The NSE has done well to limit price gain in SME initial public offerings. These offers have been witnessing unprecedented speculative activity in recent times. The NSE Emerge platform for SME stocks registered 138 public issues in FY24 raising ₹4,622 crore. This is far higher than the previous record of 87 issues raising ₹1,442 crore in 2017-18. This surge in activity is led by retail investors getting lured by the large listing gains in these IPOSs. The NSE’s move shows that the exchanges and the regulator are keenly watching this space.

But the move to limit the stock price gain in the pre-open session on the listing day to 90 per cent may not be enough to dampen speculative fervour. Further measures will be required to make the SME platforms regain credibility and attract money from long-term investors. When the SME platforms were launched by BSE and NSE in 2012, the intention was to provide an avenue to small and medium enterprises to raise funding through capital markets. The compliance burden for these issues was lowered with the minimum number of subscribers at 50, the offer document having to be cleared by the exchanges and not SEBI, and requirement to file half-yearly financial accounts. The regulator, however, did not envisage active trading activity on the platform and expected liquidity to be low with the minimum SME IPO application size set at ₹1 lakh. This was done to keep away retail investors who may not be able bear the risks associated with these companies. But given the inflation and income rise over the decade, the ₹1 lakh limit is no longer a constraint for smaller investors. Retail participation has been increasing rapidly on these platforms, with the smaller float making these stocks more vulnerable to price manipulation and sharp price gains.

The regulator can consider increasing the minimum subscription amount in SME IPOs to ₹5 lakh as the first step to shield smaller investors. Further, the limit of 90 per cent for capping the gains in the pre-opening session needs to be significantly lowered. While 40 of the 128 SME stocks, which debuted on the BSE and the NSE’s SME platforms in 2024, delivered over 90 per cent return on the listing day, the cap is liberal enough to continue attracting speculators. Halving the limit for price gain in pre-open session could be more effective in checking speculators. If the stock has merit, it will move higher in the medium to long-term and reward long-term investors.

Also, rules to curb speculation need to be implemented simultaneously on both the BSE as well as the NSE. Both exchanges list around 300 SME stocks each and public issuances on both exchanges evoke equal amount of retail investor interest. Curbing price gain on one platform will only result in speculators shifting to the other. The market regulator needs to start an awareness campaign on the difference between mainboard and SME IPOs to caution new investors who may be less aware of the risks.