Initial and After-market Performance of SME IPOs in India

Abstract

This article examines the initial and after-market performance of the initial public offerings (IPOs) listed on the recently launched platform for small and medium enterprises (SMEs) by the Bombay Stock Exchange (BSE), Mumbai and the National Stock Exchange (NSE). The study does find evidence of underpricing of IPOs by SMEs in line with other studies internationally. However, the level of underpricing is found to be lower than that of IPOs listed on the main board stock exchanges in India, reported by earlier studies. This may be partially due to the fact that the SME platform is at an infancy stage and has failed to attract investors’ fancy. This is reflected in a low level of oversubscription of SME IPOs at 1.35 times on average. The multivariate analysis identifies the type of offer, size of issue, promoter holding, extent of oversubscription, lead manager prestige and the stock exchange of listing as the key determinants of underpricing of SME IPOs. Post listing, these IPOs have significantly out-performed the benchmark index. The finding is inconsistent with the results of other studies on the main board exchanges where the IPOs, in general, are found to underperform the markets over a significant period of time post listing. This may partly be attributed to thin trading in these stocks and, therefore, to their lower level of liquidity. The findings have significant implications for stock-market regulators, issuers and investors.