating capital for growing enterprises, the SME platform of stock exchanges has amassed money worth over Rs 14,000 crore over the previous decade, with Rs 6,000 crore raised in FY24.
According to Prime Database statistics, for every mainboard IPO launched in the previous three years, about three SME IPOs have followed. This year has seen 45 mainboard IPOs, with an average offering size of ₹1,074 crore and an average oversubscription of 43 times. The runway rally in the Indian stock market since the abatement of the COVID-19 pandemic has been fuelling strong speculative interest in small-sized SME IPOs. In the past three years, SME IPOs have broadly outperformed mainboard IPOs in terms of oversubscriptions, listing gains and post-listing returns.
For instance, 182 SME IPOs were launched last year with an average oversubscription of 86 times, average listing gains of 36% and average stock returns of 216%. In contrast, 57 mainboard IPOs were launched with an average oversubscription of 32 times, average listing gains of 29% and post-listing gains of 216%. Incidentally, the average listing gains of SME IPOs have been steadily rising over the past three years. From an average listing gain of 2.2% in 2019, the average listing gains for the SME IPOs have climbed up to 74% in 2024.
Why and who are injecting funds into these SME IPOs- What do market pundits say?
SME IPOs are popular on Dalal Street among both small and high-net-worth investors since several have recently delivered multi-bagger returns, with some producing returns of more than 300% on the first day of bidding. Moreover, the recent excellent returns on SME IPOs, along with government backing for the sector, have prompted Alternative Investment Funds (AIFs) to explore this growth opportunity. Paradise Moon Investment Fund, an AIF, has announced its launch with the goal of generating Rs 750 crore over the next several years, targeting investors wanting to capitalise on the expansion of the SME sector before and after IPOs.
According to analysts, the recent spike in SME stocks, and high listing gains in some companies, are mostly due to three important factors: liquidity, the Fomo impact, and retail engagement. The allure of attractive listing returns combined with strong post-listing stock performance on low investment has maintained continuous investor interest in SME IPOs, regardless of the type or size of the underlying companies.
“Huge market liquidity has fuelled excessive price fluctuations in smaller, less liquid SME stocks, as investors seek huge returns while ignoring the underlying risk.” Increased retail investor engagement has contributed to interest in the SME category,” said Vaibhav Porwal, Dezerv’s co-founder. He goes on to say, “While this tendency may continue in the short term, issues like market corrections and regulatory interventions may temper the market frenzy.” Investors should be cautious and focus on fundamentals, as SME stocks may fall significantly if the mood moves.
Deepak Shenoy, a market veteran and Capitalmind Founder, said the oversubscription for the IPO should not be taken seriously as it indicates a desire for the IPO rather than actual cash received by the firm. According to Shenoy, record-breaking subscription figures for SME IPOs indicate market enthusiasm.
According to V K Vijayakumar of Geojit Financial Services, SMEs’ access to the capital market is a beneficial and desirable trend because they contribute significantly to India’s GDP and job creation. “However, recent trends suggest excess. SME IPOs with little track record or good financials are frequently oversubscribed, owing to retail investors seeking listing profits. These are excesses that must be corrected. “Experience has taught us that speculative excesses lead to tears,” he remarked.
Mohit Gulati, CIO and managing partner of ITI Growth Opportunities Fund, says that the liquidity-injected party is currently in full swing, and everyone is making hay while the sun shines. It is believed the retail segment likes the excitement of playing SME IPOs, although knowing completely that this may be a recipe for disaster. Also, new-age market players have never witnessed a low cycle in the markets. Therefore, their core assumption is that stock prices will always grow.
The investor enthusiasm around SME IPOs has stunned several Dalal Street veterans, including Radhika Gupta of Edelweiss Mutual Fund. The CEO labelled the SME concerns as worse than the “sins of the bull market,” warning investors to be cautious.
SME IPOs often have low trading volumes, making it relatively easy to inflate share prices and result in severe overvaluation. ‘SME IPO subscription figures and listing profits are getting too good to be true. Overall, regulators are attempting to control this market because they see that it can no longer be ignored,” said Kush Gupta, Director of SKG Investment & Advisory.
What did the regulatory bodies do to tackle such an enthusiastic yet cautious situation?
As massive subscription numbers for SME IPOs have left many old-timers dumbfounded, market regulator SEBI warned investors against promoters who paint an unrealistic picture of their operations. Such firms/promoters have been observed making public statements that paint a good picture of their activities. These announcements are often followed by a variety of corporate measures, including bonus issues, stock splits, preferential allotments, and so on,” SEBI adds.
According to the regulator, such company measures generate a favourable mood among investors, prompting them to buy these securities. At the same time, this gives promoters an easy way to offload their holdings at high prices. SEBI advised investors to be wary of the aforementioned tendencies and exercise caution while investing in SME stocks, saying they should not depend on unverified social media posts or invest based on tips and rumours.
SEBI also plans to come out with a discussion paper on this aspect before the end of the year, says Ashwani Bhatia, SEBI’s whole time member, which includes better monitoring and tighter scrutiny on the auditors front, adding that if the chartered accountants do their job diligently, they can avoid problems.
In an effort to protect investor interests, SEBI has also advised stock exchanges to be more careful when approving SME IPOs, even if it means slowing down the clearance process. Last week, amid growing worries over the unregulated growth of the SME IPO market, the NSE increased the scrutiny of companies wishing to list on its SME platform.
The exchange has added a new qualifying requirement: firms must now show positive Free Cash Flow to Equity (FCFE) for at least two of the three financial years preceding the filing of their draft IPO documents. The extra criterion will apply to all DRHPs submitted beginning September 1. The measure intends to promote financial stability before becoming public, which is anticipated to boost trust in the SME market. Analysts feel that the increased disclosures needed by SME companies will increase transparency and allow investors to make more informed judgements.
Why did we connect it to PP Waterballs IPO- Did anything such happened earlier, that paves possible ways to intercept doubt?
Indian screen has always been a mirror of the realities of Indian society. The notion of inflating stock market sentiments is so common that people used this concept three decades ago and demonstrated it through dramatic episodes on screen. The actual examples of Jaspal Bhatti’s PP Waterballs IPO date back to the 1990s, when firms like MS Shoes and Pandian Graphite sold shares without disclosing or even misrepresenting facts, making false promises and manipulating data.
In the context of 2024, these incidents can be connected to the latest crackdown of SEBI on Mumbai-based background verification company SecUR Credentials and its managing director, Rahul Belwalkar, and Varanium Cloud, its promoter, and managing director, Harshawardhan Sabale, for financial irregularities, lapses in corporate governance, and misuse of IPO proceeds.
The SEBI inquiry indicated that these two SMEs were not only guilty of financial irregularities and governance shortcomings on an individual basis but also colluded. They organised fraudulent transactions among themselves to give the idea of strong financial health, deceiving investors. This misleading picture of growth and financial stability enticed investors, allowing promoter entities to exit at the cost of unsuspecting shareholders.
In the show, in it shown that the character Jaspal Bhatti knew everything about the in and out of the business, and he is the one who was responsible for the successful launch of IPO, giving good gains at one end, and staggering losses at the other. As said, the Indian screen reflect what is happening in society. Manyatimes, insider people only play a vital role in smooth flowing of these dubious channels. In the case of Varanium clouds, similar things can be witnessed.
The SEBI probe also revealed serious concerns about the function of the company’s independent directors. The inquiry uncovered massive financial transfers between Belwalkar and independent directors Mithun Kothari and Prateek Jain. Mithun Kothari, who also served as the chairman of the audit committee, was in charge of monitoring and approving the company’s related party activities and financial statements.
Independent directors are not authorised to have any financial contact with the firm other than their sitting fees to ensure the smooth and independent fulfilment of their duties and avoid any conflict of interest. However, according to Sebi’s order, the fund transfers between Belwalkar and independent directors appear to have been carried out to jeopardise the sanctity of the responsibilities assigned to them, including the approval of related-party transactions and financial statements containing fictitious transactions, which appear parallel with Jaspal Bhatti’s character.
The clearer picture.
SME listings began in India over two decades ago, with the BSE and NSE launching their separate SME listing categories, NSE Emerge and BSE SME, in 2012. Since the beginning of 2021, the S&P BSE SME IPO Index for these tiny listings has increased by more than 5,000%. The SME listing has lower compliance requirements than its counterparts listed on the major bourses. Furthermore, unlike main board IPOs, in SME IPOs, retail shareholders are the main investors, and because share prices are low, they are an ideal target for price manipulation or pump-and-dump scams by promoters, leaving retail investors shortchanged.
In March 2024, Sebi chairperson Madhabi Puri Buch acknowledged that the regulator had cause to think that certain businesses were exploiting the segment with the sole goal of manipulating prices. Since then, the SME listing category has been on the market regulator’s radar. Although there are certain precautionary measures that regulators have taken and enough cautionary warnings have been given to retail investors, human behaviour is something that is the most unpredictable thing in the world.
Even the great Sir Issac Newton said, ‘I can calculate the motion of heavenly bodies, but not the madness of people‘ in response to a financial loss he suffered in the South Sea Bubble. So, if a genius like Newton can’t predict what the market will do, then how could we? However, a series of actions can definitely be taken to avoid maximum potential losses, both to the market and to investors.
Conclusion.
During moments of market panic, people’s brains are short-circuited, and reasoning goes out the window. The want to do something becomes too strong to resist, and individuals make illogical decisions to reduce cognitive burden.
Sometimes the finest thing to do is to sit on your ass and do nothing. In such circumstances, individuals seek clairvoyance when they should be seeking discipline. Only the disciplined are truly liberated; the rest of us are just slaves to our emotions and the insane behaviour of humans. So, it is better that retail investors keep their minds from short-circuiting before they are exposed to the losses of kinds of famous PP Waterballs IPOs!
