You must have come across these two terms, DRHP and RHP, when following the IPO news about companies. Both play a significant yet different role in the process of filing for an IPO by a company. Let’s understand these documents.
What Is a DRHP (Draft Red Herring Prospectus)?
A Draft Red Herring Prospectus (DRHP) is the preliminary document a company files with the SEBI before it moves forward with an IPO. This document contains information about the company’s financials, business model, risk factors, and the industry in which it operates. However, it is called “draft” because it has not yet received final approval from the regulatory body. During this phase, regulators and the public can review the company’s disclosures and submit feedback or concerns.
Key Elements of a DRHP
Company Overview
Offers insights into the firm’s history, core activities, and market presence.Risk Factors
Points out the challenges that might affect the company’s performance, helping you assess the potential risks in investing. Financial Statements
Shows the company’s balance sheets, income statements, and cash flow records (usually for a few years). Usage of IPO Proceeds
This section explains how the company plans to use the money raised, whether it is for expansion, debt repayment, or other corporate needs. . Draft Status
Highlights that the document is not final. Regulators or market participants can comment, and the company may revise the content before it becomes official.
What is an RHP? (Red Herring Prospectus)
Once the draft document has undergone scrutiny from regulators and other stakeholders, the company files the Red Herring Prospectus (RHP). This step means that the prospectus is close to final and approved by regulatory authorities (with only minor details that can still be updated). Prospective investors will review the RHP version before subscribing to the IPO.
Key Elements of an RHP
Regulator-Approved Data
Reflects any changes or clarifications requested by the regulatory body after reviewing the DRHP.Final IPO Details
Often includes the price band or the expected pricing details, issue size, and exact dates of the IPO.Comprehensive Disclosure
Contains updated financials, risk factors, and use-of-funds explanations. It is the primary document you rely on when you decide whether to invest.No Issue Price in Some Cases
Sometimes, the RHP still does not mention the final price if it is a book-building issue, but it will provide a price band (a minimum and maximum range).
The Relationship Between DRHP and RHP
In essence, the DRHP is an initial draft, while the RHP is the nearly final or final version of the prospectus. The DRHP undergoes revisions based on feedback from regulators. Once the company incorporates these changes, it files the RHP and advances the steps in the IPO process.
How to Use the DRHP and RHP Effectively
Don't skim through risks
The document provides details of the risks associated with the business that may affect your investment. It's important to understand the company's growth story and future plans.Compare with Competitors
You can compare the company with peers from the same industry. Look at market share, product differentiation, and other competitive advantages or weaknesses.Check the financial fundamentals
Carefully check and understand the profit-and-loss statements, balance sheets, and cash flow statements. The knowledge of increasing revenues, outstanding debt and other parameters will give you an idea of the company's financial condition. Assess the use of proceeds
Please be aware of how the funds from the IPO will be used by the company, whether it is for expansion, technology upgrades, debt repayment, or other purposes. This will help you understand whether the future plans they are sharing align with the fund management.Stay updated
The DRHP might not include final details about pricing or the exact date of the IPO. Be vigilant for any announcements that confirm any changes. By the time the RHP is released, you should have a clearer picture of timing and valuation.
Combine what you learn from the DRHP and RHP with other market research, analyst opinions, and your personal risk profile. This balanced approach will help you navigate IPO investments more confidently and improve your chances of long-term success.