The IPO market in India witnessed active movement in 2023. With new companies going public every day, investors have a platter of options to choose from. But how do they assess each company’s IPO and choose the most suitable one?
It seems like a tedious job to assess each company one by one, do you agree? That is where the role of DRHP comes in to make the job easy for investors. In today’s article, let’s learn the importance of DRHPs in IPOs and the information they contain.
What is DRHP?
The full form of DRHP is Draft Red Herring Prospectus. It is a document that every company launching its Initial Public Offering (IPO) prepares and files with the Securities and Exchange Board of India (SEBI).
The DRHP acts as an advertisement and also contains all the material information that investors must know before deciding to invest in a company’s IPO.
The draft prospectus is the first document to begin the IPO process. Once SEBI reviews the DRHP and finds the details and disclosures satisfactory, companies file the actual prospectus called RHP – Red Herring Prospectus. This again contains similar details as DRHP, after incorporating the changes suggested by SEBI.
Why is DRHP necessary?
The prospectus is a mandatory document to be filed by every company before issuing shares to the public. The regulator mandates this document as the prospectus contains all relevant information that helps investors make their decisions. So, a prospectus acts as a document to protect the investor’s interest by providing transparency about the company’s financial background, strengths, risks, etc.
Besides that, it helps companies invite new investors. Since companies going public for the first time may have limited information for investor’s research, the prospectus acts as the basis for analysing the different aspects. Without a prospectus, investors may not have sufficient information, because of which they may hesitate to invest, causing an impact on the firm’s IPO process.
What information does DRHP contain?
DRHPs contain hundreds of pages, holding in-depth information about the company. Some significant details are:
- IPO issue – DRHPs contain information about the IPO size, including the number of shares the company is willing to offer. It also contains the amount of funds the company intends to raise.
- Shareholding details – DRHPs state the current shareholding pattern. It lists the names of shareholders and their shareholding percentages before the IPO. If the IPO is an offer for sale, where existing shareholders sell their shares, the selling percentage is available in the DRHP, too.
- Contact information – DRHPs contain the details of relevant people in the organisation responsible for the IPO. Besides that, it also contains details of the underwriters and associated book-running managers.
- IPO dates and prices – Some companies publish the dates in DRHP if it is already decided. Otherwise, they leave it blank and publish it directly in the prospectus. Price bands work the same way, too. If the company decides on a fixed price method, the price band will be part of the DRHP. If the decision is pending or the firm wants to follow a book-building method, price band details will directly come in the final prospectus.
- Objects of the offer – This is a significant component in the draft prospectus. It lists out the company’s fund utilisation plan. It includes the breakdown of IPO proceeds and how they will be incorporated across different plans.
- Financial report – The prospectus contains financial reports of the company, including profit and loss, balance sheets and cash flow statements for three fiscal years. It also includes different financial ratios like earnings per share (EPS), fixed asset turnover ratio, debt to equity ratio, return on capital employed, etc.
- Industry overview – Another important piece of information on DRHP is the industry’s overview. It contains material data on how the industry is performing and the growth opportunities for companies operating in that industry.
- Strengths and risks – This is again one of the significant components in the draft prospectus. It contains the strengths and risk factors of the company, including information about suppliers, consumers, revenue concentration, etc.
- Competitor details – Besides giving details of the issuing company, the draft prospectus also includes details and important ratios of competitor companies, facilitating easy comparison.
A prospectus is a compulsory document required for companies issuing shares publicly. It contains all the relevant information necessary for the regulator to assess the company and deem it fit for public issues. Similarly, it helps investors analyse if investing in the company’s stocks fits well in their portfolios.
The red herring prospectus is the authentic version of DRHP after making changes to it as recommended by SEBI. Like RHP is filed by companies issuing equity shares to the public, shelf prospectus is filed by companies issuing bond securities to the public.
The four types of prospectus are red herring prospectus (and DRHP), shelf prospectus, abridged prospectus and deemed prospectus. An abridged prospectus is a summary of RHP, concisely containing relevant information. A deemed prospectus is a document that acts as a prospectus in special circumstances, though it is legally not qualified to be one.
Investors can find RHPs and DRHPs on NSE, BSE and SEBI’s website. While they are definitely available on SEBI, their availability on exchange portals depends on which exchange they will be listed in. The documents are also available on the issuing company’s website.
DRHPs are drafted by merchant bankers who assist the issuing company with the IPO process. The details of such bankers are available in the initial pages of the prospectus.
After filing DRHP, companies submit IPO applications to SEBI. The regulator then reviews the documents and approves them, provided there are no concerns. Post that, companies file RHPs and begin the IPO process.