What is a Draft Red Herring Prospectus (DRHP)?

If you’ve ever planned to purchase an electronic device or appliance, you probably spend a substantial amount of time studying and researching the various features, services, and prices of the product. The product advertisement is one of the primary sources through which you can access information about the product. Similarly, while investing in a company that is going public through an initial public offering (IPO), investors make use of the draft red herring prospectus (DRHP), which contains all the relevant and important information about the issue. Read on to learn more about the DRHP.

What is a Draft Red Herring Prospectus (DRHP)?

The DRHP is a document filed with the Securities and Exchange Board of India (SEBI) before a company launches an IPO. The DRHP is also known as the offer document and contains all the key information about the company.

The DRHP provides potential investors with information such as the company’s business model, risks, management, and recent financial performance. It also contains information about any recent fundraises, the industry outlook, and opportunities for the company. The DRHP is not the final document, but it is important for companies to raise awareness about the issue and to provide potential investors with the important details.

Purpose of DRHP in IPO

The DRHP is one of the most important steps before a company launches an IPO for the following reasons:

Complying with SEBI 

SEBI mandates a company to file a DRHP before launching an IPO, as it aligns with SEBI’s goals of safeguarding the interests of investors and market participants. SEBI reviews and approves the DRHP, following which the IPO process can move ahead.

Helpful for Investors

Companies as well as potential investors benefit from the DRHP. The DRHP provides key information about the company. Investors can study the business model and financial performance, and get more details about the company’s management and leadership through the DRHP. The DRHP helps disseminate information while boosting transparency. 

Incorporating Feedback

The DRHP is filed in the early stages of the IPO process. When a company makes the DRHP available, it can be viewed by potential investors, analysts, and market participants. In some cases, the company might receive feedback which they can incorporate by revising and making changes to the DRHP.

Transitioning to RHP

The red herring prospectus (RHP) or the final prospectus of the issue can be filed only after the DRHP is reviewed and approved by SEBI. The DRHP is a draft of the final offer document and allows the company to make the necessary changes before moving ahead. 

Key Contents of a DRHP Document

The DRHP is a document which includes crucial information such as:

Company and Business Details

The DRHP allows potential investors to view key company details such as the company’s name, its business model, and the relevant industry. It also provides information about the company’s strategies, growth opportunities, and risks.

Management and Leadership

Information about the management and leadership is included in the DRHP. Potential investors can get information about the key personnel of the company. The DRHP also includes information about the promoters of the company. The section provides their qualifications, experience, and information about any legal or criminal cases.

Financial Information

One of the most crucial aspects of the DRHP is the company’s financial performance. The DRHP includes key statements such as the profit & loss, balance sheet, and cash flow statement. Investors and analysts can use the DRHP to study important financial ratios, revenue streams, and asset health. 

Market Research

The DRHP provides information about the industry in which the company operates. Market data such as ongoing trends, scope for growth, market size, and competitors are included in the DRHP. 

Utilisation of Funds (Objects of Issue)

Since the IPO process aims to raise funds from retail investors, the DRHP includes the objects of the issue, which highlights how the funds will be utilised. The DRHP states the usage of the funds, such as debt repayment, fueling growth, or for strategic acquisitions.

DRHP vs. RHP

Investors often get confused between a draft red herring prospectus and a red herring prospectus. However, there are some key differences between the two.

How Investors Can Use DRHP?

As an investor, it is important to thoroughly research a company before making an investment decision. Here’s how you can use the DRHP before applying for an IPO:

• Study the company in great detail. Understand its business model, industry, market size, growth opportunities, and risks.
• Know the management, promoters, and leadership of the company. The DRHP provides information about their role, experience, and any legal issues they might be involved in.
• Use the DRHP to analyse the company’s financial health. The financial statements and key ratios can help investors gauge how the company has performed in the past and recently.
• Be aware of how the funds from the IPO will be utilised. The DRHP includes the objects of the issue, which can help investors be aware of how the company intends to utilise the funds from the IPO.

SEBI’s Role in DRHP Review

SEBI mandates companies to file a DRHP to safeguard investor interests. SEBI carefully reviews the DRHP along with the submitted documents to prevent any misleading information from being approved. It also recommends that companies make necessary changes to ensure they meet the compliance requirements.

Where to Find DRHPs? 

If the DRHP is made available to the public, it can be accessed from SEBI’s website. The DRHP can also be found on the websites of the merchant banker or the associated stock exchange.