What Are DRHP and RHP in an IPO? Meaning, Differences, and How to Read Them

Most of us do this before purchasing any high-value item such as a mobile handset, or any other electronic appliance. We do a lot of research, scanning through documents to learn about their various features, services or prices of the products. The product document is one of the primary sources of information.

Similarly, a company’s stock market debut is a highly advertised affair. Every time any business entity announces its initial public offering (IPO), headlines splash valuation figures, subscription targets, and expected listing gains.

Many retail investors are blinded by the splashy figures. They make hasty bids without reading the foundational paperwork that details the business model, financial liabilities, and core risks.

This happens despite the Securities and Exchange Board of India (SEBI) requiring companies making public issues to provide detailed disclosures in their offer documents.

That vital groundwork begins with two documents, and the process progresses through different stages, including the Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP).

What Is an Offer Document?

In India, unlisted companies invite the public to buy its shares through an IPO. Securities regulations require companies to make specified disclosures to prospective investors.

It’s mandatory for a business to issue a legally binding disclosure document, popularly called an offer document, when raising capital from the public. Equities cannot be marketed like ordinary consumer goods.

In India, the primary legal framework for managing corporate behaviour and raising public money is governed by the Companies Act, 2013, and the SEBI (Issue of Capital and Disclosure Requirements) Regulations.

The evolution of the offer document happens across stages, including the draft stage (DRHP), the bidding stage (RHP), and the post-allocation stage (Prospectus).

It is prepared with the involvement of SEBI-registered merchant bankers, known as Book Running Lead Managers. The document lays bare the complete record of a company. Any attempt to conceal material debts, pending tax disputes, or misleading information on fund utilisation can attract regulatory action and legal liability, depending on the nature of the violation.

The Myth of SEBI Approval

Most retail investors remain under the misconception that an offer vetted by SEBI carries a certificate of commercial viability.

The regulator has repeatedly clarified that it neither endorses companies, nor validates business models, or predicts future share returns. It does not even evaluate whether an issue is priced attractively.

SEBI allows even an unprofitable business with substantial debt to float an IPO as long as the required disclosures are made. It issues observations, as they are officially called, to ensure that every material fact, be it an operating loss, heavy debt load, or pending litigation, is disclosed clearly.

What Is a DRHP or Draft Red Herring Prospectus?

When a company plans to go public, it submits an initial draft offer document to SEBI and, as applicable, the stock exchanges. This is called a Draft Red Herring Prospectus (DRHP) because it does not contain the final issue price. It also generally does not contain the final bidding schedule, which is determined closer to the issue.

It serves three primary functions:

The document garners institutional feedback. Lead managers conduct preliminary roadshows with domestic mutual funds and other institutional investors with the help of this draft to evaluate market appetite before pricing terms are set.

As part of regulatory review, SEBI officers examine the document to verify compliance with disclosure norms, evaluate accounting adjustments, and question ambiguous operating data.

There is also a public comment period, mandated by SEBI. According to the rule, every DRHP must remain accessible on the SEBI portal and stock exchange websites for at least 21 days. During this window, analysts, institutional funds, and individual investors can submit written objections or comments regarding disclosed figures.

Critical Sections to Review in a DRHP

A DRHP, consisting of hundreds of pages, contains four high-impact chapters. The following are among the sections that merit attention:

1. Objects of the Issue

This chapter is about capital utilisation.
Fresh Issue: The company creates new shares. The proceeds enter the company’s account to build facilities, repay borrowings, or fund working capital expansion.

Offer for Sale (OFS): Under this, existing investors, such as venture funds or promoters, sell part of their holdings. The money goes directly to the selling shareholders.

Consider a ₹1,000-crore IPO. In an operational growth scenario, the company might issue ₹800 crore as a Fresh Issue and ₹200 crore as an OFS. In this case, 80% of the funds raised through the issue would come from the fresh issue and be available to the company for the stated objects of the issue.

In an exit scenario, the company might issue ₹100 crore as a Fresh Issue and ₹900 crore as an OFS. In this instance, 90% of the offering would comprise an OFS, with the proceeds from that portion going to the selling shareholders. A heavy OFS component may warrant closer examination of the stated objectives and the reasons for the offer for sale.

2. Risk Factors and Litigation

The section detailing operational hazards appears early in the document. It is focussed on internal risks:

Heavy reliance on a single manufacturing unit or an exclusive supplier.

High customer concentration.

Material legal and tax claims. These can be considered in relation to the company’s financial position to understand their potential significance.

3. Promoter Background and Related-Party Transactions

Analysts commonly review the promoter shareholding history to evaluate transactions between the company and promoter-owned private entities. Above-market lease payments, unexplained management fees, or unsecured loans to group firms introduce corporate governance questions that require careful scrutiny.

4. Restated Financials and Cash Flows

The DRHP provides three to five years of audited figures under Indian Accounting Standards (Ind AS). Before applying for an IPO, one must compare net profit after tax directly against cash flow from operations.

For instance, if a company reports steady accounting profits of ₹100 crore but operating cash flow is negative or barely ₹10 crore across multiple years, this could indicate that a significant portion of reported earnings has not translated into cash generation.

Revenues may remain tied up in unpaid customer receivables or unsold inventory. High accounting profits without operational cash collection may warrant closer examination of earnings quality.

What Is an RHP (Red Herring Prospectus)?

The second stage of the draft is the Red Herring Prospectus or RHP. At this stage, SEBI has completed its review and issued its observations, and the lead managers update the offer document accordingly.

The RHP is registered with the Registrar of Companies (RoC) at least three working days before the IPO opens for bidding. It provides the following commercial parameters for investors:

Bidding Schedule: The exact opening, closing, and anchor investor bidding dates.

Price Band: The floor price and cap price within which bids must be placed.

Minimum Bid Lot: The minimum number of shares for which a bid can be made.

Updated Financials: The financial figures may be updated to reflect the most recently completed financial period, as required under applicable regulations.

The RHP does not contain the final issue price determined through the book-building process. The final issue price and the final issue size are reflected in the Prospectus filed after the issue.

DRHP vs RHP: Key Differences Explained

Both the documents describe the same business, but their purpose, timing, and operational details differ across several distinct parameters.

Filing Destination: The DRHP is filed with SEBI and available through the stock exchanges for regulatory scrutiny and public feedback.

The RHP is formally registered with the Registrar of Companies (RoC) as a statutory offer document for the public issue. Pricing Terms: The DRHP contains no final price band or issue price.

The RHP explicitly states the price band (floor price and cap price) for the bidding process.

Bidding Dates: The DRHP generally does not contain the final bidding schedule. The RHP specifies the complete issue bidding timeline, including the opening and closing dates.

Issuance Timeline: The DRHP appears during the preliminary stage of the offering. The RHP appears at least three working days before the issue opens for bidding.

Public Feedback: The DRHP is subject to a public comment period, generally 21 days. The RHP is the offer document used for the public bidding process and is not subject to the same public comment process.

Decoding the Basis

The basic description of operations is inadequate, when you are bidding for an IPO. Institutional fund managers know this very well and so they spend considerable time reading the section on ‘Basis for Issue Price’ in the RHP to analyse the financial ratios and comparative metrics that management and merchant bankers use to present the basis for the proposed price band.

Key Financial Ratios Disclosed in the Basis for Issue Price

It’s compulsory for the RHP to reveal several core valuation metrics calculated on both standalone and consolidated bases for the past three financial years where applicable:

Basic and Diluted Earnings Per Share (EPS): Indicates historical net profit per equity share, and can be used to assess changes in earnings on a per-share basis.

Price to Earnings (P/E) Ratio: Calculated by dividing the issue price by the relevant diluted EPS. The price-to-earnings ratio disclosed in the offer document can be compared with those of the stated peer companies.

Return on Net Worth (RoNW): Measures the return generated on shareholders’ net worth.

Net Asset Value (NAV) Per Equity Share: Represents the book value attributable to each equity share. A comparison between NAV and the issue price can help investors understand the relationship between the company’s book value and the proposed issue price.

Peer Group Comparison

A comprehensive RHP incorporates an explicit peer comparison section, which compares the company’s operating metrics against listed industry competitors in India.

When reviewing this comparison, analysts examine:

• Whether the chosen listed peers run genuinely comparable business models, and not businesses that are materially different despite operating in the same broad industry.
• The company’s operating EBITDA margin compared to the peer median.
• The company’s P/E ratio relative to established listed peers that possess broader distribution networks and longer operating track records.

If a company with smaller operational scale, lower margins, and higher debt seeks a valuation multiple substantially higher than its established industry peers, investors can examine whether the company’s financial and operating characteristics provide a basis for the difference.

SEBI Mandates on Key Performance Indicators (KPIs)

New-age loss-making technology businesses may use non-GAAP metrics and other operating KPIs alongside traditional accounting measures. To improve the transparency of such disclosures, SEBI mandates specific disclosures around certain non-financial key performance indicators.

The first rule makes the company and merchant bankers liable to disclose relevant KPIs and other specified performance metrics shared with pre-IPO private equity investors over the previous three years as required under applicable regulations.

Second, the statutory auditors are required to certify specified KPI disclosures. The offer document must define how each metric is calculated and why it matters to the commercial operation.

Third, the RHP must disclose the valuation and share price from every primary issuance and secondary sale or transfer meeting the applicable disclosure requirements undertaken in the 18 months preceding the IPO.

Anchor Investor Allocation and Post-Listing Lock-Ins

The RHP framework bears one of the most informative signals that occurs immediately before the public subscription window opens. This is called the Anchor Investor allocation.

Who Are Anchor Investors?

Domestic mutual funds, insurance companies, sovereign wealth funds, and pension managers can fall within the category of Qualified Institutional Buyers (QIBs), subject to the applicable regulatory definitions. Eligible QIBs may participate as anchor investors. Under SEBI regulations, up to 60% of the QIB portion can be allocated to anchor investors on a discretionary basis.

Anchor investors bid on a single day, designated as T-1 or one business day before the public subscription opens. Their bidding takes place at a fixed price within the price band, and the complete allocation details are disclosed in the public domain before the issue opens.

Mandatory Anchor Lock-In Rules

SEBI has put in place a split lock-in framework for all anchor investors under the applicable SEBI ICDR Regulations to curb speculative bidding and prevent sudden post-listing share dumping with As per the framework:

• 50% of anchor shares should be locked in for 90 days from the date of share allotment.
• Remaining 50% of anchor shares must be locked in for 30 days from the date of share allotment.

Once these 30-day and 90-day lock-in windows expire, the relevant shares may become eligible for transfer, subject to applicable regulations and other restrictions.

Post-listing potential trading volatility can be gauged by studying the proportion of shares held by short-term funds versus long-term institutional holders.

Key Governance Red Flags to Spot in Offer Documents

A well-constructed offer document contains information about corporate governance practices. The relevant sections can help readers identify matters that warrant further examination.

1. Auditor Resignations or Audit Qualifications

Examine the restated financial notes for any statutory auditor resignations or adverse audit opinions over the preceding three years. If an auditor resigned mid-tenure citing inadequate internal financial controls, management access restrictions, or disagreements over revenue recognition, this may warrant careful examination of the reasons disclosed in the offer document.

2. Sudden Pre-IPO Revenue Surges

Examine the revenue progression across the three-year restated period. If a business recorded modest 8% annual growth for two years, followed by an abrupt 45% revenue surge in the final four quarters leading to the DRHP filing, check the accompanying trade receivables.

If that sudden revenue surge corresponds to a parallel increase in uncollected receivables, the business may have experienced changes in credit terms or collection patterns. The underlying disclosures should be examined to understand the reasons for the increase.

3. Promoter Share Pledges and Pre-IPO Restructuring

Review the capital structure table to confirm whether any promoter shares are pledged to secure loans for external private ventures. A promoter with pledged equity may face additional financial pressure if the value of the pledged shares declines.

Additionally, check whether the company underwent major internal restructurings in the 12 months prior to filing. If valuable proprietary software, trademarks, or land assets were transferred between private promoter-owned firms and the listing entity, confirm whether those transfers occurred at appropriately disclosed valuations and on terms described in the offer document.

Where to Download Offer Documents

Investors should always access primary filings from official, regulated repositories:

SEBI Portal (sebi.gov.in): Under the Filings tab, select Public Issues to access both draft documents (DRHP) and Red Herring Prospectuses (RHPs).

Stock Exchange Portals: Both NSE India (nseindia.com) and BSE Limited (bseindia.com) host complete downloadable PDFs under their respective public issue sections.

Lead Manager Websites: Registered merchant bankers maintain unedited copies of offer documents on their corporate and investor relations pages.

FAQs

What is the difference between DRHP and RHP in an IPO?

The DRHP is the draft offer document submitted for regulatory review, while the RHP contains updated disclosures and key details such as the price band and bidding schedule.

What is a DRHP in an IPO?

DRHP stands for Draft Red Herring Prospectus. It contains detailed information about the company, its financials, risks, promoters and proposed use of IPO proceeds before the issue is opened to the public.

What is an RHP in an IPO?

RHP stands for Red Herring Prospectus. It is the offer document used for the public issue and contains details such as the price band, bidding schedule, financial information and risk factors.

Does the RHP contain the final IPO price?

No. The final issue price is determined through the book-building process after bidding and is reflected in the Prospectus filed after the issue.

Does SEBI approve an IPO?

SEBI reviews the offer document and issues observations on disclosures and regulatory compliance. Its review does not mean that SEBI endorses the company, its business model or the investment merits of the IPO.

Where can I find the DRHP and RHP of an IPO?

Offer documents can be accessed through SEBI and stock exchange websites, as well as the websites of the merchant bankers handling the issue.

What should I look for in an IPO DRHP or RHP?

Key sections include the objects of the issue, risk factors, financial statements, promoter and related-party information, basis for issue price, peer comparison and other material disclosures.