What is red herring prospectus?

All the information about companies which are listed on stock exchanges is in public domain for everyone to see. But what about the companies which are not listed. So before any company goes for an IPO to raise money and hits the primary market, it comes out with a draft red herring prospectus (DRHP).

This document is filed with market regulator Securities and Exchange Board of India and is also known as “offer document” or “preliminary registration document”.

Draft red herring prospectus or DRHP in short serves as a crucial communication link between the company and its investors and stakeholders.

Through the DRHP, the issuer firm allows potential investors to make an informed decision and analyse its financials, issuance objectives, business operations, promoter holding, market valuation, and other important information.

This draft tells the reasons for the IPO. It informs about the risks involved and how the company will spend the money raised from the primary market. Some of the important DRHP details include balance sheet, earning statement, net proceeds, legal opinion of the listings and underwriting document’s copy.

However, it does not include the amount of issue and details of the price or number of shares being offered.

The DRHP of a company is available on the official websites of the issuing company, Sebi, merchant bankers and stock exchanges.

Firm planning to go public delegates a merchant banker to prepare the DRHP. The Sebi analyses the DRHP and recommends changes, if required, and then gives a go-ahead when the suggested amendments are made according to its guidelines.

After the approval from Sebi, Registrar of Companies (ROC) and the stock exchanges -- Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) -- the DRHP converts into a Red Herring Prospectus (RHP) which is also known as “final prospectus”.

An RHP document comprises additional details of the issue, the number of shares offered and the face value.

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