PP Waterballs IPO Outcome: SEBI Taming The Deadly Dance Of SME IPOs In The Securities Market!
7 Months Ago…
Let’s walk 7 months down the lane. In August 2023, a company called Resourceful Automobile decided to go public, falling in the category of SME IPO. One would think that Resourceful Automobile company must be manufacturing cutting-edge vehicles or at least some revolutionary auto components. Wait, it was a two-showroom dealership of Yamaha with precisely eight employees.
Yes, you read that correctly. Eight employees. Two showrooms. Despite its tiny size, this firm received offers for ₹ 2,700 crore for its ₹ 12 crore IPO. That is more than 400 times oversubscription! Even the most seasoned Dalal Street veterans scratched their heads in surprise, and shock!
Cut To Today-
Fast forward to today, and those shares have plummeted more than 50% from their IPO price of Rs 117. Shocked? You shouldn’t be. This is what happens when financial water balloons pop—they make a mess, and someone inevitably gets wet.
The unbelievable IPO subscription figures for SMEs were not a new phenomena, since retail and non-institutional investors subscribed hundreds of times more than the shares available. For example, last year, over 15 SME issues obtained subscriptions of 400 times or more, with the highest total exceeding 2000 times. Such astronomical figures prompted regulators to implement essential checks.
When things get this absurd, someone has to restore order to the playground. That someone was SEBI’s then-chief, Madhabi Puri Buch. The bull market had brought with it some dubious characters, like some SME IPOs, much like a flooded river dropping rubbish along its banks.
Madhabi Puri Buch, the then head of the SEBI, admitted in March 2024 that the regulator had reason to believe that some companies were abusing the market sector for the ONLY purpose of price manipulation. The market regulator has been keeping an eye on the SME listing category ever since. Human behavior is the most unpredictable thing in the world, despite the fact that authorities have adopted certain preventative steps and that ordinary investors have received adequate warnings.
Do you know SEBI’s primary concern? “As the number of SME issues has expanded, so has investor involvement in these offerings. The applicant-to-allotted investor ratio rose from 4X in FY22 to 46X in FY23 and 245X in FY24. How can an increase in the number of applications raise anxiety for a market regulator whose goal is to deepen the market and foster investing culture? There appears to be an attitude that large is beautiful and sacred, whereas little is untrustworthy and unethical.
What SEBI did to deal with Jaspal Bhatti’s PP Waterballs IPO Effect?
For those unaware with Jaspal Bhatti’s satirical talent, “PP Waterballs” is a fictional company from his television show that stands for crazy commercial enterprises. Our SME IPO market was experiencing its own PP Waterball moment.
So, to tame this PP Waterballs Effect, SEBI bought some new hunters.
- Now, companies must have had operating earnings (EBITDA) of at least Rs 1 crore in two of the last three fiscal years.
- SEBI has also limited the offer-for-sale (OFS) component in SME IPOs to 20% of the total issue size.
- Selling shareholders cannot sell more than half of their present shares.
- The regulator has also restricted the use of IPO gains. Companies can no longer use IPO proceeds to repay loans to promoters, directors, or related parties. This is intended to keep money from being exploited, as was the case with Varanium Clouds, and to guarantee that the monies generated are used for their intended purpose.
Finally, The Medicine Worked.
SEBI’s measures have clearly had an impact. SME IPO subscriptions have dropped dramatically this year, with the highest in the last two months being about 44 times—a far cry from the 400+ times we saw before. The once-bustling grey market activity has nearly vanished.
But the question arises- Why small appetite investors are attracted towards SME IPOs?
In a main board IPO, the lot size for small investors is around ₹ 15,000. The average listing gains are around 40%. This means that the investor makes a gain of ₹ 6,000. Compare this with the SME IPOs, where the average lot size is in the range of ₹ 120,000 to ₹ 140,000 and the listing gains are in the range of 70%-80%. This means that an investor has an opportunity to make a gain of ₹ 1 lakh in a SME IPO. This is what makes it attractive.
The Path Forward Is A Mix Of Growing Pains And Maturing Markets.
Growing pains will occur, as they do in every new market. The SME capital market is like a teenager, who is full of enthusiasm and potential, but prone to making rash decisions and requiring regular, periodic direction.
With change in regulatory rules and more investor awareness, this market will mature. Companies will learn to value sustainable growth over quick cash grabs. Investors will develop more sophisticated evaluation tools beyond just “how many times will this IPO be oversubscribed?”
In the long run, a healthier SME IPO market could help bridge the funding gap for smaller companies, reducing their dependence on often-expensive debt financing. It could create a more diverse and resilient corporate ecosystem where businesses of all sizes have access to appropriate capital.
The Water Balloon Philosophy of Investing
Perhaps the best way to think about SME IPOs—or any investment, really—is to return to our water balloon analogy. A water balloon filled to just the right point is resilient, functional, and serves its purpose. Overfill it, and you’re asking for a splash.
The art of investing, like the art of filling water balloons, lies in knowing when enough is enough. SEBI’s regulations are simply trying to teach us all that valuable lesson—before too many more of us get soaked.
As the market matures and investors become more aware, we’ll likely find a balanced middle ground where promising small businesses can access capital, and investors can earn reasonable returns without exposing themselves to PP Waterballs-level risks.
After suffering a financial loss in the South Sea Bubble, even the renowned Sir Isaac Newton remarked, “I can calculate the motion of celestial things, but not the stupidity of humans.” So how could we foresee what the market would do if even a genius like Newton couldn’t? It is possible to take a number of steps to minimize the market’s and investors’ possible losses. 
Until then, trade carefully in the SME IPO playground. Those water balloons might look fun, but they can leave you surprisingly wet.
