In recent years, several new‑age tech companies have shown a sharp financial glow‑up in the year of their IPO or listing preparation, often driven by one‑off gains or accounting effects rather than a long profitability track record.
While some companies like Groww, Meesho, PhysicsWallah showed genuine, multi‑year improvement in profitability or loss narrowing before or in the IPO year, companies like Urban Company and WeWork India leaned more on one‑time tax credits, accounting gains, or aggressive cost‑cuts to engineer their IPO‑year profits.
Lenskart, the eyewear retailer reported a loss of INR 10 crore in FY24, only to post a profit of INR 297 crore in FY25 ahead of its IPO. However, INR 167 crore of this profit came from one-time acquisition gains. Urban Company swung from a loss of INR 92.7 crore in FY24 to a net profit of INR 240 crore in FY25 ahead of its IPO, with around INR 211 crore of that profit coming from a one‑time deferred‑tax‑credit. WeWork India shifted from INR 135.7 crore loss in FY24 to INR 128.2 crore profit in FY25, driven overwhelmingly by a INR 285.7 crore deferred‑tax gain.
Some earlier listings include companies like Zomato and Honasa (parent company of Mamaearth) which demonstrated sharp financial improvements, particularly in loss‑narrowing and margin‑expansion in their pre-IPO phases.
“What’s currently happening is a focus on financial optimisation during the IPO cycle rather than a fundamental change in business operations,” explains Vaibhav Kakkar, senior partner at Saraf and Partners. “As companies, especially new-age tech firms, prepare for their IPOs, they often cut discretionary expenses like marketing and expansion, while also benefiting from certain one-time accounting events.”
“The intense pressure to offer exits to early investors and PE funds plus other reasons are pushing certain classes of companies to resort to window dressing,” says Jayesh H, co-founder at Juris Corp.
“One-off gains, aggressive cost deferrals, provision reversals, and selective expenditure cuts can temporarily enhance reported numbers without strengthening the underlying economics of the business. The risk is not of illegality, but of misinterpretation, particularly when headline profitability is used as a marketing tool during IPO roadshows,” said Hardeep Sachdeva, senior partner at AZB & Partners.
SEBI‘s Disclosure Norms
SEBI typically reviews the DRHP and issues observation letters within one to three months. Material misstatements can result in penalties, settlement directions, or cooling-off periods that delay IPO plans. The IPO-year profitability questions whether these measures are enough.
“From a regulatory standpoint, SEBI does not prohibit such profits but emphasises transparency to prevent any investor misinterpretation. In such cases, SEBI frequently requires clear separation of operating and non-operating income, detailed explanations, and risk disclosures in the DRHP,” said Kakkar.
“SEBI has increasingly been red flagging them and often has sought for restatements including by insisting on disclosures as to how some of the profits are one-time in nature, due to change in accounting policies, or exceptional,” notes Jayesh H. “SEBI has even pushed for changes in disclosures.”
“All of this may be of no avail. After all, how many investors read offer documents to determine whether to invest or not? There is FOMO. And this is not just restricted to retail investors,” Jayesh H observes.
In March 2025, SEBI amended the ICDR Regulations to require SME companies to demonstrate an operating profit (EBITDA) of at least INR 1 crore in any two of the last three financial years before filing their DRHP. The regulation aims to filter out speculative listings and enhance investor protection in a segment that saw 240 companies collectively raise INR 8,753 crore in 2024.
“Such a norm does not reduce cosmetic profit-making. Companies can still engineer profits. Even where the requirement is of 3 years profits, this used to happen,” says Jayesh H.
“Regulator needs to look beyond surface-level compliance and apply heightened scrutiny to any sudden improvement in profitability or loss reduction in the IPO year or the preceding one to two years. Greater emphasis should be placed on the quality of earnings, sustainability of margins, consistency of accounting policies, and reconciliation between EBITDA, cash flows, and net profit,” said Sachdeva.
Reading Between the Lines
The pattern of IPO-year profitability, whether driven by genuine operational improvements or accounting-friendly events, requires a forensic approach to financial disclosures. Comparing the original DRHP with SEBI’s observation-driven revisions, scrutinising the split between operating and non-operating income, and tracking post-listing quarterly performance are all important tools for separating substance from narrative.
“SEBI’s comments can only be gleaned by comparing the refined DRHP with the originally filed one. There have been instances of companies having to tone down or not remove their so-called profit boosting items,” Jayesh H notes.
“A stricter, more forensic review of pre-IPO financials, especially for companies transitioning from venture-funded growth models, would strengthen market integrity without stifling innovation or capital formation,” Sachdeva explains.
