IPOs are running hot ahead of new wave of listings before one-year validity of approvals from the Securities and Exchange Board of India (Sebi) for several companies expire. Since IPO-bound businesses do not have a track record of exchange disclosures or trading history, investors rely on what the companies disclose before listing, primarily through the red herring prospectus (RHP).
A closer look at a handful of sections of this lengthy, technical document can help investors spot risky investments, assess company's financial quality and valuation. Investors must look for the following warning signs before placing their bet to dodge lemons.
Notably, contingent liabilities include guarantees issued on behalf of others, disputed tax demands, pending legal claims and discounted bills. These represent potential obligations that are not recorded as debt on the balance sheet but could materialise as liabilities in the future.
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