What are RHP and DRHP in an IPO?

When a company prepares to go public, it releases a set of preliminary documents called the Red Herring Prospectus (RHP) and the Draft Red Herring Prospectus (DRHP) – at different points in time, commonly known as prospectus or IPO papers. These papers aim to invite the general public to subscribe to the company’s equities so it can raise money.  

Both RHP and DRHP contain all the necessary information, such as the fundamentals of the firm, to allow investors to do risk analysis before investing. There are different kinds of prospectuses, including red herring, draft red herring, shelf, abridged, and deemed prospectus. 

In this article, we talk about two of the most important documents to help you make a smart IPO investing decision – RHP and DRHP. 

What are RHP and DRHP in IPO? 

A corporation must have access to adequate funds or capital to execute its activities efficiently. There are two approaches to raising capital – from the general public and a specific group of people. 

A public offer is used when a business wants to raise money from the general population. On the other hand, when it is raised from a specific group of people or its close friends or family, it is referred to as a private placement of securities.  

Prospectus/Public Offer, however, can only be used to raise money by a publicly traded corporation. There are other ways as well, such as a rights issue, debt funds, etc., for a corporation to raise money in the name of capital. 

The company, along with its investment bankers, releases IPO papers some good months before the issue is made live to inform the general public about the particulars of a company. There are two most common IPO papers, called Red Herring Prospectus and Draft Red Herring Prospects.  

What is Draft Red Herring Prospectus? 

A draft red herring prospectus (DRHP) is a written statement intended to present a new company or item to a potential investor. It is often generated at the start of the IPO process and submitted to the market regulator SEBI for approval. It serves as an outline for the formal prospectus.  

It intends to provide prospective investors and company officials with a summary of the information they can expect to find in the formal prospectus, which is typically created after some time has passed since the DRHP was published.  

It includes background data about the business, salient points on the most recent round of fundraising, and market research. It also contains sections on the present state of the firm as well as any liabilities associated with investing in this company. Additionally, it provides information on the amount of cash required at each stage of the investment process, as well as generally focuses on the company's advantages and risk factors. 

This document also describes the company’s vision and its target audience. Although, remember that this is not the final document for an investor. Instead, it is a tool to show value and give potential investors enough knowledge to make an informed decision about whether to invest in the business or not.  

A DRHP is often used as a preliminary offering memorandum to build interest in the securities. It provides investors with details about an issuer and its securities, receives commitments from investors, and gathers feedback from potential investors. 

It is at this stage that SEBI carefully examines all the information to ensure that it doesn't contain any deliberate or unintentional lies, as well as any representations that violate any rules or regulations. The SEBI may also take note of any failure to disclose required information. 

DRHP also means that while the company has declared bring about an IPO and has communicated the same to SEBI, it has not yet become effective. In other words, the prospectus's information is incomplete and subject to change. In fact, it does change if SEBI finds discrepancies in the information. As a result, the securities cannot be sold and offers to purchase them cannot be accepted before the registration statement takes effect.  

What is a Red Herring Prospectus? 

A Red Herring Prospectus (RHP), also known as an offer document, is filed with the market regulator SEBI by a company when it intends to raise funds from the public by offering equity shares. It might refer to the initial prospectus submitted to the SEBI as well as several successive drafts made before getting consent to disseminate the information to the public.  

At this stage, the red herring document doesn't contain any details about the security's price or volume. You may compare it to new lab-tested medicine with strong clinical evidence that was submitted to the FDA for approval but has not yet received clearance. However, in this situation, no approval is provided, and only effective registration is given. 

A final prospectus that includes the final IPO price and issue size is released by the company after the registration statement takes effect. The minimum time between the filing of a registration statement and its effective date is 15 days.  

Although remember that the SEBI does not authorize the securities; rather, it guarantees that all essential information is disclosed in the registration statement. 

Key Differences between Red Herring Prospectus and Draft Herring Prospectus 

The primary distinction between a DRHP and an RHP is that when a DRHP is accepted and finalized with new information on the issue, it transforms into an RHP. In other words, the DRHP does not constitute an official offer to sell securities, whereas an RHP does.  

Here are some of the key differences between the two: 

Content: A DRHP includes high-level descriptions of the company's business strategy and financial situation and a summary of its key services. An RHP, on the other hand, contains all the information an investor needs to know before investing in the company. 

Review: Before being made available to the general public, DRHP might be examined by internal business accountants. In contrast, RHPs must always be reviewed by licensed accountants before they can be authorized. 

Uses: A DRHP is only made public before an IPO. Alternatively, an RHP can be utilized by a firm that is already public and wishes to give potential investors an overview of its operations. 

Conclusion 

The DRHP and RHP both contain vital information about a company. These assist investors in making informed investment decisions, particularly about IPOs. Although, it is crucial for investors to carefully review these documents and take into account all the listed variables before making a decision. 

FAQs 

Q. Where can I find the DHRP of an IPO? 

The DRHP of a company may be accessed via several channels, including the merchant banker's website, the company's official site, stock exchange websites, or the official SEBI website. 

Q. How do you analyze RHP?  

Sometimes, the RHP may extend to over 500 pages. In such cases, investors should look at a few key elements, such as the company's background, management, dividend policy, financial information, strengths and weaknesses, risk factors and promoter holdings. 

Q. How is the final IPO price determined?  

An IPO's listing price is determined by the company's and the offering's market demand. The listing price rises as demand increases. Numerous variables, such as the industry, the potential for growth, and the anticipated valuation, influence the demand for the IPO.