IPO red flags: what we check in every offer document

How often each one fires, across 89 offer documents

At least one check fired on 34 of 44 (77%) mainboard documents and 41 of 45 (91%) SME documents.

And the signs in a company's favour

Counted on documents we read in full: a read that is missing sales, profit or equity is left out of every rate, so a gap in our reading cannot pass for a clean document. Each check is counted only on documents that print what it needs (a draft often leaves the post-issue promoter stake blank, for one), which is why the totals differ from row to row. One document per issue, the most final we hold (the RHP over the DRHP). Rebuilt with every run.

Every check we run, question by question

Each one compares two facts the document itself prints, against a fixed line we publish here. On an IPO's page a check that fires is shown under "Look closer" with the page it comes from; we never call an issue a red flag.

1. How it makes money

• A "largest" or "leading" claim beside a far larger peer. Fires when the document calls itself "largest", "leading", "top three" or similar, and a peer it names in its own comparison has three times its revenue or more.
• Called diversified, described as concentrated. Fires when its strengths call a customer base, product range or geography diversified, while its own risk factors describe dependence on the same thing.

2. Is it growing, and is profit turning into cash?

• Profit jumped just before the IPO, cash did not follow. Fires when the last full year's operating margin is at least 1.5 times the earlier years' average, while under half of that year's profit arrived as cash.
• Little of the profit came in as cash, over several years. Fires when cash from operations is under half of reported profit, added up over every year the document covers.
• Sales shrank. Fires when revenue is lower at the end of the period than at the start.
• Operating margin falling. Fires when the operating margin has fallen across the years the document covers.
• Fast growth, paid for in cash. In its favour Fires when revenue compounded above 20% a year and at least 80% of profit arrived as cash.
• Profit turning into cash. In its favour Fires when cash from operations at least matches reported profit, added up over the period.

3. How much cushion does it have?

• More debt than the usual line for its sector. Fires when debt is above the usual line for its sector: twice net worth by default, half of net worth for asset-light IT services, and not applied to lenders or insurers, where borrowing is the business.

4. What you pay, and who gets the money

• Most of the money goes to selling shareholders. Fires when more than 70% of the issue is an offer for sale, so the money goes to existing holders rather than the company.
• Part of the new money goes back to the promoters or their companies. Fires when a use of the fresh issue is worded as paying the promoters, their group, holding or fellow-subsidiary companies, related parties or selling shareholders.
• Use of proceeds that does not add up. Fires when a risk factor states a different share of the proceeds for a use than the objects table does, or the named uses add up to under 30% of the fresh issue.

5. Who controls it, and what is on record?

• Promoters below half after the IPO. Fires when promoters will own under 50% of the company after the issue.
• Promoters keep most of the company. In its favour Fires when promoters will own 60% or more after the issue.

How we read a document

• We read the offer document itself: the DRHP, and the RHP once it is filed, which replaces the draft. Every figure carries the page it comes from.
• Where the document's text can be read, every figure we extracted is matched back to it, and one that cannot be found is marked as unverified.
• Debt, margins and cash are judged against the company's own sector, so a lender is not flagged for borrowing and a software company is held to a tighter line on debt.
• A shareholder quota is checked against the exchange's own bidding categories before we state it.
• A read that misses the core figures is read again, and until it is, the page says so instead of leaving a gap.
• No score, no ranking, no buy or avoid. A check is a reason to read closely, not a conclusion.

Common questions about IPO red flags

The record, and how to use it

The per-issue record behind every count above downloads as CSV: one row per offer document read in full, one yes or no column per check. Free to reuse with credit (CC BY 4.0).

Data & analysis only. Not investment advice. Not a SEBI-registered research analyst. Every check is a fact from the company's own document, tested against a published line.