Draft Red Herring Prospectus (DRHP) : Components, Importance and More

Draft Red Herring Prospectus (DRHP) : Components, Importance and More

Finding details about a company which is already listed on the stock exchange is not a difficult task. But what about the companies which are not yet listed? There are investors who want to invest in pre-IPO. How will they get details of such companies? This is why a Draft Red Herring Prospectus is of significant value to investors.

What Is a Draft Red Herring Prospectus?

When a company plans to float an IPO for a book building issue, it has to arrange for merchant bankers to file a Draft Red Herring Prospectus. This document is prepared to launch a product or new business to prospective investors to raise capital.  

As the name suggests, a DRHP is not the final copy but a draft. This document is also known as an 'offer document' or 'preliminary registration document'. 

A DRHP aims to provide insight to an investor of what they are getting into. This is more like a loose framework of a company's details for the initial stages of the IPO. It contains details regarding the present status of the business and if there are any risks involved with investing in this company. 

Its aim is to give potential investors and officials an idea about what they might be getting in the final prospectus. It highlights the positive aspects of the firm as well as details on how much funding it would require for each investment stage. 

DRHP is like a preliminary document that offers a memorandum to create interest in the securities before a final prospectus is filed. It helps the issuer company to obtain feedback and secure commitment from prospective investors. 

What Are the Components of a Draft Red Herring Prospectus?

A DRHP contains the following information which can be of great value to an investor: 

  •   Object for Raising Fund

You will get to know the company’s objective for raising the fund. These can be for paying off debts, working capital requirements, buying assets or business expansion. You can also go through the capital structure to learn about the investors. 

  • Business Description

This section of the prospectus states the company’s core operations and how it conducts business. As a potential investor, you should pay attention to this section as this is how and where your investment will get utilised. 

  • Financial Details 

This is where you will find the most important details, such as audit reports and financial statements. You will be able to get an insight into safety and profitability of your investment from records of profits disclosed. You can also get an idea of future dividend declarations, if applicable. 

  • Management 

Management plays one of the most significant parts in a company's performance. It has the most significant say in matters such as business expansion, marketing, renovation and overall progress. In this section, you will find details of significant personnel, directors and promoters of the company. You can also check whether there are any pending litigations and cases against any of them. 

  • Industry Overview 

This section of the prospectus contains data about performance trends of the industry of the company. You will find details on supply and demand mechanisms, various economic variables, and future prospects of the company. 

  • Risk Factors

You will find information on the risk factors the company deals with. While most of them are general risks, you need to pay close attention to those specific to the company. These risks can pose a threat to your investment

Why Should Companies File a Draft Red Herring Prospectus?

SEBI has made it mandatory for all companies with prospective IPO to file a DRHP before approaching the ROC (Registrar of Company). SEBI reviews this offer document and suggests necessary changes. Once the company amends the document as per the suggestions, the DRHP gets approval from SEBI, the stock exchanges (BSE & NSE) and the ROC and converts it into a Red Herring Prospectus. 

Where Can You Find the DRHP of a Company?

You can find the DRHP of a company on various platforms. You can find it on the merchant banker's website, the official website of SEBI and the stock exchange websites. Moreover, you can find such information on news portals and newspapers as well.  

Why Is a Draft Red Herring Prospectus Important to Investors?

A Draft Red Herring Prospectus can be of great value to an investor because of the vast amount of information it reveals to the investor. As a potential investor, you can make a wise and informed decision by going through this document.  

How Is a DRHP Different from an RHP? 

A DRHP, also known as a 'preliminary registration document' or 'offer document', serves as an essential link between a company and its potential shareholders. The chosen merchant banker prepares a DRHP for the company and submits it to SEBI. After the company makes the required changes as per SEBI's suggestions and guidelines, it receives approval from the same. 

After SEBI, ROC and stock exchanges (NSE and BSE) sanction the preliminary document, it converts into an RHP. 

Final Word 

A Draft Red Herring Prospectus is usually around 300 to 500 pages. Hence, it might not be convenient for an investor to go through such a huge amount of information. So, you can consider going through important sections, such as the ones mentioned in this article.