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Understanding All that a Prospectus Entails

09 Aug 2023


When you invest in an Initial Public Offering (IPO) of a company (or any other public investment offer being issued for the first time), there are several things that you need to check. For example, the fundamentals of the issuer, the risk involved with the offering, minimum and maximum investment that can be made, and the estimated returns that can be generated.

But do you know from where you can get an idea of these details? The best way to know and analyze a public investment offering is by reading the prospectus filed by the issuer. In this article, we will discuss the prospectus, what it is, and what it contains. Continue reading.

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What is a prospectus?

A prospectus is a legal document that an issuer needs to file with the Securities and Exchange Board of India (SEBI) before issuing securities for public investment. It contains detailed information about the investment product that is being issued, such as mutual funds, bonds, stocks, IPOs, etc. It is meant for the perusal of prospective investors and other market participants.

One of the most common forms of prospectus that you will come across in your daily life is the Draft Red Herring Prospectus (DRHP). It is required to be filed by the companies planning to issue their IPOs in the future.

What does a prospectus entail?

From the objectives behind the offer to its risks and strengths, a prospectus contains detailed information about an investment product being launched for public investment. Here is some common information that a prospectus entails:

  • Details of the issue

The first thing that a company mentions in a prospectus is the details of the public issue that it is planning to launch. For example, in the case of an IPO, the issuing company needs to mention the size of the IPO, the total quantity of equity shares it is planning to sell, the face value of each equity share, and an estimated issue price. 

These details will help you know what an investment product is about and decide whether you should seek finer details.

  • The issue date for the offer

The next thing you will find in a prospectus is the issue date of the public offer. Knowing this is very important as it will help you arrange the finances to invest on that particular date. For example, if you plan to invest in an IPO, you need to know the issue date to understand the window to place your bid.

Apart from the issue date, a prospectus contains the maturity date or listing date.

  • Details of the issuing company

Knowing the issuing company's details is crucial to making any investment decision. It includes the company's name, background, products and services it offers and other useful information. 

Apart from the basic details, you will also find detailed information on the issuing company’s fundamentals, past performance, financial data for the last three to five years, strengths and weaknesses. Based on these details, you can decide whether investing in the public offer would be profitable.

  • Objectives of the offer

A prospectus also contains crucial information on the objectives behind issuing a public offering. For example, the primary objective behind an IPO is to raise funds from the public to meet working capital requirements and undertake business expansion. Companies sometimes float IPOs to clear their debts and/or acquire other smaller companies.

Knowing the objectives of an offer will help you understand how the issuing company is planning to use your money and, subsequently, get an idea of the returns and associated risks.

  • Name of the underwriters and other financial entities

A prospectus also contains the names of the underwriters and other financial entities involved in issuing the public offer. An underwriter is usually an investment banker who decides on an offer's pricing, valuation and other details. Others involved in the process are the book-running lead managers, registrars, etc.

To conclude

The prospectus is a very crucial document for investors like you. Reading it lets you know the important details of a public offer and decide whether it’s worth your investment. If you need a Demat account to invest in IPOs and stocks, you can open it for free with Motilal Oswal and enjoy many exciting features.


Related Articles: What is the Roles of IPO In Stock Market | What Happens to Your Money Once You Bid For an IPO | How Is An IPO Valued | What Are the Different Types of IPO |  How to Apply for IPO Using UPI ID

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