An Indian offer document runs to five or six hundred pages. It's the richest description of a private company that will ever be public, and most people who apply for the shares read none of it. That's a lot of free information to leave on the table.
They read the grey market premium instead. It's an unofficial, unregulated price quoted by a small number of participants. There's no settlement guarantee and no published volume, and the premium has no relationship to whether the business is worth owning in three years.
The document is free, and read in the right order it gives up its value in about an hour.
What the document is
A company filing for a public issue in India first files a draft red herring prospectus with the regulator. After review it files a red herring prospectus carrying the price band, and finally a prospectus with the issue price.
The draft is the version worth reading, because it appears well before the issue and the substance rarely changes. It covers the business, the industry, the risks, the promoters, the restated financials, the litigation and what the money will be used for.
For someone learning to analyse companies it's better teaching material than most annual reports, because it explains a business from scratch to a reader assumed to know nothing.
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Stop one: the objects of the issue
Read this before anything else, because it decides what kind of transaction you're being offered.
An Indian issue can combine a fresh issue, where the money goes to the company, and an offer for sale, where existing holders sell and the company receives nothing at all. The split is disclosed on the cover.
An issue raising ₹1,400 crore of fresh capital that allocates ₹600 crore to debt repayment and ₹500 crore to new capacity leaves ₹300 crore for general corporate purposes.
That allocation is the fastest read available on what this is. Money for capacity in a business earning good returns is one thing. Money to repay debt the operations couldn't service is another. A large general corporate purposes bucket is money with no stated plan, and the regulator limits how much of the total it can be.
Where the offer is entirely a sale by insiders, the company gets nothing. The transaction is a liquidity event for the existing owners. That's legitimate and it's worth knowing, because it changes the question from "what will they build with this" to "why are they selling".
Stop two: the risk factors
Forty to eighty pages, drafted by lawyers whose incentive is to disclose everything, which makes this the most candid section in Indian corporate literature.
Read all of it, quickly, marking anything that's quantified. Most of the entries are boilerplate, and the ones that carry information share a shape: they name a number, a dependency or a proceeding.
Four categories repay attention.
Start with concentration. That means revenue from the top customers, and dependence on one plant, one geography or one product. A company with four customers producing 71% of revenue has a structural ceiling on its margin.
Next come related-party and promoter matters. These include loans to or from promoter entities and guarantees. They also include properties leased from promoters and any history of regulatory proceedings against the promoters or directors. All of it is disclosed by name.
Then read the litigation and tax entries, where a summary table lists outstanding proceedings against the company and against its promoters and directors, with amounts where quantifiable.
Last come contingent liabilities and statutory dues. Disputed tax demands are almost always larger than they look and almost always settle lower, but the total belongs in your assessment of the equity.
Stop three: the restated financial statements
This is the section that makes the document unusually valuable.
Indian rules require the accounts to be restated onto a single consistent basis across the periods shown, correcting for accounting policy changes and for the effects of restructuring during the period. That produces a comparable multi-year series for a company that has never had one, and it's often the only place such a series exists.
Build four things from it. It takes about twenty minutes.
Revenue and its growth, by segment where disclosed. Gross and operating margin by year. Operating cash flow against net profit, year by year, to see whether the profit converts. And return on capital employed, computed identically for each year.
Then look at the shape. A company whose revenue and margins both stepped up sharply in the year immediately before filing deserves an explanation, because that's the year the valuation is anchored to and it's the year management had the most reason to make look good.
Stop four: the basis for the issue price
The company's own justification of its price band, showing its earnings per share, its return on net worth, and the multiples of the listed peers it selected.
At a ₹950 issue price against ₹15.50 of earnings per share, the offer is priced at 61.3 times.
Two things make the price basis unusually useful. The peer set was chosen by the company, so it represents the most flattering comparison available. And the multiple is stated explicitly, so the reader doesn't have to compute it.
If the issue looks expensive against the company's own chosen peers, you can stop there. The analysis is finished. That happens more often than people expect, and no piece of work in the whole exercise is cheaper.
Set the multiple against the return on net worth disclosed in the same section. A company earning 14% on net worth and asking 61 times earnings is being priced for a transformation, and the document has to explain what that transformation is. Where the only explanation is a market-growth statistic from a paid research report, with nothing about the company itself, that's the answer.
Stop five: the industry section, read as sponsored
Issuers almost always commission the industry chapter from a research agency and pay for it. It's cited as a source throughout the document.
That doesn't make it false. It makes it selective. The market size will be defined in a way that flatters, the growth forecast will be at the optimistic end, and the company's market share will be computed on the definition that produces the largest number.
Read it for the structure of the industry, the names of the competitors and the units the sector uses. Don't take the forecast.
Stop six: promoters, lock-ins and the supply calendar
Promoter shares are locked for a period after listing and other pre-listing shares for a shorter one. The figures in common use are 18 months and 6 months.
Those expiry dates are predictable supply. A company whose pre-listing investors hold a large block will see that block become sellable on a known date, and the market usually anticipates it.
The shareholding tables before and after the issue show who owned what and at what average cost. Where an early investor's average acquisition cost is a small fraction of the issue price, they have a great deal of room to sell, which is a fact and no criticism of them.
Also note the minimum public shareholding requirement. A company listing below 25% public holding has to reach it within prescribed timelines, which is more supply on a known schedule.
Stop seven: the anchor book, on the day it is disclosed
Anchor investors are allotted shares a day before the offer opens, at a price within the band, with a lock-in on what they receive.
The list is published and is worth reading. Long-only funds with a record of holding for years say something different from investors who have historically sold at the first opportunity.
Mark the anchor lock-in expiry in your calendar too.
What the subscription numbers do and do not tell you
Daily subscription figures are published by investor category during the offer.
Heavy oversubscription tells you about demand for the shares in that week. It says nothing about the value of the business, and the correlation between first-day subscription and three-year returns isn't one you should rely on.
Institutional subscription is the more informative category, because retail interest tends to follow price momentum and media coverage.
The grey market premium, and why to ignore it
A ₹120 premium quoted on a ₹950 issue implies a listing near ₹1,070, a 12.6% gain.
The market has no legal standing, no settlement guarantee and no published volume, so the quoted premium can be moved by a small number of trades. It's a sentiment indicator with a wide error, frequently reported as though it were a forecast.
Systematic underpricing of public offers is a durable finding across markets, and sellers accept it in exchange for a fully subscribed issue. For you as an applicant, the expected value of chasing listing gains is heavily reduced by allotment odds in the very issues that are worth applying for.
The long-run record of these shares after the first week is a separate and much less flattering statistic.
The hour, summarised
Objects of the issue, five minutes. Risk factors, twenty. Restated financials, twenty. Basis for the issue price, five. Promoters and lock-ins, five. Industry section, skimmed, five.
At the end you should be able to write four sentences: what this company sells and to whom, whether its profit converts to cash, what the offer is priced at against its own chosen peers, and what has to be true for that price to make sense.
If you can't write the fourth sentence, that's the finding.
Four things to compute yourself, from the restated financials
The document gives you the numbers. It doesn't give you the ratios that matter, and computing them takes about twenty minutes.
First, revenue growth, split where possible. A company whose revenue grew 171% over the period covered has a story, and the story is different if it came from volume, from price, from acquisitions or from a change in accounting. The segment and product disclosures usually allow at least a partial split.
Second, cash conversion, meaning operating cash flow against net profit, year by year. A company whose profit has never converted to cash is asking you to fund a working capital cycle rather than a business.
Third, return on capital employed, computed identically for each restated year. This is the number the offer document is least likely to present, because for many issuers it's the least flattering.
Fourth, the step-up year. Almost every offer document shows one year in which margins improved sharply, and it's usually the most recent. Find it, and find the explanation. Operating leverage on rising volumes is a good explanation. A change in accounting policy, a one-off contract or a related-party transaction isn't.
Four numbers. They take twenty minutes and they decide most applications.
The litigation and statutory sections
Two tables that repay a careful read.
The summary of outstanding litigation covers proceedings against the company, its subsidiaries, its promoters and its directors, split into criminal, tax, regulatory and material civil matters, with amounts where they can be quantified. Look past the total, since disputed tax demands are almost always larger than the eventual settlement. Look for the pattern. Repeated regulatory proceedings against the promoters is a different disclosure from a single tax dispute.
The statutory dues disclosure and the auditor's annexure cover whether the company has been regular in depositing provident fund, tax and other dues. A company that hasn't is a company under cash pressure, whatever the profit line says.
Both are short. Both get skipped.
After the listing, which is where the real test starts
The more useful work starts the day after listing.
Don't throw the offer document away. When the first annual report arrives, put the two side by side and check three things: whether the money raised was deployed on the objects it was raised for, whether the growth the industry section promised has appeared, and whether the margins held once the company was public.
Monitoring agency reports on deployment of proceeds are filed with the exchanges and are almost never read.
Do that comparison once for two or three companies and you'll learn more about how offer documents are written than any amount of reading them at the time would teach you.
The honest summary
An offer document is a sales document under legal liability. Both halves of that sentence are true and they pull in opposite directions. So the sections drafted by lawyers are more useful than the sections drafted by bankers.
Read the risk factors and the objects. Then read the restated financials and the basis for the price, and skim the rest.
And apply the one test that survives everything else: at this price, what has to be true?
The one hour, and what it should leave you with
At the end of the reading you should be able to answer four questions without opening the document again. What this company sells and to whom, and what stops somebody else selling it. Whether its reported profit has historically turned into cash. What the offer is priced at, on the company's own chosen peer comparison. And what has to be true about the next five years for that price to make sense. Those four answers are the analysis, and everything else in five hundred pages exists to support or to obscure them. If you can't write the fourth answer as a sentence a person in that industry could argue with, that's not a gap in your research. It's the finding, and the correct response to it is to skip the issue and read the next one, of which there will be several.
Objects first. Risks second. Restated financials third.
The price basis takes five minutes and decides most applications.
The grey market premium decides nothing.