Red Herring Prospectus (RHP) is an important document detailing the business and non-business aspects of a company that is about to go public. The document contains all the essential details of the company, and it is shared with the regulatory authority, which evaluates the document and makes it public for assessment by potential investors.
In India, the Red Herring Prospectus is guided by section 32 of the Indian Companies Act, 2013. The law makes it binding for companies, intending to go public, to file the Red Herring Prospectus with the Registrar of Companies at least three days before opening of the subscription list and the offer.
While the Red Herring Prospectus requires to have all the essential details of the company, it is not necessary for it to include the complete particulars of quantum or price of the securities. These details are required to be submitted in the final prospectus. The mandatory issuance of the Red Herring Prospectus guides potential investors in making informed decisions about investing in the company’s initial public offering.
What is in the Red Herring Prospectus?
The Red Herring Prospectus issued by a company includes every piece of crucial information that is needed by the regulatory authority, in evaluating the company, and potential investors in assessing the company’s past, present and future prospects.
Whether it is the details about the company’s formation, its losses, its functioning and business models, its failures and successes, details about its promoters and directors, legal disputes and litigations, every piece of information that is relevant about the company is to be included in the document.
Here are some of the important sections that are included in the RHP.
Overview of IPO
The section offers a concise summary of the offer that the company intends to make as it goes public. This section includes the details like the issue size, issue price, and number of shares offered to the public. This information is of essential use for potential investors to do their homework prior to the IPO release date.
Risk Factors
This section gives a detailed breakdown of the risks and uncertainties that can impact the company immediately and in the future, and thus affect the outcome of investment by investors.
The assessment of risk factors includes all the possibilities like compliance failure to existing and new laws, inability to effectively compete with the rivals in the sector, inability to implement growth strategies, market volatility, and internal risks.
Purpose of IPO
This section is of essential utility as it provides information about the company’s strategic plans and how it intends to use the funds that it generates by going public. This may include the company’s intention to expand its operations, repay its debts, or invest in research and development.
About the Company
This section provides the key information about the company itself, including the industry overview, the company’s businesses, business models, management and history, promoters, dividend policy, and other statistical information.
Financial Statement
This section provides an overview of the company’s financial situation and its past. It includes consolidated financial information, other financial information, management’s analysis of the company’s financial condition and results of operations, capitalisation statement, and financial indebtedness.
Legal Information
This section of RHP provides information about the company’s legal situation, including outstanding litigations, and government and other approvals.
Importance of Red Herring Prospectus for Investors
When a company decides to go for an IPO, there is very little information available before the public and potential investors to make any informed decision about the company and its potential to generate profit. This is where the Red Herring Prospectus becomes a handy document for potential investors to assess the company, its strengths and weaknesses, its past shortcomings and future potential.
Here are the key pieces of information that can be deduced from the Red Herring Prospectus.
Assessing Risks and Uncertainties
The Red Herring Prospectus provides a broad overview of the risks and uncertainties that are involved with investing in the company, which creates transparency about the entire investing process. By assessing the risks and uncertainties, the investors can make an informed investing decision that matches with his or her risk appetite and financial goals.
Assessing Growth Potential
By analysing the financial statements, including revenue, profit and operational costs of the company, an investor stands better informed about the growth potential and future prospects of the company.
Assessing Sectoral Trends
The Red Herring Prospectus provides key insights into the industry and sector in which the company operates, which can assist a potential investor to understand the market dynamics, sectoral dynamic, and challenges from rivals and competitors to the company within the sector.
Difference Between DRHP, RHP and Final Offer
Draft Red Herring Prospectus (DRHP), Red Herring Prospectus (RHP), and Final Prospectus or Final Offer are the three essential documents which are submitted by a company at different stages before it goes public. There is a slight difference in the information that is to be mandatorily included in these three documents.
| DRHP | RHP | Final Offer |
| The DRHP is submitted by a company to the Securities and Exchange Board of India (SEBI). It is the first document to be submitted which signals the company’s intent to go public. | The RHP is submitted to the Registrar of Companies. It is the second document released by the company in its journey to become public. | The Final Offer is submitted to the Registrar of Companies and is the final document that is submitted before a company goes public. |
| It includes all the essential information, including the information about the company, its history, management, financials, and risk factors. | Any changes to the DRHP are reflected in the RHP. | It is the same as the RHP, however, it includes finalised and definite information about share prices and issue size. |
| It excludes the IPO price. | It provides a price range within which the IPO price will be determined. | It gives the finalised IPO price. |
Conclusion
Red Herring Prospectus is an important handbook for investors who want to understand a company before it goes for an IPO. This document provides key details about the company’s history and functioning, its business model and financials, and its shortcomings and growth potentials.
If you are planning to invest in a company’s IPO, the Red Herring Prospectus is the most essential document for you to understand the company and make an informed investment decision that matches with your risk appetite and financial goals.
FAQs
Who prepares the Red Herring Prospectus?
The company that intends to go for an initial public offering (IPO) prepares the Red Herring Prospectus and submits it to the Registrar of Companies. This document has to be mandatorily submitted at least three days before the IPO date.
Why is the Red Herring Prospectus important for investors?
This document provides essential details like risk factors, the company’s history, its management, financial statements, and the purpose of raising the funds. With these important pieces of information available, an investor can easily deduce the company’s shortcomings and potential for growth, and therefore make an informed investment decision.
Is it mandatory for a company to issue a Red Herring Prospectus?
Yes, it is mandatory under the Indian Companies Act, 2013, for a company to release the Red Herring Prospectus if the company plans to go for an IPO.
Where can I download the Red Herring Prospectus of any company?
You can download the document from the website of the Securities and Exchange Board of India (SEBI). These documents are available in the “Filings” section.
