How to conduct your own due diligence on Indian IPOs from prospectus

Be it concession agreements, articles of association, prospectus, letter of offer etc, legal documents of any consequence usually have a default standard template or else statutorily mandated minimum disclosures. That 'boilerplate' is there for a reason but retail investors may tend to gloss over that, instead favoring the sexier details like business information/industry information etc. That is why I decided to list out some useful information mandated by the Indian securities regulator SEBI, for investors to ponder over. This is usually found in the section OTHER REGULATORY AND STATUTORY DISCLOSURES. Some factors are hygiene factors to ensure that the issue is authorized, promoters are not debarred from capital etc, financial eligibility for issue etc  but other factors for really meant for information purpose, and those are the factors I cover

1. Listed ventures of Promoters:-This information is needed to be disclosed, and if those companies are underperforming/in same line of business without non compete/have let down investors in the past, then prospective investors should beware
2. Previous issues of Equity Shares otherwise than for cash:-This allows the readers to assess the extent of 'sweat equity' or 'in kind' equity allotments of the company. Too much of that may mean asset valuation is suspect..
3. Promise vis-à-vis performance:- This data is needed in case company/promoter group companies made any previous rights or public issues. This data would help identify those promoter groups which have sick companies etc in their midst, or whose issues bombed in the recent past
4. Outstanding debentures or bonds and redeemable preference shares and other instruments:- Though the capital structure/balance sheet lists those instruments, this portion explicitly details the contingent capital securities. 
5. Changes in Auditors during the last three financial years:- This is a red flag, which might indicate that company wanted more pliant auditors to certify their IPO proforma statements. Of course, it may be that the company felt it had outgrown its existing auditors/for other genuine reasons. But any change here does warrant a closer look.
6. Revaluation of assets during the last five (5) years:- Any suspect looking revaluation(especially one done near the IPO time itself) may need adjustment while valuing the company. 

Under the section GOVERNMENT & OTHER APPROVALS, there is useful information as well. Despite the apparent liberalization, large portions of the ecosystem is still controlled by the Government. Hence, relevant permit raj information would be

1. Approvals applied for and pending:-Looking at the application dates would give a good idea of the company's foresight/planning. For example, filing for a trademark just months before an IPO smacks of negligence. But applications pending for too long(what is too long is professional judgement) are risky
2. Approvals to be applied for the Objects of the Issue:-To the extent major objects need approvals not yet applied for, that increases the risk. 

 Under the section OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS, that gives a good idea of contingent liabilities and reputation risk(in case of group company/directors litigation). The company needs to give an undertaking that Except as stated herein, there are

1. no outstanding or pending litigation, suits, civil prosecution,criminal proceedings or tax liabilities against our Company, our Directors,  our Promoters and Promoter Group and 
2. there are no defaults, non-payment of statutory dues, over dues to banks and financial institutions, defaults against bank and financial institutions and there are no outstanding debentures, bonds, fixed deposits or preference shares issued by our Company; no default in creation of full security as per the terms of the issue, 
3. no proceedings initiated for economic or other offences

 Under the section MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, there is some useful information towards the end which includes

1. Unusual or infrequent events or transactions:-Though exceptional income have to be identified separately, the events must be identified separately as well.
2. Significant economic changes that materially affected or are likely to affect income from
   continuing operation:-While this is likely to be positively biased, merchant bankers might state even negative trends in fear of being hauled up by SEBI
3. Known trends or uncertainties:- This covers factors expected to have/have head a material adverse impact on sales, revenue or income from continuing operations.
4. Future changes in relationship between costs and revenues:-This helps for modelling if disclose given in useful/complete manner, which often it is not. 
5. Source of material increases in revenue:- The company must disclose the extent to which material increases in net sales / revenue is due to increase in sales volume, introduction of new products or services or increased sales prices. That allows investors to assess the strategy-margins, penetration
6. Status of any publicly announced new products or business segment;- This ensures that the company does not get away with fluff/vapourware. Of course, what is 'new product/business segment' is subjective, but SEBIs effort is commendable to seek this disclosure.
7. The extent to which  Company’s business is seasonal:-This helps interpret quarterly results in a correct manner, and also assess impact of climate change etc
8. Any significant dependence on a single or few suppliers or customers:-Concentration risk can be evaluated, thereby discounting the valuation accordingly.
9. Competitive conditions: No where else do companies have to disclose their competition explicitly. This requirement compels them to state their competition

Of course, if the merchant banker slips up on ensuring full disclosure, then even this can be gamed. But barring that, these are red flags which should be looked out for.