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What Is a Red Herring Prospectus

A company that wants to issue its shares to the public for the first time has to do it through an Initial Public Offering (IPO). The IPO process involves the filing of several documents and disclosures with the Securities and Exchange Board of India (SEBI). One of the most important documents that a company wanting to go through an IPO has to file is the Red Herring Prospectus. 

As an investor, you need to read through this document thoroughly before investing in an IPO. Wondering what this particular document contains and why it is important for investors to read through it extensively? Here’s everything you need to know. 

What is a Red Herring Prospectus?

Also known as an offer document, the Red Herring Prospectus (RHP) is an extensive document that every company going for IPO files with the Securities and Exchange Board of India. This document contains information regarding the public issue proposed by the company. It also includes extensive details regarding the company and its business. 

The SEBI goes through the Red Herring Prospectus filed by the company using a fine-toothed comb to ensure that all of the declarations made by the company are true. Once the SEBI is convinced of the authenticity and veracity of the statements in the RHP, it accords its approval for the proposed public issue. 

Difference between a Red Herring Prospectus and a Draft Red Herring Prospectus

A company going for IPO files two prospectuses with the SEBI. The first one is termed the Draft Red Herring Prospectus (DRHP). The SEBI accords its approval for the company’s proposed public issue only after thoroughly examining the DRHP.

The second one is termed the final Red Herring Prospectus. The final RHP is filed a few days to a few weeks before the public issue is opened to the public for subscription. 

There’s usually a time gap between the compilation and filing of the DRHP and the RHP. Any updates regarding the public issue, the company’s business, its financials and other related information about this period are usually included in the final Red Herring Prospectus. 

Also, the final RHP contains details of the opening and closing dates of the public issue. Other than this, there’s usually not much of a difference between the Draft Red Herring Prospectus and the final prospectus. 

What are the components of a Red Herring Prospectus? 

The Red Herring Prospectus is a comprehensive document that usually runs up to hundreds of pages. Here’s a quick look at some of the contents of a typical RHP.

1. Section I - General 

This section consists of general information such as the definitions of terms and abbreviations used throughout the document, conventions used, foreign exchange rates and industry and market data. It also contains forward-looking statements regarding the company’s business and a summary of the offer document. 

2. Section II - Risk Factors 

This entire section contains extensive information regarding the risk factors that the company’s business faces and how they can impact it. 

3. Section III - Introduction 

This section contains information regarding the offer, a summary of the financial statements, capital structure and objects of the offer. 

4. Section IV - About the Company 

This section is dedicated entirely to company-related information. You can find an overview of the industry, the company’s business, important regulations and policies governing the company, history, corporate governance, management and Key Managerial Personnel, and dividend policy. 

5. Section V -  Financial Information 

All the financial statements of the company including the balance sheet, profit and loss statement, cash flow statement and their respective schedules are present in this section. 

6. Section VI - Legal and Other Information 

This section contains details of all the legal issues and outstanding litigations faced by the company. You can find regulatory and statutory disclosures made by the company as well. 

7. Section VII - Offer Information 

This section contains information on the terms, structure and procedure of the offer. It also includes details on the restrictions on foreign ownership of Indian securities. 

8. Section IX - Other Information 

This is the final section of the Red Herring Prospectus. It contains details regarding material contracts and documents of the company and the declaration made by the directors. 

Where can you find the Red Herring Prospectus? 

The Red Herring Prospectus will be listed on the website of the company issuing the offer, SEBI, stock exchanges and the merchant bankers to the issue. You can also get a physical copy of the RHP by visiting the branches of stockbrokers or the bankers to the issue. 

Conclusion

The Red Herring Prospectus is a very important document that every individual desirous of investing in upcoming IPOs should read through. It is the most reliable, authentic, and accurate source of information for any company.

Speaking of IPOs, before you invest in one, make sure to first open a demat account in your name. Without one, it is not possible to invest in the Indian stock market. To open a demat and trading account, simply visit the website of Motilal Oswal. Once you’re there, fill out and submit an online application. Your account will be opened and activated within a few days. 

 

Related articles: 5 Tips for Investing In IPOs | What's the big deal about IPOs | Clearing the confusion from IPOs | IPO in India- The future looks bright | Upcoming IPO

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