The Indian SME IPO market, once celebrated for its "multibagger" potential, is undergoing a significant correction. As of late February 2026, the segment is grappling with a sharp cooling of investor sentiment and a return to fundamental valuations. Recent data shows that nearly 60% of SME companies listed in 2026 are currently trading below their issue price. This is a marked shift from the exuberant gains seen in previous years. Average listing gains have moderated significantly, dropping from a peak of 30% in 2024 to single digits in 2025, and now showing an average return of -2.4% for the initial months of 2026. Liquidity remains the most pressing concern for the platform. Trading volumes for many listed SMEs have plummeted, with daily turnover often falling below 0.5% of total free float. This illiquidity has made institutional investors, including Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs), increasingly hesitant. Without a clear exit mechanism, these large-scale players are pulling back, which in turn compresses valuations even for fundamentally strong companies. Regulatory tightening by SEBI has further transformed the landscape. New rules introduced in March 2025 and fully implemented throughout early 2026 have raised the barrier for entry. Minimum application sizes have doubled to 200,000 INR to filter out casual retail participation and ensure only high-risk-tolerant investors remain. Additional reforms now mandate a minimum operating profit (EBITDA) of 10 million INR for at least two of the last three financial years. Furthermore, the "Offer-for-Sale" (OFS) component is now capped at 20% of the total issue size, preventing insiders from offloading excessive stakes during the listing. Institutional participation has also been impacted by the new allocation methodology, which now uses a "draw of lots" for the Non-Institutional Investor (NII) category. This shift away from proportionate allotment has reduced the incentive for large-scale bidding, contributing to the cooling of subscription numbers. Despite these challenges, many market analysts view the current downturn as a "healthy reset." By flushing out speculative heat and enforcing stricter governance, the platform is moving toward a more mature ecosystem. However, the long-term relevance of the SME exchange depends heavily on whether liquidity challenges can be addressed to provide investors with viable exit routes.