Everyone wants SME IPOs, no one reads the fine print

Everyone around me is applying for SME IPOs. My batchmates, society friends, and even neighbours who barely check the news. It has become a thing now – open the app, apply with ₹1 lakh, and hope for a big listing-day jump.

Some people got lucky. Stocks doubled. The screenshots went viral (of course on Twitter and Telegram).

But no one really talks about what these companies do. No one reads the offer document. Most just check the grey market premium and rush to apply. It feels like the goal is not to invest, but to just get any allotment.

In this financial year alone, over two lakh people have applied for the average SME IPO. Most are first-time or young investors. That is a big shift from just a few years ago, when fewer than five hundred people used to apply. The returns look tempting with average listing gains tending to be above 50%, but many of these stocks fall sharply after the initial buzz fades.

Someone I know has three SME IPO stocks stuck in his demat. He is not sure what the companies sell. One is down 40%. The others do not trade much anymore.

That is when it hit me. This is not investing. This is chasing. And most people do not realise what they are getting into.

It Started with One Allotment

The first time someone I know got an allotment in an SME IPO, the stock opened nearly 90 percent above issue price. He sold it on listing day. The profit was more than his one-month salary.

That one moment changed everything. He started applying to every SME IPO after that. He did not care what the company did. He did not read any financials. He just wanted the next listing pop.

For a while, it worked. Not always huge gains, but enough to keep going.

Then came the allotments he did not expect. One stock opened flat. Another listed below issue price. The third got stuck and barely traded. A few months later, those stocks were down over 40 percent. His money was locked, and there was no exit.

That is when we sat down and looked at the details. Most of the IPOs he applied to were not raising money to build anything new. The promoter was selling. The business had thin margins. One company had shown a sudden profit spike just before going public.

It felt like no one was building anything. Everyone was just using the IPO to get out.

When IPOs Are Just a Way Out

I looked deeper into one of the companies he had invested in. It turned out almost all IPO proceeds were not for business expansion. It was for something called an “Offer for Sale.”

That means the promoter was not raising money to grow the company. He was simply selling part of his own stake to the public. The IPO money was not going into machines, new plants, or hiring but it was going into the promoter’s bank account.

This is not illegal. But it changes what the IPO really is.

It is not a plan for growth. It is an exit strategy.

The problem is, most retail investors do not notice this. They see a ₹1 lakh minimum investment. They see the grey market premium. They apply. But they do not realise the person who knows the company best is trying to cash out.

That should make anyone pause.

When we checked other filings, we saw similar patterns. Some promoters reduced their stake right after the lock-in ended. In some cases, the company’s profits had jumped 50 to 100 percent just before the IPO and almost like a final push to make the numbers look good.

If that profit spike disappears in the next quarter, the stock drops. And once the excitement fades, there are fewer buyers. That is when retail investors get stuck.

The promoter is out. The stock is illiquid. The price keeps slipping. And the person who applied just for the allotment is now holding a business they never understood.

What You Should Always Check Before Applying

After going through a few filings together, something became clear that most of what we needed to know was right there in the documents. We just never looked.

Most people do not. They trust what others are saying online, or they go by the grey market premium. But that is not how money should be invested.

If you are applying to any SME IPO, here are a few things to always check:

1. Where the money is going: Look for the section called “Objects of the Issue.” If the funds are being used to build something new like expanding capacity or launching new products and that is a positive sign. If most of it is for working capital or loan repayment, slow down and think. If the company is repaying loans it took from its own promoter, be extra careful.
   
2. How much the promoter is selling: If a big part of the IPO is the promoter selling shares, ask yourself why they are doing that now. A little is okay. A lot is a red flag.
   
3. Sudden profit jump: If the company had flat or low profits for years and suddenly shows a 60 percent profit increase in the last year, check if that performance is real or just timed for the IPO.
   
4. What the company actually does: This sounds basic, but it matters. If you cannot explain what the company does in one line, do not apply. If you read the name and still do not understand the business, step back.
   
5. How often the stock might trade: SME stocks have fewer shares in the market. Some do not trade at all for days. If you want to exit, it may be difficult. Check if the issue size is small and if the float is low both can affect liquidity.

These are not advanced checks. They just take a bit of time. If you are ready to apply with ₹1 lakh, it is worth giving 15 minutes to read where that money is going.

When Instagram and Telegram Become Your Research

Most people I spoke to admitted one thing that they never opened the company filings. They checked Twitter, Telegram, or some video on YouTube. Some even applied based on a forwarded message from a friend who said, “Good GMP, apply.”

The screenshots of big listing gains make it look easy. The grey market premiums create a rush. Influencers say, “This one is strong,” and it spreads.

But here is what no one tells you.

Those screenshots are from the good ones. No one posts the SME IPOs that went nowhere. Or the ones that got stuck. Or the ones that dropped 40 percent after two months.

And sometimes, the same people sharing “must apply” tips are part of small pump groups. Some have early access. Some work with market makers. Some simply post because they know it creates buzz.

If everyone is talking about the IPO and no one is talking about what the company does, that is not research. That is marketing.

This is how real money gets trapped. One click. One forward. One bet too many.

And once you are holding a stock you do not understand, there is no one to guide you out. The same channels that hyped it will move on to the next IPO. You will be left refreshing your app, wondering why the stock does not move.

What You Hold in Your Demat Is Not Just a Code

When you open your demat account and see those SME IPO shares sitting there, they are not just symbols. They are businesses. Some are real. Some are weak. Some should not have gone public at all.

But by the time you find that out, it is often too late.

What hurts most is not just the money stuck. It is the feeling that you never really knew what you were buying. That it was not investing. It was just applying, because everyone else was.

No one teaches this early. No one tells you to read the filings. No one says, “Do not chase every issue.” You only learn when the stock does not move. When the red line keeps growing. When the buzz dies and the promoter walks away with your money.

SME IPOs are not evil. But they are not toys either.

If you are not careful, you are not investing in a business rather you are just helping someone else exit theirs.

So the next time you see a grey market premium, or a post saying “Apply fast,” pause.

Ask: Would I still want this stock if I had to hold it for five years? Do I know where my money is going? Do I even know what this company sells?

If the answer is no, skip it. You do not have to apply for everything. Missing one IPO will not hurt you. But holding the wrong one just might.

Author Note

Note: This article relies on data from fund reports, index history, and public disclosures. We have used our own assumptions for analysis and illustrations.

The purpose of this article is to share insights, data points, and thought-provoking perspectives on investing. It is not investment advice. If you wish to act on any investment idea, you are strongly advised to consult a qualified advisor. This article is strictly for educational purposes. The views expressed are personal and do not reflect those of my current or past employers.

Parth Parikh has over a decade of experience in finance, research, and portfolio strategy. He currently leads Organic Growth and Content at Vested Finance, where he drives investor education, community building, and multi-channel content initiatives across global investing products such as US Stocks and ETFs, Global Funds, Private Markets, and Managed Portfolios.