What is more worrying for investors is the correction follows a difficult 2025, when broader markets turned volatile. High valuations after a long rally, global inflation concerns, geopolitical tensions and foreign investor outflows weighed on sentiment. SME stocks, which are typically more sensitive to liquidity and risk appetite, were hit harder than largecaps last year.
Sourav Choudhary, Managing Director at Raghunath Capital, said the shift in sentiment has been dramatic. “Over the last 12 months, most SME-listed companies have witnessed a sharp correction in stock prices. The SME platform, which created enormous value between 2022 and 2025, is now facing a completely different reality. We are seeing issues where even 1x subscription is doubtful,” he said.
Liquidity has emerged as the core problem. During the boom phase, institutional investors, including FIIs and DIIs, participated actively in anchor portions. Their presence not only ensured successful subscriptions but also provided post-listing stability by absorbing selling pressure from retail investors.
“Today, institutions are hesitant. The core issue is liquidity,” Choudhary said. “If an institutional investor holds 1–5% equity in an SME company, there is practically no clarity on how to execute a partial or full exit when daily traded volumes are often below 0.5% of total free float. Without a viable exit mechanism, capital allocation becomes difficult.”
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With low trading volumes, even fundamentally sound companies have seen valuations compress. Choudhary pointed out that some SME stocks have corrected 80-90% from their peaks and still struggle to find buyers. Companies that were trading at P/E multiples of 40-50 during the boom are now available below 10 times earnings.
Regulatory changes have also had an impact. Stricter norms and reduced probability of migration from the SME platform to the main board have made investors more cautious. The earlier belief that an SME listing was a stepping stone to a main board presence has weakened.However, not everyone believes the story is over. Abhinav Tiwari, Research Analyst at Bonanza, said the broader Indian market environment is improving in 2026. “India has been strengthening trade ties with major economies through agreements with the US, EU and UK. These deals are expected to improve export opportunities and attract foreign investments. On the domestic front, the Union Budget FY27 allocated Rs 10,000 crore for MSMEs, which could support growth in the small business segment from which many SME-listed companies emerge,” he said.
Tiwari also noted that small cap and SME indices have shown signs of recovery since late January 2026. Out of around 25 SME IPOs launched in 2026, 14 delivered positive listing gains and about 10 are currently trading above their issue price, roughly 40%. For IPOs launched after January 27, the numbers look slightly better, with about half still trading above issue price.
“These indicators suggest that investor appetite for smaller companies has improved in recent weeks,” he said.
Arpit Jain, Joint Managing Director at Arihant Capital Markets, said the easy money phase is clearly behind. “The IPO story is far from over, but the mad rush in SME IPOs is certainly behind us,” he said.
According to him, the correction has exposed companies with weak fundamentals that listed during the peak euphoria. “The current correction is actually healthy for the ecosystem,” Jain said. “However, the slowdown will create some short-term challenges even for fundamentally strong companies. Investor sentiment has turned cautious, and the easy liquidity that once chased every SME IPO is no longer there.”
He added that quality companies with sound fundamentals and credible management teams can still attract capital. In his view, the long-term growth story of SMEs remains intact, but the market is undergoing a reset.
The bigger concern is whether the SME platform risks losing relevance if liquidity issues persist. Choudhary believes the regulator may need to rethink the framework to improve trading volumes and institutional participation. “Without liquidity, valuation discovery becomes distorted and institutional participation dries up,” he said. “If liquidity challenges remain unaddressed, the platform risks losing relevance over time.”
The SME platform was designed to help smaller businesses access equity capital and formalise their operations. It has played a key role in broadening India’s capital markets and supporting entrepreneurship. But its success depends on trust, liquidity and fair valuation.
The next phase for SME IPOs will likely be more selective. Investors are no longer chasing every issue. Merchant bankers and regulators may need to tighten due diligence and ensure stronger post-listing governance. If that happens, the platform could emerge stronger, though probably with more realistic expectations.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)