What Factors Should You Check Before Applying to an IPO

What factors should you check before applying to an IPO? Start with the offer document, because it answers most of the questions that social-media hype skips. This is general information, not investment advice, and every factor below is a rule of thumb, not a guarantee.

Read the Offer Document First

Everything else on this list comes from one source, so know which version you’re reading.

• The DRHP (draft red herring prospectus) is filed first. The RHP is the updated version released closer to the opening, with final details
• Most of what matters sits in a handful of sections: Objects of the Issue, The Issue and Capital Structure, Basis for Issue Price, risk factors, litigation and restated financials
• A focused read takes 30 to 60 minutes if you work through the sections in order
• SEBI’s observations on the DRHP often point to real risks, so they’re worth a look
• Read the “Basis for Issue Price” section with caution. The issuer writes it carefully because it wants you to anchor on it

Fresh Issue or Exit Ticket

The structure of the issue tells you where your money goes.

• In a fresh issue, the company creates new shares and keeps the proceeds
• In an offer for sale (OFS), existing holders such as promoters or private equity funds sell shares and keep the money
• A large promoter OFS can mean insiders are using the IPO as an exit, not a growth step
• Some analysts set personal filters, such as wanting fresh issue to be at least 70% of the size, and treat a 100% OFS as a reason to pass. These are individual rules, not regulation
• A mix is common. Manika Plastech’s recent issue, for example, split into ₹92.5 crore fresh and ₹33 crore OFS from its promoter entity

Where the Fresh Money Is Going

The “Objects of the Issue” section is the reason the company wants your cash.

• Better signs: new capacity, expansion into new markets, technology, or funding growth
• Weaker signs: mostly repaying old debt, or vague “general corporate purposes”
• Check whether the numbers add up to something you can verify, such as a stated plant or capex plan
• A strong business can still be a poor IPO if the money isn’t going to the business

Business Quality and Financials

Three years of numbers show whether growth is steady or lumpy.

• Revenue growth, and whether it’s consistent year to year
• Margins, and whether they can improve as revenue rises
• Debt-to-equity, since heavy borrowing raises risk, especially when interest rates rise
• ROE and ROCE, which show how efficiently the company uses capital
• Cash flow, not just reported profit
• Revenue concentration: dependence on one customer or product is a risk the prospectus will flag

Valuation Against Listed Peers

A good company bought at a high price can still be a bad investment.

• Compare the IPO’s P/E, EV/EBITDA and price-to-sales at the upper price band with listed competitors
• If peers trade at 25x earnings and the IPO asks 50x, you’re paying a steep premium that needs a clear reason, such as better growth or margins
• One investor guide suggests passing when valuation runs more than 50% above peers. Treat that as a personal filter too
• Peer comparison is only as good as the peers chosen, so check whether the listed comparables are truly similar

Promoters and Governance

In India, many listed businesses stay promoter-driven, so the people matter.

• Promoter background and past ventures
• Holding before and after the IPO. A high post-IPO stake signals commitment, while a heavy sell-down needs an explanation
• Shares pledged to lenders, which can create pressure later
• Related-party transactions and litigation, including any regulatory actions
• Lock-in periods, which show when insiders can sell

Anchor Investors and Demand Signals

Other people’s money is a clue, but a weak one on its own.

• Anchor investors are institutions that buy a day before the public opening at the fixed price, usually with a 30 to 90 day lock-in
• Check who they are and how large the anchor book is compared with the issue
• Don’t confuse buzz with fundamentals. In one comparison, an IPO subscribed about 43x and another subscribed about 0.93x both opened lower
• Grey market premium is speculative, so read the documents before looking at it

A Reminder From the Numbers

Listing-day performance isn’t the final verdict, in either direction.

• One analysis notes that Omnitech Engineering listed about 10% below its ₹227 issue price in March 2026 and traded around ₹584 by August 2026
• That cuts both ways: an early stumble can recover, and an early pop can fade
• Decide whether you’re applying for listing gains or for long-term ownership, because the checklist weighs differently for each

FAQs

Q1. Where can I find reliable information on an IPO?

The RHP and DRHP filed with SEBI carry the legally required disclosures. They cover the business, financials, risk factors, promoters and how the issue proceeds will be used.

Q2. Is a high grey market premium a good reason to apply?

No. Grey market premium is speculative and can change quickly. Read the offer document and judge the price first, then treat GMP as a minor extra signal at most.

Q3. Is an IPO with a large OFS always bad?

Not always, since early investors exiting is normal. But if most of the issue is OFS, the company gets little of the money, so check how much promoters keep and why they’re selling.

Q4. Does heavy subscription guarantee a listing gain?

No. Two issues subscribed very differently, about 43x and about 0.93x, both opened in the negative. Pricing, market mood and fundamentals still decide how the stock trades.