Pricing Efficiency and Underpricing in MSME Initial Public Offerings: Evidence from the Indian Capital Market
Keywords:
MSME IPOs; underpricing; pricing efficiency; listing gains; book building; BSE SME; NSE Emerge; IndiaAbstract
This study examines whether the offer prices of micro, small, and medium enterprise (MSME) initial public offerings in India efficiently incorporate publicly observable information. It integrates information-asymmetry, signaling, book-building, certification, and investor-sentiment explanations of IPO underpricing. For a reproducible empirical demonstration, the paper uses a clearly identified illustrative dataset of 160 SME IPO observations calibrated to the institutional characteristics of BSE SME and NSE Emerge during 2019–2024. Pricing efficiency is evaluated through listing-day raw returns, market-adjusted returns, the proportion of positive initial returns, thirty-trading-day price correction, and multivariate determinants. The illustrative results indicate an average initial return of approximately 18.3%, with 88.8% of offerings closing above the offer price on the listing day. Subscription demand is positively related to initial returns, whereas issue size, firm age, and reputable intermediary certification reduce the pricing gap. The results support the proposition that public information is not completely absorbed into SME IPO offer prices. However, the decline in abnormal returns over the first month suggests partial aftermarket correction. The paper contributes an integrated framework for distinguishing deliberate underpricing from inefficient price discovery and offers recommendations for issuers, merchant bankers, exchanges, regulators, and investors. Because the numerical dataset is illustrative, the findings demonstrate a defensible research design rather than claim new facts about the complete population of Indian SME IPOs.
References
Allen, F., & Faulhaber, G. R. (1989). Signalling by underpricing in the IPO market. Journal of Financial Economics, 23(2), 303–323. https://doi.org/10.1016/0304-405X(89)90060-3
Beatty, R. P., & Ritter, J. R. (1986). Investment banking, reputation, and the underpricing of initial public offerings. Journal of Financial Economics, 15(1–2), 213–232. https://doi.org/10.1016/0304-405X(86)90055-3
Benveniste, L. M., & Spindt, P. A. (1989). How investment bankers determine the offer price and allocation of new issues. Journal of Financial Economics, 24(2), 343–361. https://doi.org/10.1016/0304-405X(89)90051-8
BSE Ltd. (n.d.). BSE SME market watch. Retrieved July 24, 2026, from https://m.bseindia.com/smemarket.aspx
Carter, R., & Manaster, S. (1990). Initial public offerings and underwriter reputation. The Journal of Finance, 45(4), 1045–1067. https://doi.org/10.1111/j.1540-6261.1990.tb02426.x
Chemmanur, T. J., & Fulghieri, P. (1999). A theory of the going-public decision. The Review of Financial Studies, 12(2), 249–279. https://doi.org/10.1093/rfs/12.2.249
Chorruk, J., & Worthington, A. C. (2013). The pricing and performance of IPOs for small- and medium-sized enterprises: Evidence from Thailand. The Journal of the Asia Pacific Economy, 18(4), 543–559. https://doi.org/10.1080/13547860.2013.803840
Derrien, F. (2005). IPO pricing in “hot” market conditions: Who leaves money on the table? The Journal of Finance, 60(1), 487–521. https://doi.org/10.1111/j.1540-6261.2005.00736.x
Dhamija, S., & Arora, R. K. (2017). Initial and after-market performance of SME IPOs in India. Global Business Review, 18(6), 1536–1551. https://doi.org/10.1177/0972150917713081
Hanley, K. W. (1993). The underpricing of initial public offerings and the partial adjustment phenomenon. Journal of Financial Economics, 34(2), 231–250. https://doi.org/10.1016/0304-405X(93)90019-8
Loughran, T., Ritter, J. R., & Rydqvist, K. (1994). Initial public offerings: International insights. Pacific-Basin Finance Journal, 2(2–3), 165–199. https://doi.org/10.1016/0927-538X(94)90016-7
Lowry, M., & Schwert, G. W. (2004). Is the IPO pricing process efficient? Journal of Financial Economics, 71(1), 3–26. https://doi.org/10.1016/S0304-405X(03)00205-8
Megginson, W. L., & Weiss, K. A. (1991). Venture capitalist certification in initial public offerings. The Journal of Finance, 46(3), 879–903. https://doi.org/10.1111/j.1540-6261.1991.tb03770.x
National Stock Exchange of India. (n.d.). About Emerge platform. Retrieved July 24, 2026, from https://www.nseindia.com/static/products-services/emerge-platform-about-sme
Purnanandam, A. K., & Swaminathan, B. (2004). Are IPOs really underpriced? The Review of Financial Studies, 17(3), 811–848. https://doi.org/10.1093/rfs/hhg055
Rathnayake, D. N., Louembé, P. A., Kassi, D. F., Sun, G., & Ning, D. (2019). Are IPOs underpriced or overpriced? Evidence from an emerging market. Research in International Business and Finance, 50, 171–190. https://doi.org/10.1016/j.ribaf.2019.04.013
Ritter, J. R. (1991). The long-run performance of initial public offerings. The Journal of Finance, 46(1), 3–27. https://doi.org/10.1111/j.1540-6261.1991.tb03743.x
Rock, K. (1986). Why new issues are underpriced. Journal of Financial Economics, 15(1–2), 187–212. https://doi.org/10.1016/0304-405X(86)90054-1
Securities and Exchange Board of India. (2018). Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. https://www.sebi.gov.in/legal/regulations/sep-2018/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-_40328.html
Securities and Exchange Board of India. (2025). Frequently asked questions on issue of capital and disclosure requirements. https://www.sebi.gov.in/sebi_data/faqfiles/may-2025/1747290561386.pdf
Downloads
How to Cite
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
