Draft Red Herring Prospectus (DRHP)

A Draft Red Herring Prospectus (DRHP) is one of the most crucial documents filed by a company planning to launch an Initial Public Offering (IPO). It provides investors with essential information about the company's operations, financials, and risk factors. As a regulatory requirement under the Securities and Exchange Board of India (SEBI), the DRHP serves as the foundation of transparency in capital markets. This guide breaks down the concept, structure, utility, and accessibility of a DRHP for retail investors who are still navigating the basics of stock market investing.

A Draft Red Herring Prospectus (DRHP) is a preliminary filing submitted by a company to SEBI before it proceeds with a public issue. It is a disclosure document that provides vital details such as the company’s financial performance, business model, management credentials, risk profile, and intended use of funds from the IPO. However, it does not contain information on the issue price or the number of shares being offered, which are added later in the final Red Herring Prospectus (RHP).

This document is an important checkpoint in the IPO lifecycle and offers potential investors an opportunity to understand the company better before making investment decisions.

Understanding the contents of a DRHP helps investors decode the essentials of a company going public. Here are the major sections typically included:

Business Overview

This section outlines the company’s vision, mission, history, and core activities. It often includes information about its industry sector, competitive landscape, and long-term strategy.

Financial Statements

This part provides audited financial data for at least three financial years. It includes:

• Balance sheet summaries
  

• Income statements
  

• Cash flow statements
  

• Key ratios such as Return on Net Worth (RoNW) and Earnings Per Share (EPS)
  

Risk Factors

This section highlights various internal and external risks that could affect the company’s performance. These could include:

• Regulatory changes
  

• Market competition
  

• Dependency on key personnel
  

• Supply chain risks
  

Use of Proceeds

The company explains how it plans to utilise the capital raised from the IPO. Typical purposes include:

• Repayment of borrowings
  

• Funding capital expenditure
  

• Business expansion
  

• General corporate purposes
  

Promoters and Management

Details about the individuals or entities promoting the company, along with profiles of the board of directors and key managerial personnel, are shared here. Their experience and background offer insights into corporate governance standards.

Legal Proceedings

Any outstanding litigations, criminal proceedings, tax disputes or penalties involving the company, its subsidiaries, promoters or directors are detailed in this section.

A DRHP is designed not only for regulatory compliance but also to empower retail investors to make informed decisions. Here's why it matters:

Enables Detailed Due Diligence

Before investing in a company's IPO, potential investors can examine the business model, financials, and risks involved. This allows for an objective evaluation.

Builds Market Confidence

Publicly disclosing detailed information promotes transparency and accountability, which strengthens investor trust.

Encourages Public Participation

Since the DRHP is available in the public domain, it opens the door for feedback and observations from market participants, analysts, and potential investors.

You can review a company’s DRHP from multiple official sources:

SEBI Website

Navigate to the SEBI portal and select the section titled "Public Issues > Draft Offer Documents."
Visit SEBI Filings at : https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=3&smid=10&ssid=15

Stock Exchanges

Both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) maintain updated sections for draft offer documents:

• https://www.nseindia.com/
  

• https://www.bseindia.com/
  

Company Websites

Companies are required to upload their DRHP under the ‘Investors’ section of their websites.

Refer the following table:

The submission and structure of a DRHP are governed by the following regulations:

SEBI (ICDR) Regulations, 2018

The SEBI (Issue of Capital and Disclosure Requirements) Regulations outline:

• Mandatory disclosures
  

• Timeline for public observations
  

• Rules governing eligibility and valuation
  

Companies Act, 2013

Relevant provisions under the Companies Act stipulate:

• Content structure
  

• Approval procedures
  

• Filing requirements
  

These frameworks aim to ensure fairness, transparency, and investor protection during capital raising.

While a DRHP is informative, it is still a draft and subject to change. Here are its limitations:

• No Final Pricing: Without price-related information, investors cannot evaluate the valuation metrics.
  

• Subject to SEBI Feedback: SEBI may require changes to ensure compliance or correct disclosures.
  

• Not an Investment Offer: The DRHP should not be considered a call to action for investment.

The Draft Red Herring Prospectus plays an integral role in the IPO process. It acts as the first detailed interaction between a company and the investing public. For retail investors, especially those new to capital markets, reviewing the DRHP offers valuable insight into the operational and financial blueprint of a company preparing to go public. Understanding how to read and interpret this document helps investors develop clarity, improve financial literacy, and make informed decisions once the IPO opens.

This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

• SEBI – Draft Offer Documents
  

• NSE India
  

• BSE India
  

• NSDL
  

• CDSL
  

• Companies Act, 2013