The DRHP (Draft Red Herring Prospectus) for every Indian IPO is publicly available on the SEBI website and the company’s website before the IPO opens. It contains everything you need to make an informed investment decision. Most retail investors never open it.

Here is a 15-minute DRHP reading framework that will catch the most important issues before you apply.

Minute 1-2: The “Objects of the Issue” Section

Start here. This section tells you what the company plans to do with the money raised.

Green flag: Funds going toward capex (building factories, equipment), debt repayment of productive loans, or expanding operations.

Red flag: Funds going toward “offer for sale” (OFS). OFS means existing shareholders - promoters, PE investors - are selling their shares. No money goes to the company. The IPO is an exit for insiders, not a capital raise. You are buying someone else’s exit.

Zomato’s IPO: Rs. 9,000 crore fresh issue + Rs. 375 crore OFS. Mostly fresh capital. Acceptable. Nykaa’s IPO: Rs. 630 crore fresh issue + Rs. 4,722 crore OFS. Primarily an insider exit.

Neither tells you whether the stock performed well - but OFS-heavy IPOs deserve extra scrutiny of why insiders are selling at IPO price.

Minute 3-4: Revenue and Profit Trend (3-Year Summary)

Find the “Financial Statements” section. Look at:

  • Revenue (top line): Growing? By how much per year?
  • EBITDA or Operating Profit: What is the margin? Is it expanding or contracting?
  • PAT (Profit After Tax): Is the company profitable? If not, how fast is it burning cash?

Quick formula: If revenue is growing 30%+ annually but margins are flat or declining, the company is buying growth at the expense of profitability. Sometimes justified (market expansion phase), sometimes a structural problem.

Red flag in 10 seconds: If three years of financials show declining revenue or widening losses without a clear turnaround narrative, stop here.

Minute 5-6: The Promoter’s Share Dilution

Check the pre-IPO vs post-IPO promoter shareholding. Promoters reducing their stake below 50% immediately post-IPO should prompt questions. Promoters selling into an IPO (OFS) while the company is still loss-making is a significant red flag.

Also check: promoter pledging. If promoters have pledged their shares as collateral for loans, the IPO money may partially be used to unlock that pledge. This is not always bad, but it tells you the promoters were financially stressed before the IPO.

Minute 7-8: Peer Comparison Table

Every DRHP includes a peer comparison table showing the IPO company’s valuations against listed competitors. Always includes:

  • P/E (Price to Earnings)
  • P/B (Price to Book)
  • EV/EBITDA

The company sets this up to make itself look cheap. Their peer selection may exclude expensive comps. Your job: check if the actual listed peers are the right ones. Is the company asking for a premium to existing players? Why?

If the IPO is priced at 80x P/E and listed peers trade at 35-40x P/E, the IPO is pricing in 3-5 years of growth already. Any miss will punish the stock.

Often 40-60 pages long and written in dense legal language. You are not reading it fully. You are looking for:

  • Tax demands: Outstanding income tax, GST, or customs demands. A Rs. 500 crore tax demand on a Rs. 2,000 crore revenue company is material.
  • Promoter/director criminal cases: Any FIR or criminal proceeding against promoters should be a hard stop unless it is clearly frivolous.
  • Regulatory actions by SEBI/RBI/IRDAI: Any existing regulatory action against the company or its directors.

Run Ctrl+F for “criminal proceeding,” “FIR,” and “non-compliance.” Skim these sections.

Minute 11-12: Debt and Cash Flow

Two numbers in the balance sheet that tell more than the P&L:

Debt-to-Equity ratio: Above 1.5x in capital-intensive sectors (manufacturing) is worth watching. Above 1.0x in asset-light businesses (tech, FMCG) is a red flag.

Free Cash Flow: Revenue minus operating expenses minus capex. A company with positive revenue growth but consistently negative free cash flow is either in a heavy investment phase or structurally cash-destructive. Check the 3-year FCF trend.

Minute 13: The “Risk Factors” Section

Companies are required to disclose all material risks. Read the first 3-5 risk factors - by convention, these are listed in order of materiality. The top risks tell you what management considers the most serious business threats.

“We depend on one customer for 40% of revenue” in the risk section is important. “We operate in a competitive market” is boilerplate.

Minute 14: Post-IPO Lock-In Schedule

Check when pre-IPO investors (anchor investors, QIBs, PE funds) can sell their shares. Typically:

  • Anchor investors: 50% unlocked 30 days post-IPO, 50% after 90 days
  • Pre-IPO shareholders: 6-month lock-in post-listing

If a large PE fund owns 30% and their lock-in expires in 6 months, expect selling pressure at that point. This does not make the IPO bad, but it is a supply overhang to plan for.

Minute 15: Valuation vs Growth Rate

Simple sanity check. Calculate the IPO’s EV/Revenue multiple (if profitable, use P/E). Divide by the revenue growth rate. This PEG-equivalent ratio should ideally be below 1.0 for an IPO to represent value.

Company with Rs. 100 crore revenue, 40% growth, listed at Rs. 5,000 crore market cap: EV/Revenue = 50x. PEG = 50/40 = 1.25. Expensive but not crazy for high-growth.

Same company at Rs. 12,000 crore market cap: EV/Revenue = 120x. PEG = 3.0. Almost certainly overvalued unless growth accelerates.

Bottom Line

Fifteen minutes with a DRHP will not give you all the answers, but it will catch the 80% of IPOs where the obvious red flags are hiding in plain sight - heavy OFS, promoter cash-outs, undisclosed tax demands, or valuations disconnected from fundamentals. The grey market premium and analyst buy ratings reflect IPO hype, not DRHP fundamentals. Most IPO returns in India over a 1-2 year post-listing horizon revert to fundamental value. Make sure you understand what that value is before applying.