IPO Boom: 37% Below Issue Price – What to Check

So, you’re eyeing an Initial Public Offering (IPO)? While India’s IPO market is certainly active, a significant number of new listings are actually closing below their issue price on day one.

Key Numbers on IPO Performance

• Total funds raised by August 26, 2026: ₹22,400 crore
• IPOs closing below issue price in 2026: 37%
• This is an increase from 2025: 33% of IPOs fell below issue price that year

Since these companies don’t have a public trading history, your best tool is the Red Herring Prospectus (RHP). It’s your detailed guide to understanding what you’re investing in.

Is the Growth Sustainable?

First, look closely at the company’s growth and profitability. Rapid growth is exciting, but you need to see if it’s something they can maintain long-term.

A big red flag is when a company shows accounting profits but keeps generating negative cash flow. This means their reported earnings might not be translating into actual cash for the business.

Where Will Your Money Go?

Next, understand exactly how the company plans to use the money it raises from the IPO. Ideally, these funds should go towards making the business stronger and bigger.

• Look for uses like: business expansion, debt reduction, or working capital.
• Be cautious if the main purpose is for existing shareholders to sell their stakes. This means less fresh capital is actually flowing into the company itself.

Check Past Share Valuations

It’s smart to compare the prices at which shares were issued or transferred in the months right before the IPO. You’re looking for any unusual jumps in value.

If the valuation significantly increases just before the public offering without major changes in the company’s fundamentals, that needs your careful investigation.

Scrutinize Management Pay and Hidden Debts

Keep an eye on the compensation for promoters and senior management. If their pay seems too high compared to the company’s size or performance, it’s a warning sign.

Also, look beyond obvious debts for “contingent liabilities.” These are potential future financial outflows that might not be immediately clear.

• Examples include: guarantees for other parties, disputed tax demands, ongoing legal cases, and discounted bills.

Frequent Equity Issuances Can Signal Weakness

If a company keeps issuing new equity frequently, it could mean they have underlying financial weaknesses. This often points to a continuous need for more capital.

Such frequent dilution isn’t usually a healthy sign for long-term investors like you.

Is the Company Managing Its Cash Flow?

Finally, pay attention to any persistent pressure on a company’s working capital. This suggests potential operational inefficiencies or financial instability.

It can impact the company’s ability to meet its short-term obligations, which is crucial for any business.

By thoroughly checking these six aspects within the RHP, you can better assess the risks and potential returns before making an IPO investment.