Initial Public Offerings (IPOs) often capture headlines with stories of spectacular listing gains and overnight millionaires. In India’s bustling primary market, retail investors have flocked to new issues, from marquee names to niche industrial firms. Yet beneath the excitement lies a sobering reality: not every IPO delivers on its promise. As of mid‑2025, India’s IPO count has dropped by 62% year‑on‑year—raising ₹18,704 crore from just 10 issues—yet the average IPO size has doubled, reflecting caution and selective fundraising . With nearly 70 SEBI‑approved companies queued for public launch in 2025, investors must exercise heightened scrutiny. This guide offers 10 critical warnings—backed by current market data and real‑world examples—to steer clear of costly mistakes and make informed IPO investments in 2025.
1. Beware of Overpriced Valuations
Why It Matters
High valuations at IPO subscription can leave little room for upside. In Q1 2025, India raised $2.8 billion across 62 listings—yet many debuted below issue price when markets turned volatile.
What to Do
- Compare P/E Ratios: Check the IPO’s price‑to‑earnings ratio against listed peers. Excessively high P/Es signal stretched valuations.
- Look at Fresh vs. OFS: Fresh equity issues dilute shareholding; Offer‑for‑Sale (OFS) segments often indicate promoters cashing out rather than growth capital.
2. Don’t Rely Solely on Grey Market Premium (GMP)
Why It’s Risky
Grey market premiums can fluctuate wildly. Patil Automation’s IPO saw a modest GMP despite decent fundamentals, signaling cautious optimism . Conversely, Monolithisch India commanded a 25.9% GMP but carries listing execution risk .
What to Do
- Use GMP Sparingly: Treat it as a sentiment gauge—not a guaranteed listing gain.
- Focus on Fundamentals: Study the company’s balance sheet, revenue growth, and profitability.
3. Understand the Subscription Dynamics
2025 Trends
Oswal Pumps’ IPO was 1.08× subscribed overall, driven by retail demand even as institutional interest lagged . Low subscription can mean allotment risk, while extreme oversubscription often fuels fickle listing pops.
What to Do
- Track Day‑wise Subscription: Monitor retail, QIB, and HNI buckets. A balanced subscription across categories often leads to stable listing.
- Plan Your Bid: If an IPO is only 2–3× subscribed, you stand a good chance of getting allotment at issue price.
4. Read the Draft Red Herring Prospectus (DRHP) Carefully
Key Sections
- Objects of the Issue: Why is the company raising funds? Capex, debt repayment, working capital?
- Risks & Disclaimers: SEBI‑mandated risk factors often bury show‑stoppers—read these sections line by line.
- Financials: Check revenue trends, margins, cash flows, and related‑party transactions.
What to Do
- Don’t Skip Small Print: Risk factors and footnotes can reveal liquidity issues or legal battles.
- Use Checklist: Compare DRHP sections against a standardized due diligence list.
5. Beware of High Promoter Pledging
Why It’s Concerning
Promoters pledging shares—common ahead of an IPO—signal they may need collateral for personal debt. Over 25% promoter pledging often triggers governance red flags.
What to Do
- Check Pledge Data: DRHP and subsequent observation notices from SEBI disclose pledge levels.
- Limit Exposure: If promoter pledging exceeds 20%, consider waiting for clarity post‑listing or avoiding the issue.
6. Evaluate Industry Cyclicality and Macro Risks
2025 Context
India’s pipeline includes industrial names like All Time Plastics and Kalpataru—sectors sensitive to commodity cycles and interest rates . Rising global commodity prices or rate hikes can undercut their growth plans.
What to Do
- Assess Business Cycles: Avoid betting on cyclical names at market peaks.
- Diversification: Spread your IPO allocation across sectors rather than piling into one theme.
7. Don’t Ignore Lock‑In and Exit Restrictions
Typical Lock‑Ins
Anchor investors and promoters are often locked in for 180 days or longer. Retail investors have no lock‑in—but secondary market liquidity in the first few days can be thin, leading to sharp price moves.
What to Do
- Plan Holding Period: Decide if you’re a flipper seeking listing gains or a long‑term holder.
- Set Exit Triggers: Pre‑define profit and stop‑loss levels to avoid emotional decisions in choppy markets.
8. Be Wary of Over‑Concentration in New Issues
The Allotment Trap
Eager investors often apply to many IPOs concurrently, hoping for any allotment. But subscribing to 10 issues of ₹15,000 each risks blocking too much capital in Application Supported by Blocked Amount (ASBA).
What to Do
- Prioritize Quality: Limit applications to 2–3 high‑conviction IPOs per quarter.
- Monitor ASBA Blocking: Check your bank’s ASBA statements to ensure blocked funds don’t hamper your daily liquidity.
9. Understand Tax Implications
Listing Gains vs. Long‑Term Gains
- Short‑Term Capital Gains (STCG): Gains within one year taxed at 15% plus cess.
- Long‑Term Capital Gains (LTCG): Gains beyond one year over ₹1 lakh taxed at 10% without indexation.
What to Do
- Factor in Taxes: Calculate post‑tax returns before you bid.
- Holding Strategy: If you believe in the business, consider a longer hold to avail LTCG benefits.
10. Keep an Eye on Grey Markets and IPO Roadshows
Roadshows Offer Insights
Management’s tone, Q&A sessions, and projected use of funds in IPO roadshows provide qualitative cues. Overly scripted presentations or evasive answers on debt usage can be red flags.
What to Do
- Attend Virtually or Read Summaries: Extract key takeaways on growth drivers and risks.
- Gauge Institutional Interest: Strong anchor book subscriptions during the pre‑IPO phase often indicate healthy demand.
Conclusion
IPOs in 2025 present both opportunities and pitfalls. With a robust pipeline of nearly 70 SEBI‑approved issues and a recovering secondary market, the temptation to chase listing pops is strong. Yet prudent investors will heed these 10 warnings: from avoiding overpriced valuations and understanding GMP limitations, to rigorous DRHP study, pledge checks, and tax planning. By applying these checks—backed by real‑time market data and historical insights—you’ll move beyond speculation to informed decision‑making, positioning your portfolio for sustainable gains rather than short‑lived excitement. Remember, the best IPO isn’t always the most hyped one—it’s the one you’ve thoroughly vetted.
Source : thepumumedia.com