SME IPOs: Risk on steroids

BSE SME IPO index has the claim over the title of the best-performing index of the last decade. And not just that. It is the best-performing index of the last three and five years. As of January 23, 2023, the index gave a whopping 148.0, 66.3 and 67.9 per cent CAGR over three, five and ten years, respectively.

So why have we stayed away from SME IPOs? Surely, the hype is real. The return numbers are a testament to that.

The answer lies in our core motto. Value Research works for the everyday investor. We want our readers to build wealth through investment, not gamble their savings away by taking on unnecessary risks.

We have reiterated that investing in mainboard IPOs comes with a high risk. But SME IPOs are risk on steroids.

Here's why.

It's a dart in the dark
The unknowns are too many when it comes to SME companies. And investing based on buts and ifs is injurious to your portfolio.

SMEs are not subject to the stringent regulation SEBI imposes on a mainboard company. First, SME companies are not obligated to declare their results on a quarterly basis but rather on a half-yearly basis. Second, they do not have to disclose their related-party transactions.

And the list goes on. This opaqueness surrounding the core operations of SMEs makes analysing them near-impossible.

Prone to scams
Even among mainboard companies, scams are aplenty. And given that SME companies face far less scrutiny from regulators, investing in them is often akin to kicking yourself in the teeth.

You either win big, or you lose everything
SME IPOs are the Vegas of the IPO world, but not for the right reason. To apply for an SME IPO, you need to invest at least Rs 1 lakh. Even in the secondary market (a market where investors buy and sell shares from other investors), you need to invest at least Rs 1.5 lakh.

And considering the lack of transparency surrounding SMEs, if you even get back your invested capital, count yourself lucky.

Please note that we are not saying that all SMEs are out there to scam you out of your savings. But the risks associated with SMEs are far too high for us to take a stance.