Published on July 28, 2025 | Last updated on August 02, 2025
What is a Market Maker in SME IPO?
One of the significant challenges faced by Small and Medium Industries (SMEs) in comparison to Mainboard IPOs is thin liquidity. Liquidity refers to the ease with which a stock can be bought or sold without significantly impacting the market price of the stock. Limited liquidity makes it difficult to execute buy or sell orders, leading to sharp price swings and deterring investors from investing.
A Market Maker is a SEBI-registered trading member of a stock exchange who injects liquidity. It means they agree to continuously buy and sell a particular stock at quoted prices. This ensures that there is always someone to buy or sell the shares. A market maker is like a friendly store owner who always keeps some of that stock in stock and is ready to buy and sell. This way, investors like you can trade even if retail activity is low.
Is It Mandatory to Have Market Makers in SME IPOs?
Yes, as per the rules of SEBI and the SME platforms of NSE & BSE, it is mandatory to appoint a Market Maker for a period of 3 years of the SME IPO listing.
This rule ensures that the trading remains healthy and active, and investors can enter and exit positions smoothly.
Why Are Market Makers Important for SME IPOs?
Here is how market makers help.
- Provide Liquidity: They ensure there is always a buyer or seller for the stock. So, if you want to sell your SME shares, you will find a buyer (market maker).
- Reduce Price Volatility: Without market makers, the prices of SME stocks can swing wildly. Market Makers help to stabilize the prices by continuously offering to buy and sell the shares within reasonable price bands.
- Build Investor Confidence: To know that you can exit easily can make you more confident to invest in the first place.
- Help in Price Discovery: The market makers help to determine the right price of the stock based on supply and demand.
Key Rules for Market Making in SME IPOs
SEBI and SME exchanges like NSE Emerge and BSE SME mandate the following rules for market making.
- Mandatory Period: Market making must continue for 3 years from listing.
- Minimum Inventory: The issuer (the company coming with the IPO) must allocate at least 5% of the IPO shares to the market maker upfront. This gives them shares to start trading.
- Availability: For at least 75% of market hours during each trading day, the market maker must maintain a two-way quote, a “bid” price, and an “ask” price.
- Depth Requirement: The quoted price (bid and ask price) by the market maker should be a minimum of Rs 1 lakh worth of shares.
- Guaranteed Execution: The market maker guarantees the execution of the trade at the quoted price and quantity.
- No Promoter Dealings: The Market maker cannot buy promoter-owned shares during the 3 years.
- Market Makers Per Issue: There can be 1 to 5 market makers per SME IPO.
- Eligibility: Only trading members with a minimum net worth of Rs 1 crore can act as market makers (discussions are underway to increase the requirement).
What Market Makers Actually Do?
Before Listing
- They agree to take 5% of the issue price
- Once the allotment is done, they receive the shares and prepare to quote the prices.
After Listing
- They continuously post two-way quotes (bid and ask price) during trading hours (>= 75 uptime).
- They buy or sell shares from their inventory at posted prices to meet the investor demand.
- If there are multiple market makers, they compete among themselves to offer better prices, which helps to lower the spread (difference between the buy and sell price).
- They have to remain active for the 3-year mandated period.
- If the market maker fails to give a quote or meet their obligations, the exchange can penalize or replace them, or even bar them from new assignments.
How do market makers benefit from this arrangement?
Market makers benefit from this SME IPO arrangement in the following ways.
1. Profit from the Bid-Ask Spread
Market Maker quotes both the buy price (bid) and the sell price (ask). The difference between the two is called the spread. When an investor trades through a market maker, he buys at a slightly higher price and sells at a slightly lower price. The difference is the profit for the market maker.
Example:
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Market maker quotes: Buy at ₹98, Sell at ₹102.
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Investor sells at ₹98 → MM buys.
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Later, the investor buys at ₹102 → MM sells.
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Market maker earns ₹4 per share.
Since the market maker does this multiple times through the trading day, it adds up to a significant income if the trading volume is good.
2. Guaranteed Allotment of 5% Shares in IPO
It is mandated that the issuer of the SME IPO reserve 5% of the total IPO shares for the market maker. These shares are often bought at the issue price and give the market maker a ready inventory to trade post-listing. If the stock does well post-listing, it becomes another source of profit.
3. Market-Making Fee from the Issuer
The issuer (SME IPO company) pays the market maker an upfront fee, which covers the 3-year compulsory market-making service given by the market maker.
4. Reputation and Visibility
Being a market maker for a successful SME IPO helps build credibility and opens up new potential opportunities.
5. Strategic Positioning and Networking
Market makers often work closely with:
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Merchant bankers,
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Exchanges (BSE/NSE),
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SME promoters.
This helps the market maker build relationships that could be valuable for other financial services, such as broking, fundraising, and advisory.
Key Risks for the Market Maker
Price Movement Risk: If the price of the share falls below the allocation price (the price paid by the Market Maker to the issuer for the 5% IPO shares), the market maker may face losses.
Imbalance in Supply and Demand: If there are too many sellers and not enough buyers, then the market maker may be forced to buy more shares than they ideally want to hold.
Low Trading Volume: When the trading activity is low, it becomes difficult for the market maker to recover the cost and make a profit.
Bottom Line: What Investors Should Know
For Investors
Market Makers guarantee you can trade, making SME stocks less risky.
But Market Makers don’t promise profits, only ensure that you will be able to buy and sell.
Check the spread before trading. Spread is the difference between the buy and sell prices. A narrow spread means better pricing.
As an investor, be aware of IPO hype, over-subscription, and high GMP. Market-making only ensures liquidity, not the fundamentals of the company coming with the IPO.
Final Thoughts – Role of Market Makers in SME IPOs
Market Makers are like invisible supporters of the SME IPOs. While companies get the money from the IPO and the investors get their shares, it is the Market Makers who keep the market alive and healthy in the early days.
For investors, the presence of market makers is a good sign; it means you won’t be stuck with an illiquid investment. For companies, appointing a market maker helps build trust and credibility. And, for market makers, it is a profitable opportunity, but one that comes with responsibility.
About the Author
Sandip Desai is a stock market professional with over 18 years of experience in the Indian broking and investment space. He holds NISM certifications in Equity Derivatives, Currency Derivatives, Commodity Derivatives, and Mutual Fund Distribution. Sandip is passionate about simplifying financial concepts and helping investors navigate IPOs and capital markets with confidence.
Disclaimer
This article is for educational and informational purposes only. It reflects the author’s personal views based on experience in the Indian stock market. Please consult a SEBI-registered investment advisor before making financial or investment decisions.