Read This If You Are Planning to Invest in SME IPOs: RBI Report Revealed

Indian capital markets are witnessing a significant evolution in the small and medium enterprise (SME) space. A recent focus by the Reserve Bank of India (RBI) reveals how lead merchant bankers are shaping investor demand and shaping the dynamics of SME initial public offerings (IPOs). 

In this article, we explore the forces behind this surge, examine the critical role of merchant bankers, present key data on SME IPO trends, and discuss the implications for investors and the broader economy.

1. Surge in SME IPO Activity

The SME IPO segment in India has shown remarkable growth, particularly during fiscal years 2023-24 and 2024-25. According to the RBI, SME firms raised meaningful sums—approximately ₹5,917 crore in FY24 and about ₹9,111 crore in FY25, with fresh issues accounting for over 90 % of the proceeds.

This growth is being driven by strong retail investor participation and buoyant market sentiment, as many investors seek listing gains from smaller firms. 

However, underlying this exuberance are risks: the RBI study noted that while listing gains have been sharp, many SMEs show weak post-listing performance, highlighting a vulnerability that retail investors must recognise.

This boom is also supported by structural factors such as improved market frameworks, enhanced settlement mechanisms and greater awareness of equity-market access among smaller firms.

2. The Role of Lead Merchant Bankers in SME IPOs

In its study, the RBI highlights the pivotal role of lead merchant bankers (LMBs) in determining the success of SME IPOs. Specifically, the reputation and track record of the lead merchant banker emerged as the most critical factor in shaping investor confidence and demand.

Lead merchant bankers act as gatekeepers: they conduct due diligence, shape the issue price, advise on disclosures, and coordinate marketing. A merchant banker with strong brand value gives investors greater assurance about the credibility of the issue.

Meanwhile, SMEs backed by weaker merchant bankers often find their IPOs struggle to generate sustained demand or suffer steep corrections post-listing. According to the RBI, this is particularly acute in cases where valuations are driven more by hype than fundamentals. 

The merchant banker’s role has therefore become even more visible: as SMEs rise in number, market regulators and investors alike emphasise merchant banker quality, governance standards and rigorous vetting of underwriting and disclosures.

3. SME IPO Trend Data Overview

Below is a table summarising key trend data for SME IPOs in recent years, including fundraising amounts and fresh issue vs offer-for-sale (OFS) breakdowns.

Table: SME IPO Fundraising Trends (₹ crore)
 

As seen in the table, the SME IPO market is increasingly driven by fresh equity issues rather than exits via OFS. This suggests firms are seeking capital for growth and working-capital enhancement rather than promoter exits.

This shift has important implications: while capital-raising is healthy, the reliance on new issues puts pressure on merchant bankers and firms to deliver credible growth prospects and sustainable post-listing performance.

4. Implications for Investors and the Economy

For investors, the SME IPO boom offers opportunities but also heightened risk. Listing gains may be tempting, yet the RBI’s caution that many SMEs show weak fundamentals and post-listing corrections cannot be ignored.

Retail participation, which has surged significantly, adds to the dynamic. Younger investors in particular are increasingly drawn to smaller IPOs with hopes of quick gains. But such enthusiasm can lead to overvaluation: one study observed about 20 % of SME listings in FY24-25 displayed price-to-earnings ratios significantly above industry peers.

From an economic viewpoint, the rise of SME IPOs is positive: it signals an expanding base of firms accessing equity capital, potentially improving growth, job creation and competitiveness. But regulators must keep pace: the quality of disclosures, transparency of issue mechanisms and the oversight of merchant bankers all require strengthening.

For merchant bankers, the stakes are high: their reputation now directly correlates with issue success and long-term listing behaviour. Effective risk management, realistic valuations and post-listing support will distinguish credible houses from others.

Conclusion

The evolving landscape of SME IPOs in India presents both promise and challenge. The surge in fundraising reflects a deeper opening of equity markets to smaller enterprises, spurred by retail demand and buoyant sentiment. 

At the same time, the significance of lead merchant bankers in shaping IPO outcomes has never been greater: their quality, credibility and governance practices can make or break an issue.

For investors, the message is clear: approach SME IPOs with due diligence, scepticism of hype and awareness of the key institutional enablers behind the offering. For policymakers and market participants, the focus must now shift towards strengthening frameworks, valuation discipline, data transparency, merchant-banker accountability and post-listing monitoring.

Ultimately, if well-executed, the SME IPO segment can deliver a virtuous cycle of growth, capital deepening and inclusive financial participation, but only if the underlying architecture is robust and aligned with long-term value creation rather than short-term listing gains.
 

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