When companies provide investment offerings for sale, they are required to file a formal legal document with the government financial securities regulator with information for retail or institutional investors. It provides details of the company and the IPO for investors to make an informed decision. Its contents include information around the management team, disclosure of recent financial performance, the market, and the organisation’s strength
Indian companies file two types of prospectus. The first one is a preliminary prospectus that goes by a ‘red herring’, ‘draft red herring’ or a ‘Draft Red Herring Preliminary Prospectus’ (DRHP). The second one is final prospectus, also known as the Red Herring Prospectus (RHP)
The DRHP is a document available to the public, sent out at the time a company is planning for an IPO. It is submitted to the Securities and Exchange Board of India (SEBI). The valuable document has critical insights like the company’s finances, risks of investing, promoters, how the funds raised will be used, and reasons for raising funds by going public. What the document does not cover includes the size of the issuance and price at which the shares are being offered.
A DRHP goes through several stringent checks to make sure all the required disclosures were made. Merchant bankers make suggested adjustments before filling the final offer with SEBI and the Registrar of Companies (ROC and stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). It is highly recommended that investors thoroughly go through DRHPs before investing in any company. All DRHPs filed with SEBI are made available on the official websites of stock exchanges, merchant bankers, issuing companies and SEBI.
Once the DRHP is filed, companies submit a more enhanced version of it known as the final prospectus or a RHP with the SEBI. This includes added details such as IPO dates, risks involved and updated financial information. Simply put, it provides finalised information once the offer is made available for public subscription. This includes dividend policy, usage of the proceeds, offer price, and total number of shares being issued.
The fundamental difference between a DRHP and RHP is that when a DRHP is approved and finalised with updated information on the issue, it becomes a RHP. In other words, DRHP is not an official offer to sell securities. But when a DRHP is updated with the piece of the securities it becomes an RHP. All RHPs of upcoming IPOs can be found free of cost on the SEBI website under a section called ‘Offer Document’. Also like in the case of DRHPs you’ll find RHPs on the website of the issuing company and merchant banks.
Be it a DRHP or a RHP, make sure you pay close attention to these details before investing.
- The management
Remember these are key decision makers who will be driving the organisation’s vision forward. Do your research on all the promoters because you need to make sure your money is in good hands.
- Strengths and weaknesses
The documents would have an outline of the company’s key weaknesses and strengths. This will allow you to estimate the risks involved in investing.
- Check for any pending lawsuits
Lawsuits against the company or its promoters, if any, could be civil, criminal, or tax-related. It is not uncommon for organisations to have pending legal issues, but you’ll have to gauge how detrimental they are.
- Breakup of shares issued
Do make note of the total number of shares issued and how many shares would be up for public subscription and how many would be issued towards institutions and other categories of investors.
- Financial information and plans for the proceeds
Go through the financial health of the company with the fine-toothed comb. This will give you an estimate of the company’s profitability and how fruitfully they plan on spending the funds they raise through an IPO.
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