By Dhiraj Relli
With over nearly three decades in the banking, wealth management, and financial services industries, I have come to understand the critical importance of identifying red flags when investing. Recognizing potential risks and warning signs is essential; ignoring them can lead to costly mistakes and significant financial losses.
Recently, exchanges like BSE and NSE, along with the regulatory body SEBI, have issued persistent warnings about malpractices in the SME IPO market. For instance, BSE has directed several merchant bankers to strictly adhere to SEBI guidelines during the due diligence process for SME IPOs. SEBI has also raised alarms regarding unethical practices by certain SME issuers and has acted against many. These warnings serve as a stark reminder that red flags can manifest in various investment forms, including IPOs.
However, one must remember that red flags are not confined to initial public offerings. Established companies with recognizable brands can also exhibit troubling signs, which investors may overlook, ultimately resulting in significant losses. For example, Kingfisher Airlines attracted investors despite its ongoing financial troubles and dismal operational performance. The company eventually defaulted on its loans and ceased operations. Other cases include IL&FS, and DHFL, where investors failed to recognize red flags indicating financial distress, poor governance, and/or potential fraud.
In recent times, there has been a notable increase in interest among investors for pre-IPO investing—pouring capital into companies before they are officially listed on stock exchanges. While this can present unique opportunities, it’s vital to acknowledge that pre-IPO investments come with considerable risks. One major concern is the potential for complete business failure or very long delay in business launch and in achieving operational profitability, which could lead to total investment loss. Additionally, being private and unlisted, these companies typically do not disclose their full financial or operational details publicly, complicating the investor’s ability to assess their value and performance. It’s also essential not to base investment decisions solely on celebrity endorsements of these companies, as those investments may represent only a minimal part of their overall portfolios.
Before committing to any investment, investors should reflect on several critical questions. They need to consider whether the company is facing negative media sentiment or unfavourable analyst reports. Factors like frequent management changes, high debt levels, insider selling, divergence from market trends,
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