What is a Draft Red Herring Prospectus?
Every IPO is accompanied by a prospectus. While it may seem like a comprehensive and bulky document, reading and understanding is not an option but a necessity for potential IPO investors, as the information mentioned in the prospectus can determine whether to invest in the IPO or not. First, the company aiming for IPO files a DRHP (Draft Red Herring Prospectus), which is the draft prospectus of the IPO. SEBI goes through the DRHP and recommends changes, if any and/or approves it. Post SEBI’s approval, the DRHP becomes an RHP, i.e. Red Herring Prospectus. As the prospectus is probably the most important document in this entire process of IPO, both for issuer and the investors, let’s quickly have a look at the various sections of the prospectus:
1. Industry and Business Overview
This highly detailed section offers a macroeconomic view of the Indian economy, including the GDP growth and consumption patterns in the economy. It also offers a bird’s eye view of the industry in which the company belongs, and mentions an industry-specific view of the favourable demographics, growth drivers, opportunities, challenges, and macro & micro-level analysis of the industry as well as its sub-segments.
Besides the industry dynamics, this section of prospectus also offers a detailed view of the issuing company, its business operations, and typically also lists the range of products and services offered by it, its size of operations, and the principles that drive the core business.
2. Strengths
The prospectus also lists the strengths of the company, both internal and external. As the strengths are what give the company an edge over competitors, going through this section can help you understand the potential of growth it holds in future.
3. Strategies
In this section, the strategies adopted by the company to establish and grow its business are mentioned, including product-level strategies, geographic strategies, market-level strategies, etc. Going through this section can help you to understand the strategies and approach taken by the issuing company to generate profits.
4. Operations
This section offers insights into the processes and systems followed by the issuing company to offer its products and/or services to the consumers. From the manufacturing processes, pricing policies, internal processes, quality monitoring systems to marketing plans, this section offers you the opportunity to better understand the way the issuing company goes about its business.
5. Regulations and Policies
This section offers summarised details of the laws and regulations applicable to the issuing company, such as the name of the Acts under which the regulations are mandated, environment regulations, tax laws, employment regulations etc. Going through this allows you to better understand the extent of regulation present in the said industry. Generally, under-regulated industries are much more prone to attract the wrong companies due to the presence of lots of loopholes and lack of adequate laws and regulations, hence making it a possibility that investing in their IPOs can turn out to be counterproductive.
6. History
This section helps you understand the growth trajectory of the company through its history, including its major events and landmarks.
7. Management
This section lists the Board of Directors of the company along with the details of each director.It also includes a brief biography of each Director, the payment details of all Directors, and committees of the Board. This gives you a brief overview of the key people in the company’s board.
8. Promoters and Promoter Group
As promoters are amongst the key supporting staff that anchor an IPO’s success, make sure to go through this section to find complete details about the promoters and/or promoter group of the company.
9. Risk Factors
Given that investing in equity shares naturally carries risk, this section lists all possible risks faced by investors of the company, knowing which is crucial for those planning to invest in that company’s IPO, as they would then evaluate the potential risks and assess whether their risk appetite allows them to go ahead or not.
10. Details of the Offer and Offer Information
Another vital section is this, which offers all details about the IPO including the number of shares offered via fresh issue and offer for sale,retail portion, the terms of the IPO like ranking of equity shares, mode of payment of dividend, face value, offer price, price band, rights of shareholders, offer structure and procedure, important dates, technical rejection grounds, general terms and conditions etc.
By going through this important section, you can understand the finer details about the IPO. Hence, never miss out on this section when researching about the potential investment in a company’s IPO.
11. Capital Structure
This section mentions details about the Equity Share Capital of the issuing company, as on the date of the Red Herring Prospectus (RHP). This includes the authorised share capital and issued, subscribed, and paid-up capital before the IPO. Information regarding the history of the equity share capital held by the promoters of the company is also mentioned here.
12. Objectives of the Offer
This section lays out the details regarding how the company plans to utilise the funds collected via the IPO. As a potential investor, this information can be vital in order to assess if the company is focusing on growth through funds raised, or aims to steady the ship, or achieve any other goal.
13. Financial Information
As its name suggests, this crucial section includes an independent auditor’s examination report on restated consolidated financial information, the restated consolidated statements of assets and liabilities, profit and loss, cash-flows, changes in equity, current as well as non current loans and financial assets, other tangible assets, inventories, share capital, borrowings etc.
Each of these statements offers an insight into a particular financial aspect of the issuing company. Although the financial jargon and information mentioned in these statements cannot be understood by everyone, professional assistance can be sought in order to make sense of these financial statements, as it can certainly impact your decision making and understanding surrounding the IPO.
Besides these sections, the prospectus also includes other sections and information like dividend policy, legal information, basis for the offer price etc. Its always advisable to thoroughly go through the prospectus so that you are able to take an informed decision regarding whether to invest your hard earned money into that company’s IPO or not.
Where Can You Find the RHP?
You can easily find the issuing company’s RHP at the official website of SEBI and the websites of Stock Exchanges and select Merchant Bankers. Further, the issuing company has to make a public announcement through at least one newspaper after submitting the RHP to SEBI.
So now you know how to read the DRHP and can take your own informed decisions about investing in IPOs. If you think Mutual Funds are safer or you'd let a fund manager manage your money, we've got you covered. If you don't know where to start, we have a simple guide to get started with investing too.