A company planning to raise money from the public issues an offer document. This offer document is known as a Prospectus. Prospectus contains all relevant information about the company like the address, corporate profile, names of directors, management, shareholding pattern, purpose of raising funds, financial statements, important legal contracts, share capital history, dividend policy, related party transactions etc.
Companies coming out with their IPOs issue Draft Red Herring Prospectus (DRHP) providing detailed information about its business operations and also reflecting the financials of the company. This will include details related to promoters, reasons for raising money, application of money, risks involved in investment and much more. Draft Red Herring Prospectus will not provide any information on the price and size of the IPO. It is a ‘draft’ document, as SEBI is yet to approve the same. It is mandatory for companies to file a DRHP as per SEBI regulation. SEBI makes sure that the document is legally complied with and all the adequate disclosures are made in the document. Any changes or modifications, required as per SEBI, is communicated to the company or Merchant Banker responsible and the concerned party is responsible to make such changes.
A company generally appoints a merchant bank to prepare the Draft Red Herring Prospectus. Merchant Banks make sure all legal and financial compliances are met and adequate disclosures are in place, so as to keeps the investors aware of the public issue.
Once the DRHP is approved by the SEBI, it becomes a Red Herring Prospectus (RHP). Since the final IPO price is not yet discovered, this prospectus is called ‘red herring’.
A Red Herring Prospectus is a very important document for investors investing in the IPOs of these companies as it provides all necessary information about the company and helps in making an informed decision. Investors should go through the RHP and do specific research in the sector in which the company operates. RHP can be found on the company’s website, SEBI website, merchant banker’s website at the time of opening of the issue.
Once the price is discovered after issue close, the company is required to incorporate the IPO price in the RHP, which makes it a prospectus which is filed with the Registrar of Companies (RoC).