What Is IPO Prospectus And Why Is It Important

What Is IPO Prospectus And Why Is It Important

A sort of public offering known as an initial public offering (IPO) involves the sale of company shares to investors. It is a means for companies to raise capital by offering shares to the general public. Companies often use IPOs to raise money to finance growth or expansion.

Investment banks typically underwrite IPOs, and the shares are then sold to institutional investors and the general public. The process of an IPO can be very complex and can take many months to complete.

If you are looking to invest in an IPO, it is essential to research the company through its Prospectus and get the most up-to-date information.

What is an IPO prospectus?

An IPO prospectus, often known as Red Herring Prospectus, is a formal document required by the Securities and Exchange Board of India (SEBI) for a company to go public. It includes information about the company's business, financial condition, and risk factors. The Prospectus is also used to sell shares of the company to investors.

Investors rely on the Prospectus to make an informed decision about whether or not to purchase shares in the company. For this reason, it is important that the Prospectus is clear, concise, and easy to understand. SEBI reviews prospectuses to ensure that they meet these standards.

If you are considering investing in a company that is planning an IPO, be sure to read the Prospectus carefully. Pay special attention to the section on risk factors, as this will help you understand the potential risks involved in investing.

What does an IPO prospectus contain?

An Initial Public Offering Prospectus typically contains information about the company's business model, financial statements, and a description of the risks involved in investing in the company. The Prospectus also contains information about the company's management team and the underwriters managing the offering.

The structure of an Initial Public Offering Prospectus typically contains the following sections:

  1. An overview of the company, its business model, and strategy
  2. A discussion of the company's financial condition and historical financial performance
  3. A description of the offering, including the number of shares being offered, the price range, and the expected use of proceeds
  4. A description of the company's management team and board of directors
  5. A description of the company's material contracts and relationships
  6. A description of the company's intellectual property and other proprietary rights
  7. A description of the company's principal risks
  8. A description of the regulatory environment in which the company operates
  9. A description of the company's competition
  10. A description of the company's market opportunity

Why is an IPO prospectus important?

A company's IPO prospectus is important because it provides potential investors with key information about the company and its financials. The Prospectus is also important because it helps to set the tone for the company's future public image and can help to attract potential investors. 

The IPO prospectus is one of the most vital documents in the process of a company going public. As such, it should be readily available to the public without much delay.

There are two ways that SEBI and companies guarantee that the IPO prospectus is readily available. 

  • Firstly, they make it accessible on the company website. SEBI requires companies planning to undergo an IPO to have their website so potential investors can learn more about the company.
  • The IPO prospectus will be available on the company and SEBI websites.

Tips to Read Prospectus Fine Print

  • Financial Numbers - Look at the past three years' sales and profit trends as well as the previous six quarters' trends. Look for consistency of performance rather than quick increases in sales and profits. That generates more value. Based on current and projected earnings, determine if the valuations are comparable to those of the peer group. This might be a little complicated in digital IPOs, which are typically loss-making. You can, however, substitute variables like sales, Gross Merchandise Value (GMV), operating profit, etc. 
  • Grasp the Industry Ecosystem - Every industry sector has different economics and dynamics. For instance, in the cement industry, you must first comprehend the subtleties, such as demand, supply, pricing power, power costs, freight costs, cement demand, regional supply fluctuations, etc., to appreciate the value of investing in a cement IPO. When reading the IPO prospectus, here is where you should start. Every stock has a company behind it, and every company has an industry ecosystem. Try to understand that sector's working/ecosystem. ​​​​ 
  • Funds Usage - The IPO prospectus will cover the specifics of the use of money that will be raised. It is important to prefer businesses prioritising growth and capital investments since they are more likely to add value. Choosing businesses that are paying off debt is also a wise move. Be careful of businesses planning an IPO just to raise money for working capital and corporate costs. 
  • Liabilities - Although they might not appear on the balance sheet, they might help you identify possible hazards. As we have observed in several instances, be sceptical of excessive promotional assurances. Use caution if there are too many active legal cases or regulatory orders.
  • Check Possible Disruptors - Disruptors are challenging to identify and evaluate, but they also provide the greatest amounts of benefit. Check to see if the firm planning an IPO has been able to develop distinctive competitive advantages or entry barriers. Look for developing business concepts that might disrupt the sector. Hotels, for instance, faced competition from aggregators, traditional automobiles are up against EVs, physical retail is up against internet e-commerce, and the list goes on. 
  • Debt Health - Companies with a lot of debt should be avoided. Even if the debt is large, pick IPOs where the new money will be heavily invested in debt repayment. Due to their decreased danger of going bankrupt, organisations with a more manageable debt load are favoured by the market. 
  • Capital Dilution - This scenario could be challenging. Equity dilution occurs when the capital base is too high. For example, if a firm has 10 crore outstanding shares, it must make Rs. 10 crores earnings to produce Rs. 1 earnings per share (EPS). When you see it that way, the value of a modest financial basis is clear. The basis for values is that low equity base firms have greater EPS. 
  • Lead Manager Review - They are the supporting cast that will drive the IPO forward. Please pay attention to the promoter's post-IPO ownership of the business and ensure they have a stake in the outcome. Verify the credentials of the investment bankers and Book Running Lead Managers (BRLM) since the calibre of the merchant bankers will determine how smoothly the IPO moves through the system and how the public perceives it. It is best to avoid a major exodus of early investors.

How to Access IPO Prospectus?

A company's IPO prospectus is available to investors on the sites listed below:

Official website of SEBI

- Go to the website

- Click on "filings" and

- Then "public issues."

An investor can access all future IPO offer documents and draft RHPs here. 

Stock Exchange websites 

- National Stock Exchange (NSE) website

- Bombay Stock Exchange (BSE) website

Select merchant banker sites

Bottom Line

Investing in an IPO can be tough if you don't know where to find all the right information. A red herring prospectus or IPO prospectus is a great resource that can help you out. Keep in mind that the Prospectus contains a plethora of information to aid you in making knowledgeable choices regarding the IPO. It provides all the information you need in one place. You can easily read and understand the data by using the above pointers. This makes deciding whether or not to invest much simpler.


What is Initial Public Offering (IPO)?

Initial public offerings allow unlisted firms to sell their shares on a stock market. Companies use this to generate money to pursue their goals of expansion or other goals. 

What exactly does the draft Red-Herring Prospectus (RHP) mean?

A non-finalised or draft version of the RHP is known as a draft red herring prospectus. After reviewing the RHP's draft version, SEBI will make revision recommendations before approving it. When the draft version is accepted, it becomes a Red Herring Prospectus/IPO Prospectus. 

What information does a prospectus' financial part include?

Assets, liabilities, profit and loss, cash flow, borrowings, income statements, statements of changes in equity, shareholdings, financial ratios, and other information can be found in the financial portion of the Prospectus. 

What is the difference between a red herring prospectus and a full prospectus?

Before a full prospectus is written, a DRHP is a preliminary document. In order to let investors decide if they wish to participate in the firm, a red herring prospectus provides less thorough information than a full prospectus.

Companies that have already gone public and only wish to provide prospective investors with an overview of their activities frequently use red herring prospectuses. 

In a full prospectus, investors can find comprehensive information about a firm, including financial statements and business risk factors. Full prospectuses must be examined by accountants who certify that they comply with all regulatory requirements before securities authorities approve them.