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:

Business Details

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.

Financial Information

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.

Risk Factors

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.

Management

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.

Legal Information

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: 

Final Words

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.

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