Red Herring Prospectus – Whenever a company files for an IPO, it generally tends to create a buzz among investors and traders alike. The most recent- Harsha engineers IPO is an excellent example ( Do read here). An initial public offering(IPO) is when a private company goes public by offering its shares in the market for investors for the first time. The issuing company is selling a portion of its stake to institutional and retail investors. This process is known as “going public” or “floating”

Why are IPOs raised?

The core objective of is to raise new equity capital for the companies, to monetize the investments of existing shareholders such as company founders or private equity investors, and to make existing holdings or future capital raising easier to trade by becoming publicly traded.

What is a Prospectus of an IPO?

For these private issuing companies to go public, they need to seek permission from the SEBI (Securities and Exchange Board of India ) by filing a prospectus to list their shares on the stock exchanges. They also need to disclose their company’s key features as a proposed offering for investors to analyze and spectate their views on the company’s listing. Prospective buyers- Institutional and Retail investors are given information about the proposed offering in the form of a lengthy document known as a prospectus.

Investors are being presented with an increasing number of investment options as a result of the recent IPO boom in the Indian startup sector. However, reading the company’s Draft Red Herring Prospectus (DRHP) is an excellent way to determine whether a particular company’s IPO has the potential for investment.

What is a Draft Red Herring Prospectus(DHRP)?

A Draft Red Herring Prospectus (DRHP) is a document designed to introduce a new company or product to a potential investor and is filed with SEBI. This document is filed before the actual formal prospectus and is typically used as a preliminary offering memorandum to generate interest in the securities prior to the filing of an actual prospectus. The term “red herring” comes from the bold red disclaimer on the cover page of the preliminary prospectus.

The document is extremely beneficial to investors because it contains detailed information about the company’s business operations, financials, promoters, and the company’s goal of raising funds through an IPO. It also goes into detail regarding how the organization plans to use the funds raised, the potential risks for investors, and solicits feedback from potential investors.

A red herring prospectus includes a majority of information about the company’s operations and prospects but excludes key details about the security issue, such as its price and the number of shares offered.

What information does the DHRP have?

A DRHP is a preliminary document that contains information about the company and its management, as well as its product or service, its potential markets, and financing. Financial projections are also included.
This document should be read along with an offer for equities to ensure that investors have received all relevant information before deciding if to invest in the company. There are about 6 things that investors can look out for in a DHRP

1. Description of the Company:

This section discusses a company’s core operational processes and how it does business. As a potential shareholder, this section is important because your capital will be used by the firm in its main business, and if you decide to become a shareholder, you will be entitled to shareholdings of this very part.

2. Financial details:

This section has the audit and financial statements for the company. As an investor, you can utilize the financial statement to forecast future dividends based on the profits disclosed. The financial statement can help you determine the safety as well as the profitability of your future investment.

3. Risk Factors:

Businesses list the potential ‘risk factors that could affect their business and operations. While many risks are routinely listed, some must be investigated. For example, if you discover that the business has a number of pending lawsuits, you may want to avoid the IPO. As an investor, it is important to identify the true risks that could jeopardize the company’s future growth.

4. Intention of use

Companies go public for a variety of reasons. This section has details about what the firm plans to accomplish with the funds raised through the IPO. Is the company planning to reduce its debt, buy new assets, or fulfill its working capital needs? These Investments through the IPO process must be utilized by the company constructively and effectively.

5. Overview of the industry:

A red herring prospectus filed by a company contains information about the company’s position in relation to its competitors. The document also includes the performance trends of the industry to which the company belongs. As a potential stakeholder, investigate the various business and economic variables at work, the demand and supply mechanism, and the future prospects.

6. Management:

The potential of a company is heavily influenced by the people who operate it. The management is in charge of developing strategies on a variety of fronts and generally holds major decision powers. This section contains information such as the names, qualifications, and designations of the directors, promoters, and key executives.

What is the difference between a Red herring and a prospectus?

A full prospectus gives investors detailed information about the company, including financial statements and risk factors.

A red herring prospectus contains most of the information regarding the company’s operations but does not include details of the issue, such as its price band and the number of shares offered.

What is the difference between a Red herring and DHRP?

An RHP (red herring prospectus) is a finalized prospectus that is filed with SEBI during a company’s IPO. In contrast, DRHP is a non-finalized version of RHP that is designed to provide a deeper understanding of the company’s objectives and reasons for raising capital.

When the prospectus becomes effective, the company distributes the final prospectus, which includes the final IPO price and issue size. At the buyer’s discretion, representations of interest are converted into orders for the issue.
The SEBI does not approve the securities; rather, it ensures that all pertinent information is provided in the prospectus.

Who makes the red herring prospectus?

Merchant bankers prepare a draught red herring prospectus (DRHP), also known as the offer document, for companies looking to float an IPO for book-building issues. Underwriters as well as Investment banks overlo