Amid the boom in the IPO market, understanding any new issue has become more important than ever for investors. A company’s IPO being in discussion or popular among investors does not prove that it is a good investment. The real picture is hidden in the company’s business, financial position, valuation and risks.
To understand this information, the RHP, or Red Herring Prospectus, is an important document. It contains information related to the company’s business, financial position, risks, management, use of the amount raised from the IPO and legal matters.
Let us understand which 6 red flags should be kept in mind while reading the RHP and how, with the help of these signals, investors can better understand the actual situation of an IPO.
What’s Happening?
Activity has intensified in India’s IPO market during 2026. By 26 August 2026, companies had raised about Rs 22,400 crore through IPOs. But along with the boom in the IPO market, risks cannot be ignored. In 2026, by 26 August, 37% of IPOs closed below their issue price on the day of listing. In 2025, this figure was 33%. In addition, about two out of five companies listed after 2022 were trading below their IPO issue price as of 26 August 2026.
Since before the IPO, the company has no listed market track record or exchange trading history, the information in the RHP becomes even more important for investors. Investing only by looking at the size of the IPO, grey market premium or the popularity of the company is not enough.
The Real Picture of Growth, Profit and Cash Flow
While evaluating an IPO, it is necessary to look at the company’s growth, profitability and valuation together. Only rapidly growing revenue does not prove that the company is attractive for investment. If revenue is increasing but profit is weak or the company is continuously generating negative cash flow, then this can be a signal of caution.
From the financial statements, one should try to understand whether the profit reported by the company is turning into actual cash generation or not. Continuously negative cash flow can be a signal that accounting profit is not converting into actual cash.
Along with this, it is also necessary to compare the valuation of the IPO with listed companies in the same sector. Even a company with strong growth, if it comes to the market at a very expensive valuation, does not remain attractive from an investment point of view.
The ‘Objects of the Issue’ section of the RHP is also important. It states whether the amount raised from the IPO will be used for business expansion, reducing debt, working capital or other activities. If the share of OFS, or Offer for Sale, is high in the IPO, then the investor should understand how much new capital will actually go into the company’s business. The amount received from OFS goes to the existing shareholders, not to the company.
Other Red Flags Hidden in the RHP
Looking only at revenue and profit in the RHP is not enough. The price and transfer of shares before the IPO, recent funding and its valuation should also be examined. If shares were bought at a considerably lower price six months before the IPO and now the IPO price is almost double, then the question arises whether there has been such an improvement in the company’s business and financial performance that this high valuation is justified.
Along with this, match the compensation of the promoter and senior management with the size, performance and industry benchmarks of the company. Contingent liabilities such as third-party guarantees, disputed tax demands, pending legal cases and bill discounting can increase the risk of large cash outflows in the future.
On the other hand, repeatedly issuing equity can dilute the shareholding of existing shareholders. Continuously increasing pressure on working capital is also an important signal, especially when revenue is increasing, but it is taking more time to receive payments from customers or inventory is increasing rapidly. Such signals indicate that behind the growth appearing on paper, the cash flow situation may not be equally strong.
What Does This Mean for Investors?
The current IPO activity shows the need for caution along with opportunity for investors. In 2026, 37% of IPOs trading below the issue price on the day of listing indicates that not every IPO investment is profitable.
Therefore, the investment decision should not be based only on the size of the IPO, grey market premium or the popularity of the company. In the RHP, along with the company’s growth, profitability and valuation, it is also necessary to look at cash flow, use of IPO funds, pre-IPO share prices, management compensation, contingent liabilities, equity dilution and the position of working capital.
A strong IPO is not just one whose revenue is growing rapidly. The investor should also see how sustainable the growth is, whether the profit is converting into actual cash or not, and whether the valuation that the company is demanding is in line with its business and financial performance or not.
What’s Next?
In the coming time, activity in the IPO market may increase further. Several companies may come to the market before 30 September 2026, because the one-year validity of SEBI approvals for many companies is expiring around that time.
In such an environment, options for investors will increase, but more IPOs do not mean more good investment opportunities. Separate examination of every new issue will be necessary.
Going forward, the role of the RHP in IPO investment may become even more important. The most important thing for investors will be that they should not look only at the growth story, but understand the company’s profitability, cash flow, use of funds, valuation, pre-IPO transactions, management compensation and potential liabilities together. This process itself can help in distinguishing between an attractive IPO and an expensive or weak IPO.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
Investments in the securities market are subject to market risks. Read all related documents carefully before investing.
