Understanding DRHP: Your Guide to Draft Red Herring Prospectus in IPOs
Thinking about investing in an IPO in India? Next is one of the greatest documents you should know about and it is the Draft Red Herring Prospectus (DRHP). The present document is akin to the initial pitch by a company to investors, as it gives details of who they are, what they do, how they make money, the threats involved and how they will spend the money that will be raised through the IPO.
In plain words, a DRHP allows you to have an intimate glimpse into the company which is still not officially in the stock-market, yet. It is time to explain everything about this document in an informative and easy manner.
What is a DRHP?
The first document that a company that intends to raise finances through an IPO (Initial Public Offering) has to submit to SEBI (Securities and Exchange Board of India) is called a Draft Red Herring Prospectus (DRHP). It contains the entire basic and financial data of the company including its business model, financial data, promoters, future plans and risk factors.
But a DRHP does not state the price to be paid per share, the size of issue or the number of shares, the same is announced later in Red Herring Prospectus (RHP).
SEBI duly scrutinizes this draft and seeks corrections in case of any error and only upon its clearance can the company issue the final prospectus and IPO.
How is the DRHP Prepared?
When a company resolves to make a move toward publicity they may choose to employ the services of the merchant bankers or lead managers who assist them in the drafting of the DRHP. Here’s how the process works:
- The business, finances, promoters and plans of the company have been prolifically discribed by the company.
- On this information, merchant bankers put together DRHP.
- The DRHP is filed with SEBI and also posted on the SEBI and the stock exchange websites and in some cases the websites of the merchant bankers.
- SEBI can ask questions, which should be answered by the company and after getting the clearance.
Key Components of a DRHP
Here’s what you’ll typically find inside a DRHP:
1. Business Overview
In this part, the company describes what it does, what it offers, how it generates revenue, the business model, its market placement and the growth plans.
2. Financial Details
It consists of audited reports on finances including profit and loss accounts, balance sheet and cash flow statements of the last 3-5 years. Financial ratios that are important and information on loans or liabilities would also be available.
3. Risk Factors
This section enlists all the potential risks that could happen to the company such as legal risks, market risks, supply chain risks or reliance on important suppliers. This is a section that ought to be read.
4. Use of IPO Proceeds
In this case, the company details the use of the funds to be garnered as a result of the IPO. This may be in the form of expansion, paying off debts, acquisitions and general corporate purpose.
5. Industry Overview
This segment furnishes information regarding the general Industry of the business in which the company is involved including: market trends, business development, market competition as well as issues within the market.
6. Management Team
You will also obtain background data regarding the promoters, the directors and the important executives, their qualifications, their experience and any legal issues that they may have had in the past.
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What is the reasoning used by companies to file a DRHP?
A DRHP is not only a legal necessity, but it can be a shrewd decision by companies due to the fact that it has:
- Makes sure that it is not counter to the SEBI regulation.
- Supports inviting customer responses and providing a company with a possibility to resolve any issues at an early stage.
- Informs the analysts and investors on the kind of information to consider before the IPO.
- Builds trust and transparency before the IPO goes live.
Where to Find DRHPs?
Online, it is easy to find the DRHP of a particular company. They are the best places as follows:
- In the website of SEBI under the section of the Public Issues.
- The company that is going public official site.
- They (NSE/BSE) are the stock exchanges in their IPO.
- Sometimes on merchant bankers’ websites.
DRHP vs RHP – What’s the Difference?
| Feature | DRHP (Draft) | RHP (Final) |
|---|---|---|
| Filed When | At the start of IPO planning | After SEBI approves DRHP |
| Price & Share Details | Not included | Includes price band and share count |
| Level of Information | Preliminary | Final, updated details |
| SEBI Review Stage | Under review | Post-approval |
| Purpose for Investors | To understand the company | To decide on investing |
| Public Feedback | Allowed and encouraged | Not applicable |
| Used For | Collecting early feedback | Roadshows and final investor pitch |
Why DRHP is Important to the investors?
That is why you should never forget to look at DRHP when buying IPO:
- Transparency: It will allow you to see all details of company before the IPO is launched.
- Better Decisions: You have the opportunity to look into business potentiality, financial stability and management capability.
- Risk Awareness: All possible risks are clearly disclosed.
- Regulation: SEBI checks the document to protect investors from false or misleading data.
- Equal Access: The small investors, the large ones all receive information on the same time.
Conclusion
Being an effective tool available to the investor who is interested in making unique intelligent and informed choices prior to investing money into an IPO, the Draft Red Herring Prospectus (DRHP) is an extremely strong document which provides the reader with abundant and rather detailed insight into the inner workings of an IPO. It provides excellent details in the operations, financial results, risk aspects and future strategy of the company.
Before investing in any IPO, make sure to read the DRHP carefully. There is a possibility that it will assist you to steer clear of taking risky investments and investing on companies with robust fundamentals.
FAQs
1. What is DRHP?
DRHP stands for Draft Red Herring Prospectus. It is one of the initial documents sent to SEBI that predate a company when it lists an IPO. It describes all key information of the company, but not the last price and amount of shares issued.
2. Where can I get a DRHP?
This can be obtained through the web site of SEBI, the web site of the company, BSE/NSE IPO pages or the web sites of the merchant banker.
3. Why does SEBI check the DRHP?
The SEBI scrutinizes the DRHP on any fulfilment of the transparency, legality or misleading or incomplete interests of the investor.
4. Is DRHP a public document?
Yes, after being filed the DRHP is available in the open and every investor can read the DRHP before getting the IPO to be confirmed.
5. Is it compulsory to file a DRHP in India?
Yes, all the companies, which desire to list in India through an IPO, need to submit a DRHP to SEBI.
6. What should I focus on in a DRHP?
When you are an investor, you will want to look into the business model, financials and risk of a company, management, and how they are planning to utilize the funds raised through IPO.