IPO or Initial Public Offering is an opportunity for the business enterprise to raise money and for a common investor to invest money. An investor should,thus, take an informed decision before investing. One of the mediums through which he can gain knowledge is the Draft Red Herring Prospectus (DRHP).
Many companies intend to raise money through IPO. For an Investor to understand the company, the Red Herring Prospectus plays a vital role. It gives detailed information about the company’s operations, financials, and future business opportunities. This information is important from an investor’s standpoint. Through the document, the investor could take an informed decision as to whether he should invest in the business or not.
The name ‘Red Herring’is related to the disclaimer in red printon the initial page of each preliminary prospectus. The disclaimer is generally the declaration provided by the companies, which states that the prospectus will be filed with the Securities and Exchange Board of India (SEBI) and the securities will not be sold unless the filing of the prospectus with the SEBI is complete.
SEBI mandates the production and filing of the red herring document.
Draft Red Herring Prospectus
An offer document which contains the information about company’s business, operations, and financials is called the DRHP. Some key information provided by the document is as follows:
The document specifies the purpose of the issue; it vividly brings out the purpose for which the company is raising money. This gives the investor a fair sense of business expansion and growth plans. The investor could also make out via research and sector understanding, if the investment is a wise decision and is in accordance with his investment goals.
• Risk factors
The document specifically points out the risk factors which an organization may face due to uncertain environment. Some of the factors may relate to:
o Market fluctuations that may hinder the overall working of the business operations with an indication that the revenue of the organization may decrease in such circumstances
o Other risks relating to market downturn, hedging, and much more.
o Operational risks that may arise due to various circumstances.
o Risks relating to the management, policies, and procedures
o Liquidity risks
o Credit risk exposures and risks relating to it.
o IT and legal risks
• Option agreement
The document also may specifically disclose any option agreement.
The document provides the financial information of the organization, such as:
o Articles of incorporation
o Balance sheet
o Earnings statements for last three years
• Dividend policy
The document provides the dividend policy of the offer. It may provide the frequency of the dividend distribution. In some instances, the organization also provides the details of the first dividend that would be provided to the shareholders, the timing of declaration, and the amount of the dividend.
• Underwriting Information
o Names of the underwriters company has got into an agreement with for the current issue.
o It may list down the number of shares each underwriter is handling.
o Underwriter's fees, commissions and discounts that has been provided.
o Underwriting agreement
• Promoter’s information
The offer document also states the promoter’s details and the promotion expenses relating to the offer.
Some other important pointers relating to the offer document are given below:
• The offer document is prepared by the Merchant Banker. The Legal and Compliance situation of the company is being taken care-off by the merchant banker. This is to safeguard the interest of the investor.
• It is mandatory for the companies to file DRHP with the Registrar of Companies (RoCs) as per the SEBI guidelines. SEBI reviews the DRHP and provide its observations and recommendations post which it is reviewed again and Red Herring Prospectus is filed.
• The Red Herring Prospectus can be found on the company website, merchant banker website. It is also present on the stock exchange portal and the SEBI website. The offer document is available post the announcement by the organization in regards to the offer.
• SEBI and authorized Merchant Banker ensure to safeguard the interests of the investing investor. However, if the investor notices any discrepancy in the document he can raise complaint either with the merchant banker or directly with SEBI.
The primary market or the share market is regulated by the regulatory authorities. The steps have been taken to safeguard the interest of the investors and to make sure that businesses provide authentic information to the investors, which would help them in taking an informed decision. The step to issue and register Red Herring document with SEBI is one such measure by the government.