How to Evaluate an Upcoming IPO Before Investing: A Complete Guide for Investors

Every upcoming IPO arrives with the same forward in the family group: “GMP Strong Hai, Apply Kar Do.” Two weeks later, one cousin is happy with a small listing gain and another is holding a stock below its issue price.

When an IPO disappoints, the reason is rarely a surprise. It’s usually in the prospectus, on a page nobody opened. A company that sells 70% of the issue as OFS, a profit that never turned into cash, a P/E far above every listed peer: these are all disclosed, in plain numbers.

The checking falls on you for a simple reason. A listed stock has years of price history and quarterly results behind it. With a new IPO, you only have the company’s document and price decided by its bankers. You’re also among the first investors buying its shares.

In this article, we cover what to read, in what order, and what to ignore.

What Is an Upcoming IPO?

An IPO — (stands for “Initial Public Offering”) — is when a company gets listed on NSE or BSE and sells its shares to the public for the very first time. An “upcoming IPO” is one that hasn’t opened for bidding as of now, even though the company has already announced or filed it.

So, before going through prospectus, these three things you should know:

• Mainboard vs SME: Mainboard IPOs are offered by larger, more established companies. On the other hand, SME IPOs come from smaller businesses that list on separate platforms, such as (NSE Emerge, BSE SME). They also differ in rules and risk. There’s a comparison further down.
• Fresh issue vs OFS: In a fresh issue, new shares are created and the money goes into the company. In an offer for sale (OFS), existing shareholders sell and the money goes to them. So, if an IPO is entirely an OFS, the money you invested will not go to the company in any case.
• The sequence: The company files a “Draft Red Herring Prospectus” (DRHP) with SEBI. After SEBI’s observations, it files the Red Herring Prospectus (RHP) with the price band and dates. Bidding stays open for three working days, and the stock lists three working days after close (T+3).

Why Do Companies Launch IPOs?

Most prospectuses give the same four reasons:

• expansion,
• debt repayment,
• working capital, and
• exit for early investors.

The useful question is how the issue size splits between them.

Take two imaginary IPOs of ₹1,000 crore each. In the first, ₹800 crore is a fresh issue for new plants. In the second, ₹800 crore is OFS by a private equity fund that has held the stock for eight years. Both are legal and both can work out well. But in the first you’re funding growth, and in the second you’re buying from a seller whose fund is nearing its end date. You should know which one you are in before you click apply.

7 Things to Check Before Investing in an Upcoming IPO

1. Understand the Business Model

Try to explain how the company earns money in two sentences, without using the word “ecosystem” or “platform.” If you can’t, no ratio will rescue the decision.

Then ask the questions that decide whether revenue is durable:

• Do three or four customers account for most sales?
• Is the revenue repeat business, or does the company have to win new projects every year?
• Does the industry depend on a government policy, subsidy or licence?
• What stops a competitor from copying the model in two years?

The “Industry Overview” chapter is usually from a report the company itself commissioned, so expect it to be flattering. Use it for definitions and market size, not for judgement.

2. Analyse Financial Performance

The RHP has restated financials for three years plus a recent stub period. Read them as a story, not a snapshot.

Revenue and profit. Watch for the “pre-IPO jump,” where growth suddenly accelerates in the final year before filing. It may be real, or it may be a one-off contract, a change in accounting or a push to look good for the issue.

Margins. If sales are going up but margins are falling, the company may be spending more or offering discounts to increase sales.

Debt. Look at debt-to-equity and interest cover. A company that earns only 1.5 times its interest cost has little room for a bad quarter.

Cash flow. Put profit after tax next to cash flow from operations, year by year. Suppose a company reports profits of ₹40 crore, ₹55 crore and ₹70 crore, but operating cash flow of ₹5 crore, ₹-10 crore and ₹12 crore. That profit is sitting in receivables or inventory. It may be collectible, but you need the prospectus to explain why it hasn’t been collected in three years. One weak year can happen, but a pattern needs an answer.

3. Check the IPO Valuation

A good company at the wrong price is a poor investment, and valuation is the step most applicants skip because it takes effort and gives no thrill.

Work out the market cap at the upper end of the price band. The RHP gives you the P/E at that price. Then do your own peer comparison. The prospectus lists “listed peers,” but companies choose comparisons that make them look cheap, so search for businesses with a similar product mix and size.

For loss-making companies, P/E is meaningless. Use price-to-sales or EV/EBITDA, and look for the company’s own guidance on when it expects to turn profitable.

A made-up example: an IPO asks for 45 times earnings while three similar listed companies trade between 25 and 30 times. For that premium to make sense, it should be growing much faster or earning clearly better returns on capital. If its numbers look like its peers’, you’re paying an extra 50% for the IPO label and have no margin for error.

4. Understand How IPO Money Will Be Used

Open the “Objects of the Issue” section and split it into three:

1. Fresh issue amount (goes to the company)
2. OFS amount (goes to the sellers)
3. What the fresh issue will be spent on

If OFS dominates, find out who is selling and how much of their stake they’re selling. A founder trimming 5% is a different signal from a promoter or fund exiting most of its holding.

On the spending side, specifics are a good sign. “Setting up a 50,000 tonne plant in Gujarat, completion by March 2028” is believable. “Strengthening our market position” is not. Also check the line for “general corporate purposes.” SEBI caps it at 25% of the issue, but a large figure there means the company hasn’t told you much about its plans.

If a big chunk is for debt repayment, ask why the debt was taken. Paying off borrowings that funded real assets is fine. Paying off debt raised to cover losses is a different story.

5. Read the DRHP/RHP and Risk Factors

You don’t need to read 400 pages. These sections catch most of the problems:

• Litigation. Read the summary table, then look for cases against promoters, tax disputes and anything where the amount is large compared to net worth.
• Customer and supplier concentration. If most of the company’s revenue comes from its top five revenues, losing one of them can really cause problems.
• Related-party transactions. Business done with companies owned by the promoter’s family deserves a closer read.
• Promoter shareholding. Check holding before and after the IPO, and whether any shares are pledged.
• Auditor’s remarks. Look for qualifications or “emphasis of matter” notes in the audit report.
• Risk factors. The language is legal and defensive, but each risk is there because a lawyer insisted. The first ten usually matter most.

If any of the above doesn’t feel right to you, that’s enough reason to not apply. You can always wait and look at another IPO next month.

6. Check Subscription and Market Sentiment

Subscription numbers are published during the bidding window, and they show who is actually turning up:

• QIBs (mutual funds, insurers, foreign institutions). Strong demand here suggests professional analysts liked the numbers, although they get it wrong too.
• NIIs (HNIs and corporates). They often bid heavily on the last day, so don’t judge the issue on day one.
• Retail (up to ₹2 lakh per application). It reflects public enthusiasm more than analysis.

Check the anchor investor list, announced one working day before the issue opens. Anchors bid at the issue price and face a lock-in, so a list of long-term mutual funds and pension investors is a fair positive signal. But remember that being subscribed 80 times shows demand, not that the price is fair. Many heavily oversubscribed IPOs have listed flat or lower.

7. Don’t Depend Only on GMP

Grey market premium (GMP) is the unofficial price at which IPO shares or applications trade informally before listing. It’s popular because it gives you one number to look at.

The problem is that nobody regulates it. SEBI and the exchanges don’t oversee it, and the figures on websites are rough reports from dealers. GMP can change a lot within just two days, and it shows market interest rather than the company’s actual business quality.

A strong GMP also loses its meaning if the market falls between the closing date and listing day.

Treat it as a mood indicator. It can tell you what the crowd expects, but it shouldn’t be the reason you apply.

Mainboard vs SME IPO: What Investors Should Know

The big difference is what happens when you want to sell. In a mainboard stock, there are usually buyers on the other side. In an SME stock, a few sellers can push the price down and there may not be anyone bidding. Since the past few years, rules for SME listings are also changing, so check the latest rules before you apply.

Common Mistakes Investors Make

Following the trend. If you only check a “Reel” or a “Telegram channel” for IPO updates, remember promoting an issue may have their own reasons for doing so.

• Reading GMP as a promise. It is a rumour with a number attached.
• Ignoring valuation. “Good company” and “good IPO” are different statements, and the price decides which one you have.
• Skipping risk factors. Nobody hides the bad news. They just expect you not to read it.
• Calling a trade an investment. If you plan to sell on listing day, be honest that this is speculation and size the bet accordingly.
• Applying to everything. You don’t have to. Skipping a weak IPO costs you nothing, and applying to one costs you the money and the opportunity to use it elsewhere.

A 15-Minute Screen Before You Apply

If you have limited time, this order gets you to a decision fast:

1. Go through the first page of the “Our Business” section and note how the company makes money.
2. Also, check revenue, profit and operating cash flow — for three years.
3. Find the P/E at the upper band and compare it with two or three listed peers.
4. Check the fresh issue vs OFS split and the top three uses of proceeds.
5. Scan the litigation table and promoter details.

If it passes, then look at anchors and subscription. If it fails at any step, move on.

How to Track Upcoming IPOs

You need early notice to do the above. The sources worth using:

• An IPO calendar. An upcoming IPO calendar lets investors track expected issues, important dates and other IPO-related developments in one place, so you aren’t reading a prospectus the night before the issue closes.
• DRHP and RHP filings. Available on SEBI’s website and on lead managers’ sites. The DRHP often appears weeks or months before the issue, which gives you time.
• Exchange notices. NSE and BSE share details about the issue, subscription status and allotment.
• Company announcements. You can also read press releases and investor pages, alongside the prospectus.

Note: If you find a date or price band on a “third-party site”, cross-check it against these official sources. It’s best and recommended to rely only on the latest official documents.

Frequently Asked Questions

How do I analyse an upcoming IPO in India?

Ans. To analyse, check the business section in the DRHP or RHP first. Then you should look at the company’s revenue, profit, debt, and cash flow, of the last minimum “3 years”. After that, compare its valuation with similar listed peers. You can also check the “subscription data” once bidding opens.

Is a high GMP a reliable sign of listing gains?

Ans. No. GMP is an unofficial sentiment indicator and can change quickly before listing.

What’s the difference between a DRHP and an RHP?

Ans. The DRHP is the draft filed with SEBI for review. The RHP is the near-final version issued before the IPO opens, with the price band and dates.

Is an oversubscribed IPO always a good investment?

Ans. No. Oversubscription shows demand, not that the business is strong or the price is fair only on the focus company data and growth future of business. 

How much can a retail investor apply for?

Ans. Up to ₹2 lakh in application value, in multiples of the lot size. The lot size and price band are in each issue’s RHP.

Conclusion

Research the business, value it against its peers, and read what could go wrong with. Subscription data and GMP can add context but can’t replace any of those three steps. The question that has saved me from more bad applications than any ratio is this: would I be comfortable holding this company at this price if the stock went nowhere for a year? If yes, you’re investing. If the answer depends on a listing-day jump, you’re guessing. Keep an eye on what’s coming on Malik Times, read the filings before the noise starts, and be at ease with skipping most issues. Over time, the IPOs you passed on will shape your returns almost as much as the ones you applied for.