SME IPO risks: what to check in the RHP before applying

Updated 26 October 2026 · 6 min read

SME IPOs carry every risk a mainboard IPO does, plus a set of risks that come from their size: small businesses that depend on a few people and a few customers, documents reviewed by the exchange rather than SEBI, a minimum application above ₹2 lakh, and shares that can be hard to sell after listing. High subscription numbers and large grey market premiums are common in SME issues and say little about the quality of the company.

The good news is that most of these risks can be spotted in the red herring prospectus (RHP) if you know where to look. This guide lists the main SME-specific risks, the RHP section where each shows up, and the warning signs, followed by a short checklist.

1. Promoter background

In a small company the promoters are the business. Read the "Our Promoters and Promoter Group" and "Our Management" sections. Look at their experience in this industry, other companies they run, and whether any of those companies have been struck off, are loss-making or are in the same line of business (a possible conflict of interest). Also check "Outstanding Litigation and Material Developments" for cases against the promoters, including tax, regulatory and criminal matters.

• Warning sign: promoters with little background in the business, or several group companies doing similar work.
• Warning sign: regulatory action or pending criminal cases against promoters or directors.
• Warning sign: frequent changes in auditors or key managers shortly before the IPO.

2. Related-party transactions

The financial statements include a note on related-party transactions: sales to, purchases from, loans to or rent paid to companies and people connected with the promoters. Some of this is normal for a family business. It becomes a concern when a large part of revenue or purchases flows through related parties, because profits can then be shifted in or out of the listed company. Compare the related-party figures with total revenue and expenses for each year.

3. Customer and supplier concentration

Many SME companies earn most of their revenue from a handful of customers. The "Risk Factors" and "Our Business" sections usually disclose the share of revenue from the top one, five or ten customers. If one customer accounts for a large share and there is no long-term contract, losing that customer could hit the business hard. The same applies to dependence on one supplier, one product or one government contract.

4. How much of the issue is an offer for sale

In a fresh issue the money goes to the company; in an offer for sale (OFS) it goes to existing shareholders who are selling. The "Capital Structure" and "The Offer" sections show the split. Since 2025 there are limits on the OFS portion of SME issues, but even within the limits it is worth asking why promoters want to sell at this stage. Also check the price at which promoters and recent investors acquired their shares, shown in the capital structure section; a sharp gap between that and the IPO price deserves attention.

5. Use of the money raised

The "Objects of the Issue" section explains where the fresh-issue money will go. Specific, costed uses such as a named plant expansion with quotations are easier to follow than vague ones. Watch for a large share going to "general corporate purposes" or to working capital without a clear explanation of why the need is growing. Since 2025 there are also restrictions on how SME issue proceeds can be used, so check what the RHP says.

6. Financials that jump just before the IPO

Look at the restated financial statements for the last three years and the latest stub period. Sudden growth in revenue or margins in the year before the IPO, profits that are not matched by cash flow from operations, rising trade receivables, and large short-term borrowings are all worth noting. Small companies can change a lot in a year, so ask whether the explanation in "Management's Discussion and Analysis" makes sense.

7. Lead manager track record

The lead manager (merchant banker) prepares the document and markets the issue. The RHP has a section listing the price information of past issues handled by the same lead manager, including how those shares traded after listing. Read it. A lead manager whose past SME issues often fell well below the issue price some months after listing is a data point worth weighing. Also check who the market maker is; it is often linked to the lead manager.

8. Liquidity and exit difficulty

After listing, SME shares trade in lots and volumes can be very thin. If the stock starts falling, there may be few buyers at any reasonable price, and the tighter listing-day price band means a stock can hit its limit and stay there. The market maker must quote prices for three years, but that does not guarantee you can sell your whole holding quickly. Before applying, decide whether you could hold the shares for a long time if you could not sell.

Where to find each risk in the RHP

Quick checklist before applying

1. Can I afford to have the full minimum application (above ₹2 lakh) in one small company?
2. Do the promoters have a clean record and real experience in this business?
3. Is revenue spread across customers, or tied to one or two?
4. Are related-party dealings small compared with total revenue?
5. Is most of the money going into the business, with clear uses?
6. Does operating cash flow broadly support the reported profit?
7. How did the lead manager's past issues trade after listing?
8. Could I hold the shares for a long time if they became hard to sell?

Each IPO page on IPOScanner links to the RHP and shows the lot size, live subscription by category and the GMP trend. Treat the subscription and GMP as signs of demand, not of quality; the GMP accuracy page shows how far the last GMP was from the actual listing price for past IPOs.