With hundreds of IPOs launching every year in India, it is easy to get caught up in the excitement. But not every IPO is a good investment. Here are 5 red flags that should make you pause before applying.
Red Flag 1: Declining Revenue or Profitability
Always check the 3-year financial trend in the DRHP. If the company's revenue is declining or losses are widening in the year immediately before the IPO, it could mean the IPO timing is opportunistic rather than growth-driven. Strong companies typically IPO when they are in a growth phase.
Red Flag 2: Extremely High Valuations
Compare the IPO P/E ratio with listed peers in the same sector. If the IPO is priced at a 3–4x premium to sector average without a clear justification (higher growth, superior margins), the stock may underperform post-listing even if it lists well initially.
Red Flag 3: Promoter Selling a Large Stake (OFS-heavy IPO)
An IPO with a large Offer for Sale (OFS) component means promoters are cashing out, not using the capital for business growth. A fresh issue is generally more positive as funds go into the business. Watch for IPOs where OFS is > 60% of total issue size.
Red Flag 4: Vague Use of IPO Proceeds
The DRHP must disclose exact use of IPO proceeds. If a large portion is allocated to "general corporate purposes" (> 25–30%) without specific project details, it raises questions about capital allocation discipline.
Red Flag 5: High Promoter Debt or Pledged Shares
Check if promoters have significant personal debt secured against company shares. High pledge percentage is a major red flag — it indicates the promoter may be under financial stress and could be forced to sell shares, driving the price down post-listing.
Key Takeaway: Always read the Risk Factors section of the DRHP carefully. It is the most honest part of the document — companies are legally required to disclose all material risks there.