Key Differences Between Draft Red Herring Prospectus and Red Herring Prospectus
A Red Herring Prospectus (RHP) is a legal document which offers information regarding a proposed Initial Public Offer (IPO) for sale to public or institutional investors. It contains relevant information about the company and its IPO, which is crucial for the investor to know before making an informed investment decision.
The RHP also has a draft version containing details about the company, its operating sector, clients, proposed projects, financials, issue details, etc. Let’s discuss both these versions in detail.
What Is a Draft Red Herring Prospectus?
With more companies launching their IPOs in India these days, investors might need sufficient information to select the right IPO, so they can invest for fulfilling their financial goals. A draft red herring prospectus (DRHP) can help investors analyse each company’s true potential and the risk or reward associated with the company.
Also known as the offer document or the preliminary registration document, DRHP is a publicly available document containing essential details regarding the company planning to launch the IPO. First, the company files this prospectus with the Securities and Exchange Board of India (SEBI). After that, it is sent for evaluation to check whether the company has made the requisite disclosures.
The merchant bank makes the necessary suggestions before filing the final prospectus with SEBI, Registrar of Companies and stock exchanges. After this, it either receives approval from SEBI or a recommendation for changes. It is like a preliminary legal prospectus that links potential investors and the issuing .
What Is a Red Herring Prospectus?
It is the enhanced version of the DRHP. It includes details absent in the DRHP, like IPO dates, share prices, and up-to-date financial information.
The red herring prospectus is also the final prospectus. This document provides information about the company for the final time after the offering is made available for subscription to the public.
It discloses information like offer price, number of shares issued, company financial details, dividend policy, use of proceeds, risk factor and other information for investors. Note that the DRHP is not an official document, while RHP is an official document mentioning the price of securities being offered. Once DRHP receives approval, it becomes the RHP containing details of the issue.
Key Components of Red Herring Prospectus
A red herring prospectus has a number of sections. Some of the important components of RHP are as follows:
This section describes the company’s core operational details, how it conducts its business, and how this can benefit shareholders. It is crucial information as investors will be entitled to know details of core operations once they become shareholders.
RHP includes the financial statement of the company. It helps investors to gauge the growth as well as profitability prospects of the company and decide whether to participate in the offering or not.
Use of Proceeds
This section mentions the intention of the company behind raising capital through IPO. In addition, RHP contains the project’s overall cost, the method of funding, and information on how the company will utilise the proceeds.
The final prospectus also explains the company’s internal and external strengths and the risks it can face. The company explains to the investors why they should invest in the company and what risks they can come across.
As management is instrumental in strategic planning like driving growth, marketing and expansion, the investors get a look into information like name, qualification and designation of directors and promoters of the company. It helps investors gather quality insights into management personnel.
Summary of Issues
This section details the number of shares to be issued along with the breakdown of shares allocated to different categories of investors like retail investors, QIIs, corporates etc.
This section offers insights into pending lawsuits against the company. These can be criminal, tax and civil. It is better if investors do not invest in companies that have a list of legal complications.
What Are the Differences Between RHP and DRHP?
DRHP and RHP are not that different except mentioned below:
|Aspect||Draft Red Herring Prospectus||Red Herring Prospectus|
|Meaning||Draft red herring prospectus is not a final document. Instead, the company creates it to explain the reasons behind launching the IPO.||It is a finalised prospectus which is filed with SEBI.|
|Content||DRHP outlines a company’s financial goal, risks and plans for utilising the funds. However, it does not contain details like the size of the issue, particular number or price of shares the company offers.||It contains complete company details along with IPO details including the number of shares and the price the company offers them.|
|Usage||The company files DRHP only before launching an IPO.||A RHP is a finalised prospectus filed with SEBI while an IPO of a company is being made.|
|Availability||DRHP is available on several portals like the company’s website, stock exchange website, merchant banker’s website, and SEBI’s website.||The RHP is available on the official website of SEBI in the offer document section. It can also be accessed at the company’s website, stock exchange website, merchant banker’s website . After the company submits the RHP to SEBI, the issuing business has to publish this notice in at least one newspaper.|
DRHP and RHP are crucial documents that help you analyse the profitability of investing in an IPO. All types of investments involve a certain level of risk; hence, it is wise to examine the documents and understand the risks that might include investing in a company’s IPO.
It is also important to analyse the firm’s financials to ensure that it can fulfil its obligations after the IPO launch.
Frequently Asked Question (FAQ’s)
Why do companies need to file a DRHP?
According to SEBI, all companies must file a DRHP before approaching the Registrar of Companies. SEBI reviews the offer document, and after all recommendations and changes are complete, SEBI, ROC and the stock exchange review and approve the final document, which becomes the RHP. This document contains the details about the company’s financials and the number of shares being issued.
What is a red herring fallacy?
The red herring fallacy is when arguments in the red herring prospectus are irrelevant information that the marketers use to discredit competition and make offers look more impressive than they are.
One should avoid it because it breaches investors’ trust in the company by selling false versions of its products and services. According to SEBI guidelines, RHP should not contain incorrect information before presenting it to investors.
What is the lot size in an IPO?
The minimum number of shares an investor must bid for in an IPO is known as the “lot size.” This information is available to the investors in the application form of an IPO.
Is it mandatory to issue a red herring prospectus?
As per SEBI, it is mandatory for all companies planning to launch an IPO to share the RHP. Therefore, this document should explain all the important details concerning the company and the IPO launch.