What is DRHP (Draft Red Herring Prospectus)
The year 2021 witnessed the launch of the Initial Public Offerings or IPOs of several popular companies in India. Spanning across sector lines, the response to most of these IPOs has underlined the significance of a company going public and sharing its ownership with a wider class of stakeholders.
One of the key documents in any IPO is the issuing company's prospectus. This document contains all the relevant information about a company, including its operations, industry profile, risk profile, management, the size of the issue, and either the offer price of the shares or the price band.
What is a Draft Red Herring Prospectus?
Before a final prospectus for an IPO is approved, its draft version is required to be submitted to the Securities and Exchange Board of India (SEBI). This document is known as a Draft Red Herring Prospectus or DRHP. A Draft Red Herring Prospectus is, thus, the initial draft or subsequent drafts of the company’s prospectus, containing all the information about the company and the IPO. A DRHP is prepared by the Merchant Banker appointed by a company to draft the document.
The Components of a Draft Red Herring Prospectus
Now that a DRHP's meaning is clear let us discuss what it contains. Here is the information that is included in a SEBI DRHP:
1. Overview of the industry: A Draft Red Herring Prospectus comprises an overview of the industry that the IPO issuing company is a part of. This includes information such as the latest trends prevailing in the industry and the company’s position in said industry. Not only does this section shed light on the patterns of present demand and supply in the industry, but it also details the projections for the future of the industry.
2. Overview of the business and operations: A DRHP provides the relevant information on a company's business and operations. Since any potential investors will end up with a stake, however minor, in the company, the section of a DRHP should be studied in great detail.
3. Financial information: A Draft Red Herring Prospectus has all the necessary information about a company's finances, including its financial statements and audit reports. This information can serve as a guiding light to potential investors in their decision to invest in the company's IPO.
4. The risk profile of the company: This section of a DRHP contains the description of the risk profile of a company, including general risk factors as well as specific ones. If there are any serious risks associated with a company that may affect its future performance, it can deter potential investors.
5. The intended use of the IPO proceeds: One of the most important components of a Draft Red Herring Prospectus is the description of the intended funds raised through an IPO. A company may utilise the proceeds from an IPO for expansion of its operations, to settle off any debts, research and development, etc.
6. Overview of the management: A DRHP provides information about the key people constituting the management of a company, including the members of the Board of Directors and the Promoters of the company.
The Filing of a Draft Red Herring Prospectus
Once the Draft Red Herring Prospectus of a company is ready, it is required to be filed with the Securities and Exchange Board of India, following which the board may suggest several changes. After incorporating the changes and adding any missing information to the SEBI DRHP, the DRHP is resubmitted to the SEBI.
If the SEBI approves the document, it is filed with the Registrar of Companies (ROC) and the relevant Stock Exchanges. You can check a company's DRHP on their official website and the websites of the SEBI and the stock exchanges.
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Frequently Asked Questions
A company has to prepare a Draft Red Herring Prospectus for an IPO because it is mandatory under the guidelines of the Securities and Exchange Board of India. Only after being submitted to and approved by the board mentioned above can a Draft Red Herring Prospectus be filed with the Registrar of Companies to become a final Red Herring Prospectus.
To prepare a DRHP, a company approaches a merchant banker. Specialised in this task, the enlisted merchant banker drafts the company's Draft Red Herring Prospectus and ensures the inclusion of all the necessary information, including:
- The particulars of the offering under the IPO
- The company and industry overview
- The financial information of the company
- The planned use of the proceeds from the IPO
- The management of the company
- The risk profile of the company
No, a Draft Red Herring Prospectus does not always specify the price of the shares to be offered under a company's IPO. However, the company is required to mention the price band, that is, the upper and lower price limits, at which they shall accept the applications from potential investors.