Draft Red Herring Prospectus (DRHP)

Before investing in an IPO, understanding the Draft Red Herring Prospectus (DRHP) is important for making informed decisions. The DRHP is the company’s preliminary disclosure filed with SEBI that outlines the business, financials, risks, promoters, and intended use of proceeds. This guide explains what a DRHP is and how it differs from the RHP, the key sections worth reading, how to access the document, and the limits of relying on it alone. By understanding the DRHP, investors can assess potential risks and opportunities before committing capital to an IPO.

A DRHP is the company’s preliminary disclosure filed with SEBI before a public issue, giving prospective investors an early, detailed look at the business and its risks.

What it typically covers

• Business overview, strategy, industry and competition
  

• Historical financial statements and key ratios
  

• Risk factors and material dependencies
  

• Promoters, management, and shareholding pattern
  

• Use of proceeds (objects of the issue)
  

• Legal, regulatory, and outstanding proceedings

Why it matters for investors

• Enables structured due diligence before the IPO window
  

• Improves transparency and market confidence through full disclosures
  

• Invites public comments that can lead to clarifications or updates

How it differs from the final RHP

• No price band or final issue price in the DRHP; these appear in the RHP
  

• Final share quantity and offer details are confirmed in the RHP
  

• DRHP is reviewed by SEBI; the RHP is filed with the Registrar of Companies

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 Draft Red Herring Prospectus is not just a regulatory requirement; it serves as a vital tool for investors to make informed decisions before an IPO. Reading it early helps separate marketing noise from verified disclosures and gives a clear view of risks and intended use of funds.

• Early visibility of business model, strategy, industry context, and competition
  

• Transparent financial history with key ratios to test earnings quality and cash flows
  

• Clear articulation of risk factors, dependencies, and contingencies
  

• Promoter, management, and shareholding details to assess governance and alignment
  

• Specific use of proceeds to judge capital allocation discipline
  

• Legal and regulatory proceedings that may affect future performance
  

How a DRHP Enables Detailed Due Diligence for Investors

Investors can unpack unit economics, segment performance, and growth drivers, review audited financials and trends, map material risks to potential financial impact, examine use-of-proceeds against strategy, evaluate promoter background and related-party dealings, and benchmark disclosures against peers to spot red flags or strengths.

Supports Market Confidence

Public, standardised disclosures improve transparency and accountability, fostering trust among retail and institutional investors and supporting fairer price discovery.

Encourages Public Participation

Because a DRHP is open for review, market participants can submit observations that often lead to clarifications or updates, improving the overall quality of information available to investors.

Overall, a DRHP empowers investors with decision-useful information, strengthens transparency in the IPO process, and encourages active, informed participation.

Investors can access a company’s Draft Red Herring Prospectus to review key information before subscribing to an IPO. Here are the main official routes.

SEBI Website

• Visit the SEBI website.
  

• Navigate to Filings or Offer Documents → Public Issues → Draft Offer Documents.
  

• Search by company name and open the latest PDF.
  

• Check the filing date and any addenda or clarifications.
  

Stock Exchanges

• Go to the NSE or BSE website.
  

• Navigate to Markets/Products → IPO/Primary Market → Offer Documents or Draft Offer Documents.
  

• Select the company to view the DRHP and related updates.
  

Company Websites

• Open the company’s Investor Relations section.
  

• Look for IPO/Offer Documents or Downloads.
  

• Download the DRHP along with any corrigenda, addenda, and presentations.

The preparation and submission of a Draft Red Herring Prospectus are guided by strict regulatory frameworks to ensure transparency, fairness, and investor protection.

SEBI (ICDR) Regulations, 2018

• Define eligibility for public issues and prescribe mandatory disclosures, including business details, risk factors, financial information, promoters, and use of proceeds.
  

• Lay down the filing process with SEBI, timelines for public comments, issuance of observations, and requirements for updates or corrigenda.
  

• Specify norms for book building, price band disclosures, underwriting, and allotment methodology.
  

• Set due-diligence responsibilities for lead managers, registrars, and other intermediaries, including certifications and compliance checks.
  

• Govern pre-issue communications and advertising to prevent misleading claims and ensure balanced disclosures.
  

Companies Act, 2013

• Provides the legal framework for prospectus requirements and liabilities for misstatements or omissions.
  

• Mandates necessary corporate approvals and board resolutions related to capital raising.
  

• Covers filing, record-keeping, and reporting standards that underpin accuracy of financial statements and governance disclosures.
  

• Prescribes penalties and enforcement mechanisms for non-compliance, reinforcing accountability across the IPO process.
  

Together, these frameworks work in tandem to standardise disclosures, protect investors, and maintain market integrity from draft filing through to listing.

Although a Draft Red Herring Prospectus offers valuable insights, it comes with limitations investors should recognise before drawing conclusions.

• Preliminary and subject to change: SEBI observations and company updates can alter sections between the DRHP and the final RHP; impact for investors: treat early takeaways as provisional, not final.
  

• No final price band or issue size: valuation and dilution cannot be fully assessed from the DRHP alone; impact for investors: defer ratio-based judgments until the RHP confirms price and quantities.
  

• Data cut-off and lag: financials and risk disclosures are based on periods already past; impact for investors: check for material events after the reported period.
  

• Management-prepared narrative: the document reflects the issuer’s perspective within regulatory bounds; impact for investors: corroborate claims with independent sources and peer filings.
  

• Limited forward-looking specificity: guidance is cautious and non-committal; impact for investors: build scenarios rather than relying on implied projections.
  

• Density and legalese: length and complexity can obscure material points; impact for investors: prioritise risk factors, use of proceeds, related parties, and contingent liabilities.
  

• Not an investment offer: the DRHP cannot be used to apply; impact for investors: base any application on the RHP and updated disclosures.

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.