What is Red Herring Prospectus (RHP) and How Important is It?

What is Red Herring Prospectus (RHP) and How Important is It?

When a company aims to raise funds from the public, i.e., through an IPO, it has to mandatorily file and submit a Draft Red Herring Prospectus to SEBI. This document is also known as a 'preliminary registration document' or ‘offer document’. Once it gets approval from SEBI, the ROC, and the stock exchanges – BSE and NSE, it converts into a Red Herring Prospectus, also known as the 'final prospectus.'

What Is a Red Herring Prospectus? 

A Red Herring Prospectus contains all the valuable information regarding the company which intends to raise funds from the public by selling its shares. It includes crucial information regarding the company's promoters, business operations, growth prospects, and financials. It also states the company's objectives for raising the fund as well as a possible risk for investors.

Where Can You Access the Red Herring Prospectus? 

You can access this prospectus of a company on several platforms. Here are the details:

  • An issuing company needs to make an announcement of the upcoming IPO in newspapers once it has submitted its RHP to SEBI. It can be in any newspaper- Hindi, English or Regional. 
  • You can find the Red Herring Prospectus on the SEBI website. You can find these on the filings page under ‘Public Issues’. 
  • You can access them via stock exchange websites. 
  • Potential investors can also find them on the chosen merchant banker's website. 

How Is Red Herring Prospectus Important to Investors?

When investing in an IPO, you should do proper research and analysis to take an informed decision. This is where a Red Herring Prospectus can be helpful to an investor. 

As an investor, here are a few details you can look for in an RHP

  Capital Structure 

You will find the following details in this section: 

  1. Authorised share capital
  2. The issuing company’s Equity Share Capital
  3. Subscribed, issued, and paid up capital before the IPO
  4. Record of the equity share capital held by company promoters
  • Offer Details

In this section, you will get information regarding- 

  1. Total number of shares offered through the fresh issue and offer for sale
  2. Segmentation of the non-Institutional, retail, and qualified institutional buyers 
  • Offer Objective 

You will find out why the company wants to raise capital by selling the shares. An investor must know whether the company will be utilising the capital for further expansion, paying off debt or towards any other goal. 

  • Industry Overview 

You should consider a company's different business dynamics, such as demand and supply and its future growth prospects. In this section, you will find issuing company's industrial performance trends and its competitors. 

  • Financial Details

Potential investors will find details regarding the company’s audit reports and financial statements. From there, you can get an idea of how a firm has been performing financially in the past. It will also give you an idea of the company's dividend declaration based on its profits. 

  • Business Description 

In this section, you will find details regarding how the company conducts business and its operational strategies. As an investor, you should focus on this section because you should have knowledge about where your investment is getting utilised. 

  • Strategies

You will get to know how the company has been able to generate profits in the past – the strategies they use, such as geographic strategies, marketing strategies, and product-level strategies.

  • Strength

As a potential investor, you should know the factors that separate the issuing company from its competitors. This can also throw some light on the growth prospects of the company. 

  • Management

You will find details of the important personalities of the company- their names, designations, qualifications, financial felony (if any), open criminal cases (if any), and impending litigations (if any). These factors will be able to show you if there are any risk factors involved with your investment. 

  • Risk Factor 

You should pay special attention to this section. This section mostly contains generally observed risks associated with businesses, but you should focus on the risks that are specific to the company. For instance, this can be open criminal cases or unresolved financial obligations. If you find anything as such in this section, it is better to avoid that IPO. 

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  • Promoters 

In this section, you will find detailed descriptions of the promoters and promoter groups. 

  • Dividend Policy

A dividend declaration is not necessary for companies. But you will find details regarding a formal dividend policy which the company follows in this section. Also, you can find out records of dividend declaration on equities of the company, if applicable. 

Final Word 

If you are interested in investing in an IPO, you will have to conduct deeper analysis and research to make the right investment choice. The Red Herring Prospectus can be your one-stop source for finding out the most about the company.

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