Before Applying for Any IPO: Red Flag Checklist

One company went from a profit of Rs 15 lakh to Rs 2.1 crore in a single year, right before its IPO.

No new product, no major expansion, just a balance sheet that suddenly looked very different.

Retail investors who missed this detail found out the hard way after listing.

This IPO red flags checklist shows you exactly where to look before you click apply.

The IPO Red Flags Checklist

Work through these points using the DRHP, available on SEBI’s website and the exchange portals.

• Profit spike timing: Check if profit jumped sharply only in the year right before filing, a classic dress up sign.
• Offer for Sale ratio: See how much of the issue is OFS versus fresh issue, since OFS cash never reaches the company.
• Use of proceeds: Confirm whether fresh issue funds go toward expansion, or mostly toward repaying promoter loans.
• Promoter holding change: Compare pre and post IPO promoter stake for a large, unexplained drop.
• Related party transactions: Check the RHP’s related party section for deals that mainly benefit promoter relatives.
• Valuation versus peers: Compare the issue’s P/E and P/S ratios against already listed peers in the same sector.
• Risk factors section: Read the first 15 to 20 listed risks closely, since the most serious ones usually come first.

Reading the DRHP Without Drowning In It

1. Skip straight to Risk Factors: this section is ordered by severity, so the top entries matter most.

2. Jump to Use of Proceeds: and check what percentage actually funds growth versus repaying existing debt.

3. Open the Related Party Transactions note: found in the financial statements section, not the marketing pages.

4. Check the Offer for Sale breakdown: listed clearly near the front of the document, alongside the fresh issue amount.

5. Scan three years of financials: specifically watching for any single year that looks disconnected from the trend.

Why the Offer for Sale Number Deserves a Closer Look

Say an IPO raises Rs 1,000 crore, and Rs 700 crore of that is an Offer for Sale.

Component	Amount	Where It Goes
Fresh issue	Rs 300 crore	Company, for stated growth or debt purposes
Offer for Sale	Rs 700 crore	Existing shareholders cashing out directly
Total issue size	Rs 1,000 crore	Split as above, disclosed in the DRHP

A high OFS isn’t automatically bad, but it does mean you should know exactly who’s being paid and why.

Watch for Fake IPO Apps Too

Genuine IPOs are applied for only through your SEBI registered broker’s trading app.

Fraudsters run separate scams entirely, using cloned apps to show fake IPO allotments worth far more than the deposit made. Real cases of this pattern are documented in IPO scams.

Never apply for an IPO through a link sent on WhatsApp or Telegram, regardless of how official it looks.

Bottom Line

A red flag in the DRHP doesn’t automatically mean avoid the IPO, but it does mean dig deeper first.

For a broader check SEBI registered company process across brokers, advisers, and funds, visit the Fraud Free checklist series.

If you were misled through a fake allotment or listed company grievance, you can file a SEBI SCORES complaint directly.

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Report. Recover. Stay Fraud Free.

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Frequently Asked Questions

1. Where can I read a company's full IPO disclosures?

The DRHP, or Draft Red Herring Prospectus, is publicly available on SEBI's website and on both the NSE and BSE portals. It covers financials, risk factors, related party transactions, and how funds will be used.

2. Is a high Offer for Sale portion always a bad sign?

Not automatically. Early investors or promoters may simply be taking some money off the table. But a very high OFS means less capital reaches the business for growth, which is worth questioning.

3. Why does a sudden profit jump before an IPO matter?

A sharp, unexplained profit increase only in the year before filing can signal balance sheet dressing to inflate valuation. Always probe why the numbers changed so quickly before applying.

4. Can I apply for an IPO through a WhatsApp link?

No. Genuine IPOs are applied for only through your SEBI registered broker's trading app. Links shared on WhatsApp or Telegram promising guaranteed allotment are a common fake IPO scam pattern.

5. What should I do if I suspect fraudulent IPO allotment activity?

If it involves a fake app or unregistered entity, file a cyber crime complaint. If it involves a listed company or registered intermediary, you can escalate through SEBI SCORES with full documentation.

6. Where in the DRHP should I look first if I'm short on time?

Start with Risk Factors, since they're ordered by severity, then Use of Proceeds and the Related Party Transactions note. These three sections surface most red flags fastest.