A company who wants to go public undergoes a lot of paperwork and documentation and has to prepare the DRHP and the RHP and submit them to SEBI for regulatory approval. The DRHP or Draft Red Herring Prospectus is a preliminary IPO offer document that is filed with SEBI to initiate the IPO process; once it is approved, the issuer company files the RHP.
As an investor, you need to be aware of what DRHP and RHP mean, what information they provide and what are the differences between DRHP and RHP.
DRHP and RHP in IPO are important offer documents or prospectus that provide potential investors with valuable information such as an overview of the industry in which the company operates, a business overview, the company’s strengths, fundamentals i.e. income statement, balance sheet, cash flow statement, associated risks, details of promoters and more.
Prospective investors use this information to decide whether or not to invest in the IPO.
What is DRHP or Draft Red Herring Prospectus in IPO
The DRHP in an IPO is a registration document used to present a new company to potential investors. In simple words, the DRHP presents initial insight into the company’s business operations, strengths and fundamentals.
It does not contain any offer-related details such as the number of shares to be offered, the issue price, IPO offer period, etc. DRHP thus indicates that the company is preparing for the IPO, but the actual launch of the IPO will take some time.
A company that decides to sell its shares to the public must first file the DRHP with the market regulator SEBI. The DRHP is filed during the initial stages of the IPO process.
Once the DRHP is filed, SEBI reviews the contents of the DRHP to ensure regulatory compliance. If any discrepancies are found, SEBI may ask for corrections to the DRHP.
What is RHP or Red Herring Prospectus in IPO
Once SEBI approves the DRHP, the company files the RHP with SEBI. The RHP is a detailed or comprehensive version of the DRHP. The contents of the RHP include details of the business overview, its operations, financial statements for the last three years, strengths and risks and details of the IPO, such as the amount to be raised through a fresh issue or an offer for sale, utilization of funds raised through the IPO, timeline of the IPO, etc. The IPO issue price or bid size may not be specified in the RHP.
As a potential investor, it is important to review and study the Red Herring Prospectus to make wise investment decisions. The RHP serves as an important offer document to showcase the company’s strengths and future growth prospectus to generate public interest in the IPO. At this stage, companies even go on roadshows and organize investor meetings to attract institutional investors to invest in the IPO.
Unlike the DRHP, which is a preliminary document or serves as an overview of the IPO, the RHP aims to attract investors to the new investment opportunity.
Difference between DRHP and RHP
- Meaning: The DRHP is filed as a step ahead to initiative with the IPO process and after SEBI approves the DRHP, the issuer company files the RHP as the final prospectus.
- Content of DRHP and RHP: The DRHP is a preliminary document intended to provide a high-level description of the company’s key operations, strengths, financial health, etc. The RHP, on the other hand, is an offer by the company to sell its shares to the public. It contains all the information an investor needs to decide whether or not to invest in the company.
- No DRHP in FPO: In follow-on public offerings (FPOs), companies offer additional shares to raise capital from the public. There is no DRHP filed in FPO, only RHP is presented.
End Note
Both DRHP and RHP are important documents that need to be filed with the market regulator SEBI to launch the IPO. Since the DRHP is filed at the initial stage of the IPO process and the RHP is filled before the IPO is launched, investors are provided with up-to-date information about the fundamentals of the company, an overview of its business, the size of the IPO offer, the number of shares on offer and more.
As a potential investor, one need to examine the company’s RHP to review its performance or profitability, assets, liabilities, company valuation, and its growth prospects. This will help decide whether it is worth applying for the IPO or not.
