The first step any investor takes who would like to invest in the stock market is knowing about the companies they want to invest in, using the various ratios for fundamental analysis. But what about the companies that are launching their IPO (Initial Public Offering)? This is where a DRHP comes into the picture. It is an important document which contains all the key information regarding a company. In this article, learn about DRHP and important sections to consider in it.
What Is a DRHP?
A Draft Red Herring Prospectus (DRHP) is a document filed by a company with the Securities and Exchange Board of India (SEBI) when it intends to issue shares to the public through an IPO.
The DRHP provides detailed information about the company, its financials, operations, management, and the proposed offering. It serves as a disclosure document for potential investors, allowing them to evaluate the company and make informed investment decisions. The term “Draft” indicates that certain details in the document may be subject to change or omission before the final prospectus is issued.
SEBI reviews the DRHP to ensure that it complies with regulatory requirements and contains adequate disclosures. Once SEBI approves the DRHP, the company can proceed with the IPO process, including roadshows, book-building, and finalising the prospectus.
Important Sections To Read in a DRHP
Being an important document that a company needs to file while releasing its IPO, the DRHP contains several details regarding the company. As an investor, it is necessary to read the prospectus. Some of the important sections in a DRHP that you cannot miss are as follows.
1. About the Company
This section provides an overview of the company’s business model, operations, industry analysis, competitive landscape, and growth prospects. It helps in understanding the company’s core activities, market position, and future plans.
2. Industry Overview
The DRHP provides insights into the company’s competitive positioning within its industry. It also includes information about the industry’s performance trends. If you are considering investing in an initial public offering (IPO), it is essential to analyse various business and economic variables to assess the company’s future prospects.
3. IPO Objective
This section explains how the company plans to utilise the funds raised through the offering. It should provide a clear breakdown of how the company plans to allocate the funds and the expected impact on its business.
4. Management
In any company, management plays a crucial role in shaping the growth of the company. The DRHP contains management details like their names, designations, promoters, etc. It will mention the legal or criminal charges against the key management personnel. All the management-related details are necessary because you can understand the working of the company and if there are any risks involved.
5. Financial Details
The financial statements, including the balance sheet, income statement, and cash flow statement, provide insights into the company’s financial performance, profitability, liquidity, and solvency. It is important to assess the financial health and stability of the company in a DRHP.
6. Risks
The risk factors section in a DRHP outlines the potential risks and uncertainties associated with investing in the company. It provides insights into the market risks, legal or regulatory risks, challenges, and any other factors that may affect the company’s business prospects.
7. Peers
This section in the DRHP will help you find out the competitors of the company. Knowing the peers of a company can help you understand the competition the company is going to face in the market.
8. Legal and Regulatory Matters
This section covers any pending litigation, disputes, or regulatory issues that may have a significant impact on the company’s operations or financials. It is important to understand the legal and compliance aspects to assess potential risks.
DRHP vs RHP
DRHP and RHP (Red Herring Prospectus) are two different terms that are used to represent different stages of the prospectus in the IPO process. The difference between DRHP in IPO and RHP are as follows:
| Factor | DRHP | RHP |
| Meaning | It is a preliminary document filed with the SEBI before an IPO. | It is the final version of the prospectus issued to potential investors during an IPO. |
| Content | Contains all the necessary information about the company, its operations, financials, and intended offering, but subject to further revisions and modifications. | Provides detailed information about the company, its offering, risks involved, financials, and other relevant disclosures. |
| Status of the document | Includes “draft” in its name to indicate that it is not final and may undergo changes before the offering is made. | Does not contain the term “draft”, as it represents the final version of the prospectus. |
| Purpose | Helps the regulatory authority review and provide feedback on the proposed IPO before approving it for public offering. | Serves as the primary document for potential investors to assess the company and make informed investment decisions. |
| State of Regulatory Process | Filing a DRHP is a mandatory step in the IPO process to initiate regulatory review and approval. | Filing an RHP signifies that the regulatory authority has approved the offering, and the company can proceed with the IPO. |
Conclusion
The DRHP contains all the key information you need to know about a company. It is advisable to read the entire DRHP thoroughly and consult with financial advisors if needed. Understanding these sections will help you make an informed investment decision and evaluate the risks and potential rewards associated with the company’s IPO. To get started with your investment journey, open a Demat account now for free on Angel One.
FAQs
Why is it important to read DRHP?
A DRHP is an important document that a company needs to file to issue shares to the public through an IPO. It contains all the relevant information about the company like its financials, business operations, management, risk factors, competition, and future prospects. All this information can help you make an informed decision.
What does a DRHP contain?
The DRHP is an intensive document that contains all the information regarding a company that is looking to get publicly listed. It contains all the relevant information about the company like its business operations, management, financials, risk, competition, and much more.
Where can we find an IPO DRHP?
The IPO DRHP can typically be found on the websites of SEBI, stock exchanges, or investment banks involved in the IPO.
Is it mandatory to file a DRHP for a company that is planning to launch its IPO?
Yes. According to SEBI, it is mandatory to file a DRHP for a company that is planning to get listed publicly through an IPO.
