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1. Understand how the business makes money
Start by putting the issuer’s business in plain language: what it sells, who pays for it, and what drives demand. Then check whether its stated strategy fits the operations and financial record described in the offer document.
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- Identify major customers and suppliers, key products, geographies, licenses and any seasonal patterns.
- Look for dependence on a small number of customers or suppliers. Concentration can make revenue, margins or production more vulnerable if a relationship changes.
- Compare the issuer with relevant competitors and consider the economic conditions that affect demand and costs. A peer comparison is useful only when business mix, scale and financial risks are reasonably comparable.
SEBI’s investor due-diligence guidance recommends understanding a company’s business model, comparing competitors and considering economic conditions.
2. Read the financial statements as one connected picture
Review the income statement, balance sheet and cash-flow statement together, across at least the past two years. That is the period specified in SEBI’s investor guidance; a longer record, when available, can help show whether a trend is persistent.
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Check whether reported profit turns into cash
Compare profit with cash generated from operations. If earnings rise while operating cash flow remains weak, examine the reasons in the notes: cash may be tied up in receivables or inventory, or the business may need substantial working capital to support growth.
Understand debt, working capital and one-off items
Review borrowings and repayment obligations alongside working-capital needs. Check whether reported performance depends on gains that may not recur, and read the accounting policies and auditor’s report for qualifications or other explanations that affect how the numbers should be interpreted.
Investigate related-party balances and transactions
Examine disclosed sales, purchases, loans and balances involving promoters, directors, group entities or other related parties. Ask whether the stated business rationale and terms are clear. SEBI’s January 2025 board memorandum recorded observed SME-segment concerns involving proceeds diverted to connected parties or promoter-controlled shell companies and circular transactions among related parties. Those observations are a reason to scrutinize disclosures, not evidence of wrongdoing by any particular issuer.
3. Follow the offer money
Separate fresh shares issued by the company—which raise funds for it—from any offer-for-sale shares sold by existing holders. Use the current offer document to record what the company says it will do with its proceeds; one IPO’s structure does not establish another’s.
- List each stated use. Note the amount allocated to debt repayment, capital expenditure, working capital and general corporate purposes, as applicable.
- Check timing and purpose. Compare the proposed schedule and business need with the issuer’s operations. Ask what practical outcome the company says the spending will produce.
- Test execution claims. Consider whether the issuer’s operating history supports the plan and whether the disclosed risks could interfere with it.
- Review prior fund-raising, if applicable. Compare earlier stated objectives with disclosed implementation and outcomes where that information is available.
Read the offer objectives and risk factors in context. SEBI’s ICDR regulations recognize that risks can be material in combination, qualitatively or because they could become material in the future; they are not merely a checklist to tick off.
4. Examine governance, people and legal exposure
Review promoter and director backgrounds, ownership, group entities, related-party dealings, litigation, regulatory matters and changes in auditors or key management. Look for connections between disclosures: for example, customer concentration may matter more if a major customer is related to a promoter, while debt and weak cash generation may compound one another.
SEBI’s January 2025 memorandum documents concerns observed in the SME segment, including diversion of issue proceeds and circular related-party transactions. Investigate the issuer’s own disclosed facts rather than assuming a segment-level warning applies to it.
5. Judge valuation against the business, not the offer price alone
Consider the offer valuation alongside earnings, assets, cash generation, growth prospects and relevant listed peers. SEBI’s investor guidance names price-to-earnings (P/E) and intrinsic value among the checks investors may consider, and recommends looking at current price and volume information.
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A peer multiple is informative only when the businesses are sufficiently alike in mix, scale, growth, margins and financial risk. Explain differences rather than treating the peer’s valuation as a target. An offer price does not establish that shares will trade at or above it after listing; prices and volumes can change.
6. Account for SME and trading risks
An SME issuer can carry meaningful business risk, and trading conditions can make it harder to buy or sell shares when desired. Consider whether you can tolerate a loss and whether the practical liquidity of the shares fits your circumstances. SME-platform status is not a quality rating.
The National Stock Exchange’s public-issue requirements and process page, updated 29 April 2026, says the NSE SME platform eligibility statement applies to companies with post-issue face-value capital up to twenty five crore rupees. That is an exchange-page statement, not a conclusion about the merits of an individual issue; check the current rules relevant to the offer.
NSE says its draft-prospectus review is limited to listing requirements, not approval under other laws or rules. SEBI’s offer-document guidance likewise says that filing an offer document is not an endorsement or guarantee of an issuer’s financial soundness or the accuracy of its statements. Regulatory process and investment quality are different questions.
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7. Treat promotional claims and tips cautiously
SEBI’s SME investor advisory, referring to a press release dated 28 August 2024, described observed cases in which some companies or promoters made exaggerated operating claims and followed them with corporate actions such as bonus issues, stock splits or preferential allotments. SEBI warned that such patterns could encourage buying at inflated prices and, in some cases, create an opportunity for promoters to sell holdings at higher prices. The advisory concerns observed patterns, not every SME issuer.
Cross-check claims against the offer document, issuer and exchange disclosures, and other reliable sources. SEBI advises investors to avoid relying on rumors or tips and to make decisions based on facts; a promotional post or corporate action by itself does not establish business quality or fair value.
A repeatable comparison checklist
When assessing more than one SME IPO, compare the same dimensions rather than ranking issuers by a single growth or valuation figure:
- Business durability, competitive position and customer or supplier concentration.
- Revenue and profit quality, operating cash conversion, leverage and working-capital requirements.
- Promoter and governance record, related-party exposure, and disclosed legal or regulatory risks.
- Fresh-issue proceeds and stated objectives, considered against the company’s operating needs and execution history.
- Valuation relative to genuinely comparable businesses, with differences in scale and risk made explicit.
- Expected trading liquidity and your ability to withstand losses.
Offer terms, market prices and applicable rules are time-sensitive. For a particular issue, use its current offer document and exchange disclosures rather than carrying assumptions across IPOs.
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