The Roller Coaster Journey of India's SME IPO Market
The landscape for initial public offerings (IPOs) from India's small and medium enterprises (SMEs) has experienced a dramatic transformation, evolving from a niche funding avenue into a speculative frenzy before entering a new era of regulatory discipline. This surge, primarily fueled by a wave of young, risk-tolerant investors and seamless digital trading platforms, provided a crucial capital lifeline for SMEs long starved of formal credit. However, the explosion in demand soon raised alarms about a market bubble, prompting the Securities and Exchange Board of India (Sebi) to step in with stricter rules.
The Three Phases of SME Listings
The story of SME IPOs in India can be divided into three distinct chapters. It began in 2012 when Sebi introduced a dedicated, light-touch framework to help smaller companies access public funds. After a nascent early period and a subsequent slowdown, the market exploded post-pandemic. While activity first peaked in 2018, it contracted sharply in 2019 and 2020. The post-covid era, however, witnessed a rapid acceleration in both the number of issues and the total value of funds raised.
This was not the first attempt to create a platform for SMEs. Earlier initiatives like the OTCEI in 1990 and the INDO NEXT platform in 2005 saw limited success. The current framework, designed for easier access, proved to be a game-changer. Since their launch, the SME platforms of both the BSE and the National Stock Exchange (NSE) have each seen over 650 issues. The average IPO size has consistently grown, reaching ₹43.43 crore in 2025, up from ₹36.50 crore in 2024 and ₹25.75 crore in 2023.
The Retail Investor Tsunami
A powerful confluence of demographics and technology drove the SME IPO boom. Indian households increasingly shifted their savings into financial assets, a trend vividly reflected in the explosive growth of demat accounts. The number of these accounts grew at an annual rate of 23% over the past decade, skyrocketing from 23.3 million in March 2015 to 192.4 million in March 2025, with the most significant jump occurring after 2020.
Younger investors were at the forefront of this change. The share of those under 30 among NSE's registered individual investors surged from 22.6% in March 2019 to 38% in September 2025, pulling the median investor age down from 38 to 33. This demographic, with a natural appetite for risk, found a perfect match in the high-volatility SME IPO space. Simultaneously, fintech platforms like Groww, Zerodha, and Angel One, which now control a major share of the market, made investing accessible. Supportive measures, including a higher UPI limit of ₹5 lakh for IPO applications and state subsidies for listing costs, further fueled the fire.
Overheating and Regulatory Intervention
The combination of a lightly regulated listing platform and a massive, tech-savvy retail base soon led to clear signs of overheating. The most telling indicator was the astronomical rise in subscription levels. After averaging a reasonable 12 times in 2021, the average oversubscription crossed a staggering 200 times by 2024. Some IPOs, like those for HOAC Foods and NACDAC Infrastructure, saw demand exceed 2,000 times the shares on offer.
This demand was fueled by the promise of quick, substantial gains. Average listing-day returns climbed from around 30% in 2022 to over 50% in 2023 and 2024, creating a self-reinforcing cycle where strong debits attracted more applicants to subsequent issues. However, this frenzy masked a troubling reality. By mid-2025, many newly listed SMEs were trading below their issue price—28 out of 50 on the BSE SME platform and 22 out of 55 on NSE Emerge. An RBI bulletin highlighted a pattern of sharp listing gains followed by negative returns.
The distortion was also visible in index data. The S&P BSE SME IPO Index delivered a five-year return of 7,418% as of 13 November, compared to a modest 93% for the Sensex, indicating an illiquid market driven by a few stocks rather than broad fundamentals. In response, Sebi shifted its focus to investor protection, warning against irrational exuberance and introducing a new set of rules in early 2025. These included mandatory profitability requirements, tighter controls on fund use, longer promoter lock-ins, and a 21-day public comment period for IPOs, effectively cooling down the market.
The Persistent Credit Gap and The Road Ahead
The entire SME IPO saga unfolds against the backdrop of India's massive credit gap for MSMEs. A CareEdge Ratings report from May 2025 estimated that India's 63 million MSMEs have a total debt demand of ₹95.6 trillion. While ₹50.7 trillion of this is considered addressable by formal lenders like banks and NBFCs, only ₹32.4 trillion had been supplied as of the first half of FY25, leaving a vast credit gap of ₹18.3 trillion. This funding void is what originally pushed SMEs towards the public markets. Now, with Sebi's new rules making it harder for smaller, unprofitable firms to list, the unmet demand is likely to shift further towards NBFCs and the private credit market, marking the next chapter in India's quest to fund its small businesses.
