What Is a Red Herring Prospectus?

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Recently, you might have heard several companies are launching their Initial Public Offerings (IPO) and going public for the first time. This refers to a process through which private companies offer their equity for retail investors to invest in. After the IPO launch, these companies list their shares on respective stock exchanges. If you are an interested investor, you must conduct proper research before investing in an IPO. To help you with this, companies are required to submit their Red Herring Prospectus to the Registrar of Companies at least three days before the launch of their IPOs. Every investor must read this document thoroughly to plan their investment strategy.

Keep reading to understand the purpose of an RHP and what information it contains.

What Is a Red Herring Prospectus?

Every experienced investor has heard the terms- Draft Red Herring Prospectus or DRHP and Red Herring Prospectus or RHP while applying for an IPO. The former is a draft preliminary document that company stakeholders design by taking the help of a team of underwriters. This document is submitted to SEBI (Securities and Exchange Board of India) by the company, which can directly approve the draft documents or suggest certain amendments.

Red Herring Prospectus is a more comprehensive form of DRHP.  This document consists of all necessary information that is absent from the draft papers. The RHP is the final document which is provided to retail investors before the IPO goes live. It must contain updated information about the company including its latest financials and observations by SEBI.

SEBI will go through this document minutely and ensure it does not carry any incorrect or misleading piece of information. In case of any discrepancies, SEBI will ask the company to correct, update or omit them. SEBI can also ask the companies to provide additional information in this RHP if needed before approval. 

Key Contents of Red Herring Prospectus

Now that you have some idea of the meaning of Red Herring Prospectus, it is also important to know what information a Red Herring Prospectus entails. The points below will take you through all key details contained in a typical RHP. 

  1. About the Company/Business Overview

It is quite normal for all retail investors to not be aware of all businesses and industries opting for an IPO. Therefore, every RHP and DRHP carries a section labelled ‘Business Overview’. This section comprises a detailed overview of the industry, favourable factors that will help the business thrive and the company’s business model.

This section covers details like the company’s initial journey since inception, and its present position in terms of market share and growth ratio. The Red Herring Prospectus will carry information about all the offerings of a company, i.e., the products and services sold by it. You will also find information like the number of national and global outlets, manufacturing facilities, major clients and how many employees work under the organisation.

  1. Offer Details

This section of RHP carries a detailed overview of the proposed offer. Here, you will find information like total IPO size in terms of total shares or value, fresh issue size and Offer for Sale details. In addition, it will show all the purposes for which the company is raising funds and the names of all participating shareholders. 

The Offer detail section also shows the asset allocation to different categories of investors like QIIs, corporates and retail investors.

  1. Management Details

To invest in a company’s IPO you must also know about the people running the company. A glance through their profiles will help you determine their credibility and expertise. Here, you can learn about the company’s CEO, managing director, and chairman, their history with this company, their qualification, past experience and other necessary insights.

With these details, you can understand the company’s mission statement, long-term plans and the dedication of its managers. This will help you understand its future scope of returning value for investors.

  1. Strengths

This section highlights both the internal strengths and opportunities available for a company. These factors help the company stand out from its competitors in the same industry. As investors, you must browse this section carefully to judge whether that particular company is worth investing or not.

  1. Risks or Threats

Besides strengths that highlight the positive points about a company, an RHP also includes risks associated with its business. These include internal or external factors that can negatively affect the company’s prospects, operations and finances. 

Therefore, you must have a clear idea of these factors along with strengths to make an informed decision on IPO investment.

  1. Policies and Regulations

This section carries a summary of laws and regulations that affect a company’s operations and bottom line. You will find this information under ‘Acts’ under which you can browse through tax laws, environment regulations, and employment regulations.

The ‘Policies and Regulations’ section reflects the idea of efficient workflow and operation. A company with less binding regulation is more likely to outperform another company that has to work within stringent regulations.

  1. Strategies

Following strengths, you will also come across a section that discusses a company’s plans to help it flourish. As the name suggests, this section carries plans that the company will undertake for geographical, product-level or marketing expansion of its brand. 

This section highlights how the company aims to or is currently utilising its current strengths for the long run.

  1. Financial Metrics

This is one of the crucial pieces of information that you will find in a company’s Red Herring Prospectus. It shows the company’s financial statements for the previous 3 financial years and six-month reports under several parameters. Some of these details are current, non-current and total assets and liabilities, total income, total expenses, profit or loss before and after tax, EBITDA and earnings per share (EPS).

How Is a Red Herring Prospectus Different from a Draft Red Herring Prospectus?

The table below highlights the major differences between a Red Herring Prospectus (RHP) and a Draft Red Herring Prospectus (DRHP).

Red Herring ProspectusDraft Red Herring Prospectus
This document encompasses every detail about a company verified by SEBI. It shows the quantity of shares, company valuation and updated financials. It may also show the price band and lot size.DRHP provides a rough idea about the company, its financial metrics, strategies, strengths, risks and certain offer details. However, information like issue size and price details are not present in a DRHP. 
You will find the RHP on SEBI’s official website, company and stock exchange’s website. After this company submits RHP to RoC, it must publish a notice in newspapers. You can access a DRHP from several portals like the SEBI website, company portal and merchant banker’s website.
This is the final draft document containing all updated details.This is the first document that the company files to seek approval to launch an IPO and provide reasons for the same. 

Also Read: How does an IPO work?

Summary 

Besides the above-mentioned contents, you can also find details about promoters, dividend distribution, rights of shareholders, face value, offer price and price band. Thus, you can see that a Red Herring Prospectus  carries all important details about a company about to launch its IPO. 

Since a company is required to disclose accurate details about its risks, ongoing litigations, revenue, sales and profitability, the RHP is an essential document for investors to check before investing. 

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Frequently Asked Questions

1. What is an IPO’s lot size?

Answer Field

Lot size is the minimum shares that investors can bid to invest in IPO shares of a company. This detail is available in the Red Herring Prospectus after the company announces it.

2. What are the quantitative factors of a company’s strengths?

Answer Field

Some quantitative factors that act as a company’s strengths are: Net Asset value of a company, average return, net worth, industry P/E ratio and diluted earnings per share.

3. What are the two types of IPOs?

Answer Field

IPOs can be of two types. These are book-built issues and fixed-price issues.

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