Categories: Stock Markets

Red Herring Prospectus- What is it ? Contents, How to access ? -2023-24

India is seeing a massive increase in the number of investors participating in the stock markets. Both primary and secondary markets are witnessing trading traffic like never before. No wonder the recent IPO or initial public offering boom is credited to this new-found interest of masses in the stock markets. When a company comes up with an IPO, investors look for the company’s potential to assess investment viability. This involves assessment of factors like company financials, business stability and growth prospects, competition, etc. 

To provide all relevant information to investors, SEBI or Securities and Exchange Board of India has mandated all companies coming up with an IPO to share a document called the Red Herring Prospectus or RHP. Here, we will explain everything that an investor should know about RHP.

What is Red Herring Prospectus(RHP)?

A Red Herring Prospectus, also known as offer document, has to be filed by a company with SEBI while raising money through an initial public offering. This document is crucial for investors as it provides detailed information about the company’s operations, promoters, financials, the objective of raising funds through IPO, etc. It also explains how the company aims to use the money that will be raised, the possible risks for investors, etc.

How to access Red Herring Prospectus ?

Investors can access a company’s red herring prospectus on various platforms, as mentioned below:

  1. The official website of SEBI.
    1. Access the website at: https://www.sebi.gov.in/
    2. Visit the filings page and select public issues.
    3. Here, an investor can find the draft RHPs along with offer documents of all upcoming IPOs.
  1. An issuing company is required to make a public announcement of IPO via at least one newspaper once it has submitted the RHP to SEBI. The newspaper can be a Hindi, English, or Regional language one.
  1. Stock Exchange websites
  1. Select merchant banker sites
  1. National Stock Exchange (NSE) website
  2. Bombay Stock Exchange (BSE) website

Why is Red Herring Prospectus important for investors ?

When any IPO is launched or about to be launched, investors are curious to know how good the company will be and reasons why they should invest in it. 

Instead of basing investment decisions on others’ opinions, investors must focus on their own research. This is when referring to the RHP can be helpful. However, it may not be possible for investors to read the entire red herring prospectus. To make it easy for investors, here are the most important sections that they must refer to in a red herring prospectus while analyzing the company. 

1. Offer details

This section provides details of the IPO, including:

  1. the total number of shares being offered through the fresh issue plus offer for sale
  2. break-up of the retail, Non-Institutional, and qualified institutional buyers

2. Capital structure

This section contains details about:

  1. the issuing company’s Equity Share Capital
  2. authorized share capital
  3. issued, subscribed, and paid-up capital before the IPO.
  4. the history of the equity share capital held by the company promoters

3. Offer objective

This section has details on how the company will be utilizing the funds that will be raised through the IPO. An investor must use this information to evaluate if the company will be focusing on:

  1. growth
  2. repayment of debt
  3. meeting working capital requirements or
  4. any other goal

4. Industry overview:

This section has details about :

  1. the company’s position vis-à-vis its competitors
  2. industry performance trends

Investors planning to invest in a given company’s IPO should analyze different business and economic variables such as demand and supply mechanics combined with the sector’s future prospects.

5. Business description

Here, details of a company’s primary operations are mentioned along with how the company conducts business. Potential shareholders should focus on this part since their investment will be used by the company towards its core business.

6. Financial information

Being one of the most important sections of RHP, financial information talks about the company’s financial statements and audit reports. Investors can use the financial statements to get an idea about the company’s financial past. It can also throw light on future prospects of dividend declaration as per the profits being disclosed. Investors can gauge the safety and profitability of their future investment using this section.

7. Strengths

The Red Herring Prospectus states the company’s strengths that distinguish it from its competitors. Investors must go through this information after knowing about the company’s business and existing competition. This will help them in further understanding the company’s potential and growth prospects.

8. Strategies

Here, the strategies that will be adopted by the company for establishing itself and achieving growth are mentioned. The strategies can be:

  1. product-level
  2. geographic
  3. Market-level, etc.

This information helps investors to understand the company’s approach for generating profits.

9. Risk factors

Companies are also required to share information on the potential risks that may impact their business operations. This is stated in the RHP under a section called ‘Risk Factors’. Although this section may have some generally observed risks, investors should focus on risks that are specific to the company. For instance, if a company has many open legal cases, an investor is better off avoiding the IPO investment. Investors must try to read between the lines while identifying the real risks that may stun the company’s future growth.

10. Management

Here, the details of the company management are mentioned, including:

  • names,
  • qualifications,
  • designations
  • any open criminal cases
  • financial delinquency
  • pending litigations

Investors must look through this section to identify any potential risk factors.

11. Promoters

The details of the company’s promoters or promoter group is stated in this section.

12. Dividend policy

While declaring dividends is not mandatory, some companies follow a formal dividend policy, which is stated in this section under the RHP. 

Conclusion

The RHP contains a lot of information about the company that investors can go through to evaluate its potential. Investors interested in a company’s IPO should spend some time in navigating through the information for an informed and well-planned investment decision.

FAQs

What does the financial section of a red herring prospectus contain?

Some of the details that are included in the financial section of a red herring prospectus are assets, liabilities, profit and loss, cash flow, borrowings, income statement, statement of changes in equity, shareholdings, financial ratios, etc.

What is a draft red herring prospectus?

A draft red herring prospectus is a non-finalised or draft version of the RHP. Once SEBI goes through the draft version of the RHP, it will recommend changes before approving it. Once the draft version is approved, it is known as Red Herring Prospectus.

What is an IPO?

IPO or initial public offering is a route used by unlisted companies to get listed on a stock exchange through public offering of its shares. This is used by companies to raise funds for achieving further growth or other objectives.

How to invest in an IPO?

To invest in an IPO, an investor must have a Demat and trading account with a registered broker. Fisdom is a good platform for investing in IPOs since it allows a seamless KYC and account opening process.

Are IPO investments profitable?

IPO investments can be profitable if an investor conducts thorough research by going through company details in the Red Herring Prospectus. It also depends on the investor’s objective, whether he/she is investing for listing gains or for long-term profits.

Akshatha Sajumon

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