The initial public offering (IPO) market has been revived in 2026, with companies raising around Rs 22,400 crore on August 26. There are many more companies that could look to go public in the coming weeks, and the validity period of SEBI approvals for a few of them is coming to an end.
But the renewed IPO activity also comes with a warning for investors. 37% of IPOs in 2026 have closed below their issue price on the day of listing, compared with 33% in 2025. And more than two-fifths of companies that have listed since 2022 were trading below their IPO issue prices as of August 26, 2026.
The numbers show why investors should not judge an IPO based on size, grey market premium (GMP), brand popularity or market hype. Reading the company’s Red Herring Prospectus (RHP) can provide valuable information on the company’s financial health, risks, management, use of funds and legal obligations.
Growth, Profitability And Cash Flow
Revenue growth may look good at times, but it should always be tempered with profit and cash generation—that’s the main thing to know.
A company with an eye for revenue growth and strong profits but chronically negative operating cash flow should be looked at more closely. Investors should be able to compare reported profits with actual cash the business is generating.
With continued negative cash flow, accounting profits are not translating into cash generation.
Valuation is another key factor. A fast-growing company may become a poor investment if its IPO prices are very high compared to the other listed companies in the same industry.
Check How IPO Money Will Be Used
The “Objects of the Issue” section of the RHP is one of the most important areas for investors to examine.
It describes how the company will use the funds raised through the IPO. That money could be used for expansion, debt repayment, working capital needs, acquisitions, or any corporate purposes.
Investors should look at the proportion of fresh issue versus offer for sale (OFS).
In an OFS, existing shareholders sell their shares and receive the proceeds. The money does not go into the company's business. Therefore, an IPO with a large OFS component may provide considerably less fresh capital to the company than the headline issue size suggests.
Look At Pre-IPO Share Transactions
Other clues are in the company shares trading before an IPO may be helpful.
The RHP generally contains information about recent share issuances and transfers. Investors should examine the prices at which shares were issued or transferred before the IPO and compare them with the proposed IPO price.
If investors bought shares at a much lower price just months before the IPO, investors should determine if the company's business performance has improved enough to justify the subsequent valuation increase.
Any pre-IPO funding should be looked at carefully, including who invested, the valuation at which the investment was made and why the company needed funds shortly before going public.
Examine Promoter And Executive Salaries
Management compensation is another area that might be overlooked.
The RHP provides salary, remuneration and other payments to promoters and senior executives. Investors should compare these figures to the company’s revenues, profitability, size and compensation levels at comparable businesses.
Unusually high remuneration in a company with relatively modest profits or scale may need to be further investigated.
Don't Ignore Debt And Contingent Liabilities
Looking only at the debt shown on the balance sheet might not provide a complete picture of a company's financial obligations.
The Risk Factors section and other disclosures in the RHP can contain information on contingent liabilities, guarantees, disputed tax demands, pending litigation and other potential financial obligations.
These liabilities may not look like normal borrowings on the balance sheet, but they can be very heavy liabilities if the underlying problems are resolved against the company.
Frequent Share Issuances Can Mean Dilution
Another important factor is the company's history of issuing equity.
Frequent share issuances can dilute existing shareholders' ownership. Investors should therefore look into the company’s past capital-raising activities and understand why additional shares were issued.
The working capital cycle is equally important. If revenue is rising but customer receivables are increasing sharply, payments are taking longer to arrive, or inventories are building rapidly, the company could face liquidity pressure.
A business can have strong sales growth while it is cash-flow stressed.
The RHP Should Be The Starting Point
Even the most recent IPO activity shows that a strong primary market does not mean every IPO will generate returns. With more than one-third of 2026 IPOs closing below their issue price on listing day, investors need to distinguish between market excitement and underlying business quality.
Before applying for an IPO, investors should look at financial performance, cash flows, valuation, use of proceeds, OFS composition, pre-IPO transactions, promoter remuneration, debt, contingent liabilities, litigation, dilution and working-capital trends.
Grey market premiums and social-media sentiment can change rapidly. By contrast, the RHP offers a structured approach to information that allows investors to appreciate the company’s business and risk before they commit capital.
The IPO boom may give way to opportunities but also makes due diligence increasingly important. Investors should be aware that a well-known company, a large issue size, or a good GMP will not replace fundamental data and valuation analysis.
This article is for informational and educational purposes only and should not be considered investment advice. Investors should review the relevant RHP and consult a SEBI-registered investment adviser in the context of their investment before making a decision.
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