IPO rush at Dalal Street: Not every issue is worth investing in; how to spot red flags

India's IPO market has been on a roll lately, with nearly two dozen IPOs worth Rs 22,500 crore hitting the market in August 2026. Strong listing gains in issues such as Tempsens Instrument, Behari Lal Engineering, Dhoot Transmission, Indo MIM and others have pushed subscription and application numbers to new peaks.

Recent issues such as Tempsens, SBI Mutual Fund, Dhoot, Augmont Enterprises, Indo MIM, Symbiotec Pharmalab, Hy-Tech Engineers and Shiprocket attracted 45-75 lakh applications individually, with investors expecting strong listing gains. However, subdued debuts for Symbiotec Pharmalab, Hy-Tech Engineers and Skyways Airways have given investors a reality check.

Even as IPOs emerge as an avenue for quick listing gains, three weaker-than-expected IPO debuts on Tuesday have highlighted that not every issue will deliver bumper returns and that investors need to learn the art of separating the wheat from the chaff. The IPO rush is set to continue for the next two months, but investors need to be selective while picking an investable issue.

"Not every IPO is worth investing in. In fact, during bull runs, a large number of IPOs are priced to perfection, which can leave little margin of safety for retail investors and can act as lucrative exits for private equity investors rather than primarily serving to raise growth capital," said Narendra Solanki, Head Fundamental Research - Investment Services at Anand Rathi Share and Stock Brokers Ltd.

Investors should conduct a thorough study of a company's financial track record leading up to the issue and take note of sudden spikes in financial performance immediately before the IPO, valuations compared with peers and the industry, unclear fundraising objectives, and high promoter pledging as key red flags.

According to market experts, the grey market premium (GMP) may create euphoria, but it is not a reliable indicator of a company's fundamentals. It has a shelf life of one trading session, and investors should therefore avoid using it as a substitute for fundamental analysis.

Vaqarjaved Khan, Senior Analyst at Angel One, said, "We read the prospectus backwards — risk factors, litigation and related-party disclosures first, growth charts last. Three questions decide most of our calls, including proportion of fresh issue compared to promoter cashing out; margin expansion over a longer period and not only around IPO; and movement of cash flows with profit rise."

An IPO can attract strong demand due to its brand, industry outlook or expectations of listing gains. But subscription numbers alone do not indicate whether a company is fundamentally attractive. Investors should assess the business model, financial performance, competitive position, management quality and valuation before making an investment decision.

The red herring prospectus (RHP) is one of the most important documents for this exercise. It contains details about the company's operations, financials, promoters, risks, litigation, debt, related-party transactions and the proposed use of IPO proceeds. Reading these disclosures can help investors identify potential concerns that may not be visible in the company's marketing pitch.

Echoing Solanki's views, Trivesh D, COO, Tradejini, said that an IPO does not automatically translate into a favourable entry point for retail investors. Valuation matters as much as the growth story presented in the prospectus, and several issues price in future potential, leaving little margin of safety for investors buying at the listing.

Financial trajectory and governance are key areas that deserve scrutiny. Post-issue promoter holding, related-party transactions, and any auditor resignations or regulatory action disclosed in the prospectus can also point to underlying concerns that listing-day enthusiasm tends to obscure. "None of this means every IPO should be avoided," Trivesh D cautioned.

A good business may not necessarily be a good investment if the IPO is priced at a significant premium to comparable listed companies without sufficient justification. Investors should therefore assess whether the company's growth prospects, profitability and competitive advantages adequately justify the valuation.

Investing requires a long-term perspective. Hype-driven subscription alone may result in wealth erosion. Instead of focusing only on the grey market premium, subscription figures or expected listing gains, investors should ask whether the company's fundamentals and growth prospects justify the valuation being offered.