The Initial Public Offering (IPO) market in India remains highly attractive to investors, offering the promise of substantial returns. Within the year 2025, we have already seen several high-profile IPOs from tech unicorns to consumer brands enter the market. In a few cases, investors made some decent profits, and in other cases, investors who bought these IPOs lost all their profit due to a post-listing price correction.
Why? Because many investors ignored pre-IPO red flags indicating potential issues.
This blog is intended to provide you with critical red flags to consider before subscribing to an IPO to protect your capital and help you make better investment decisions.
Key Red Flags to Watch Before Investing in Pre-IPO Companies
1. Unaffordable Financials
Make sure the company is making money. They must have a solid revenue and profit track record. Red flags include excessive debt, extreme losses, or over-dependence or reliance on investor funding. For instance, several e-commerce companies had very high GMV (gross merchandise value) growth. Still, their net tangible profits were negative – this caused their share price to be corrected sharply after they went public.
2. Bad Business model
A business must have a scalable and sustainable business model. Be wary if they are relying on unsustainable prices, temporary spikes in demand, or only one market, while being profitable. In 2022–2023, many investors learned the hard way after several new-age IPOs exploded after their IPO, only to repent later and realise they were rubbish because they were losing money, even if they had growth.
3. Overpricing
Overpricing is probably the number one issue. You should always compare the IPO price to its listed comparables in the same industry. You will have, for example, seen several crazy valuations in the food delivery and fintech space, and most delisted down 30–50% within a few months.
4. Poor Management & Promoter Issues
The integrity and experience of the management team matter. You should also look for rotation of executives within a short time, a lack of corporate governance, or promoters who continuously sell down their stake to a significant extent. Former SEBI filings may provide issues of regulatory action or controversies in other organisations involving insiders.
5. No Transparency Surrounding the Prospectus
A Draft Red Herring Prospectus (DRHP) that lacks clarity with incomplete disclosures for risk, litigation, or financial disclosures is a big red flag. Legitimate companies will be upfront and willing to share all risks, while
trying to hide or obscure all of the challenges.
6. Hype and sudden appetite
When you see so much hype, even endorsements from celebrities, and massive oversubscriptions on a new IPO that has no fundamentals, there may be phantom demand, just as we saw on many of the best IPOs in 2021-22, as trading activity increased rapidly, leading to poor listing gains.
7. Over-reliance on a single product or single market
The more diversified your business, the more you can mitigate risk. You should always be cautious of any company that is overly reliant on a single revenue source. A prime example is the numerous EV start-ups that are excessively reliant on subsidies, meaning any policy changes will directly impact their revenue.
Moving from red flags to smart investing!
Even if the company does not offer key red flags, a prudent investor should:
- Assess IPO Grading – Get ratings from the SEBI-approved IPO Site, which can provide you with additional insight.
- Evaluate Market Potential – Is the sector growing? For example, renewable energy IPOs capitalised in 2025 at a breakneck pace due to favourable policies.
- Ever-present SWOT analysis – Analyse what the company’s strengths, weaknesses, opportunities, and threats are.
- Diversify your investments – You should not use all your capital for IPOs. Also, ensure that you have AIFs, mutual funds, and pre-IPO shares.
Conclusion
Investing in IPOs can be a great potential, but it can also be daunting without the necessary due diligence. When it comes to Pre-IPO investing, there are always red flags to look out for, such as unsustainable financials, inflated valuations, weak governance, and overhype of the offering. Always read the draft red herring prospectus (DRHP) and read thoroughly, use independent research, and speak to your financial advisors/investors over any investment decisions.
At Equentis Investech, our research team provides insights into Pre-IPO investments, AIFs, and wealth-building opportunities to help investors navigate the evolving IPO market in India.
