Assessing the Dichotomy in SME Merchant Banking Performance (H1-FY26)
Why India's SME Merchant Banks Face a Mid-FY26 Stress Test?
The performance of India’s SME Merchant Banking ecosystem in FY26 (so far) can be viewed through the lens of a high-octane internal combustion engine. The market is roaring, deal flow is unprecedented, fuelled by a retail investor base hungry for primary market exposure and a governmental push for formalisation. But like any engine running hot, the question is not about its immediate speed, but the integrity of its cooling system and the viscosity of its oil.
The first half of Fiscal Year 2025 has been defined by a significant divergence in the SME capital markets. While headline IPO volumes, particularly in high-growth regions like Asia, have demonstrated resilience and even set new records, the underlying merchant banking performance reveals a highly selective and risk-laden environment. The sector’s success hinges entirely on the credibility of the lead managers, who are navigating extreme market volatility and heightened regulatory scrutiny. The period is best characterized by a “flight to quality,” rewarding top-tier banks while exposing severe vulnerabilities among less rigorous market participants.
Is this sustainable thrust, or simply a sign of operational strain?
The Good, The Bad, and The Ugly
SME merchant bankers, serving as the bridge between small and medium enterprises and public markets, have experienced a half-year of extremes. Their performance is assessed across three critical dimensions: transaction volume, deal quality, and structural integrity.
1. The Two-Fold Premium of Credibility
The standout success of H1 FY2025 is the definitive value assigned to execution certainty and trust, transforming reputation into a hard, measurable financial asset.
The Reputation Dividend: Based on analysis of merchant bank deal flow and subscription metrics, including data compiled from the IPO Platform (H1 FY2025 analysis), a clear reputation-based disparity emerges. IPOs managed by the top five BRLMs (by deal value) commanded an average subscription multiple of 18.5x, starkly contrasting with the 9.2x average secured by the remaining cohort. This two-fold ‘reputation premium’ confirms that institutional and High Net Worth (HNI) investors are decisively prioritizing the integrity of the intermediary over listing volatility.
The Flight to Quality Phenomenon: Top firms have been highly selective, primarily channelling capital into national strategic priorities. Sectors such as Specialised Robotics, Defence Manufacturing, and Advanced Life Sciences secured 68% of the total funds raised by the top quartile of BRLMs. This strategic alignment insulates them from broader cyclical risk and positions them to command higher fee percentages, reinforcing their dominance through superior deal structuring and sector expertise. Their performance is less about volume and more about the profitable channelling of capital into resilient business models, securing robust aftermarket performance, and delivering a clear return on investor faith. They are the clear winners, thriving by leveraging their reputation as an arbiter of quality rather than just a transaction facilitator.
2. Macroeconomic Squeeze and Pricing Pressure
Beneath the successful headline figures, the majority of merchant bankers are contending with significant operational friction stemming from global macroeconomic realities and evolving regulatory demands.
The BSE SME IPO Index performance which can be perceived as a report card for the merchant banking cohort tells a tale. While the index has shown remarkable long-term growth (with returns over the past 3 years soaring by over 400%), the FY26 performance so far signals a distinct slowdown and bifurcation in quality.
Average Listing Gains Decelerate: While listing gains remain attractive (averaging around $+15\%$ for the overall cohort year-to-date), the frequency of triple-digit listing gains - a hallmark of the FY24/25 boom, has sharply decreased.
The Post-Listing Plunge: The most critical data point is the post-listing value destruction. As of late FY26, a worrying 40% of the newly listed SME issues are trading below their issue price within 90 days of listing. Furthermore, the tail risk is significant: a small, but high-profile group of issues has plunged over 50% from their issue price. This rapid erosion of value points directly to a systematic failure in the merchant bankers’ core fiduciary duty: gatekeeping.
More dangerously, it suggests a trend towards the misuse of the public listing mechanism. Merchant banking, in these instances, morphs from a growth engine into an exit strategy for private capital - often facilitating the offloading of equity from over-leveraged Private Equity-backed SMEs onto the unsuspecting public.
The Valuation Crucible: The global inflationary and interest rate environment has forced investors to demand realistic, foundationally sound valuations. Merchant bankers must now confront SME owners with the reality that the buoyant, permissive valuations of past cycles are obsolete. This difficult dialogue puts direct pressure on fee structures and mandate retention, as issuers, perhaps overestimating their private market value, seek more accommodating, but often less rigorous, partners.
The Regulatory Cost Barrier: In response to the high volume of listings, regulatory bodies have intensified scrutiny. New compliance requirements, including mandatory quarterly detailed risk disclosure and independent third-party market-making audits, have been introduced. For smaller or mid-tier merchant banks, the estimated increase in legal and compliance overheads for H1 is roughly 25%. This disproportionate cost acts as a structural barrier, limiting their capacity to execute rigorous due diligence and further entrenching the advantages of larger, more financially robust competitors.
3. Systemic Risk and Erosion of Investor Trust
The most concerning performance metrics relate not to fee generation, but to the long-term health and reputation of the capital market.
Post-Listing Disarray: The most telling metric of poor performance is the aftermarket failure rate. Aggregated data reveals that 38% of all H1 SME listings were trading below their issue price within 90 days of listing - a significant deterioration from the 24% recorded in the previous fiscal year. This 14-percentage-point increase fundamentally compromises the market’s social contract with investors and directly implicates the pricing and risk assessment failures of the lead managers.
The Moral Hazard of Exits: A growing concern is the transfer of credit risk. Tight private credit conditions are prompting over-leveraged, private equity-backed firms to seek public listing as a necessary exit liquidity event, rather than an organic capital infusion for growth. Should merchant bankers facilitate the offloading of financially stressed entities onto the public, they are effectively transferring private sector credit problems into the market, which constitutes a systemic failure of gatekeeping that endangers the retail investor base.
A Call for Institutional Discipline
This analysis leads to a singular, critical takeaway for senior finance professionals and corporate boards: The current SME IPO market is shifting from a retail-driven euphoria phase to an institutional-required discipline phase.
The extraordinary performance of the SME Merchant Bankers in FY26, driven by record volume and concentrated market share, is creating a systemic reputational risk for the Indian capital market. The high number of failed post-listing performance is a ticking clock for regulatory intervention.
For Promoters and Corporates: Listing is no longer merely a quick capital raise but an endurance test. Companies must select BRLMs, not based on who promises the highest listing pop, but on those who can demonstrate a robust record of post-listing stock stability and institutional investor placement.
For Merchant Bankers (The Stress Test): The next 12 months will separate the ‘distributors’ from the ‘advisors’. The leaders will be forced to shift their business model from an origination-and-execution factory (like the high-volume players) to a full-spectrum corporate advisory partnership that commands higher, justifiable fees based on fundamental corporate quality and long-term capital formation, not just transient retail hype.
What it all means?
SME merchant bankers have demonstrated an ability to generate strong revenue through transaction volume in H1 FY25, particularly by leveraging brand credibility. However, this success is balanced precariously against macroeconomic volatility and fundamental concerns over deal quality and investor protection. To maintain this momentum in H2, merchant banks must shift their focus from maximizing volume to shoring up quality and transparency. This involves strict internal due diligence protocols, realistic pricing models, and a renewed emphasis on selecting issuers with sustainable, resilient business models that can withstand persistent economic uncertainty. The future success of the SME listing segment depends on the intermediaries acting not just as brokers, but as genuine market guardians.