What is Red Herring Prospectus (RHP)?

Red Herring Prospectus (RHP) is a legal document usually submitted to the regulatory bodies when a company raises money through Public Offering.

Security And Exchange of India (SEBI), Registrar of Companies (ROCs), and Stock Exchanges vet RHP for mainline IPOs in India.

Red Herring Prospectus is not a final prospectus (FP). It keeps changing until approved. Its name begins with “Red Herring”, as it may give a false impression.

From an investor’s point of view, it contains essential information about the company in a single document that was either previously unavailable or dispersed across many media. From the company’s point of view, it is also a marketing tool that outlines its strengths and strategies.

Information in Red Herring Prospectus

RHP is a legal document containing the disclosures according to ICDR regulation of SEBI¹. It includes the following information, along with other statutory information:

• Company’s operations: What is the business of the company?
• Industry Overview: What is the state of the industry in which the company functions?
• Peer Overview: Who are the competitors of the company?
• Risk factors: What are the risks associated with the company’s business?
• Purpose of offers: Why is the company raising money through the IPO?  It mainly contains whether the company is issuing new shares (fresh issue) or any existing shareholder is selling their share (issue sale).
• Fund Utilization: How would the raised fund be utilized?
• Company Finance: Company balance sheet, P&L, and cash flow statements of the current and past years.
• Growth plans and projections: What are the growth plans of the company?
• Promoters & management details: who are the owners of the company, the board of directors, and how is it structured among them?
• Legal Records: Litigation, Intellectual Property Rights.

RHP in the Initial Public Offering (in India)

DRHP

When a company in India wants to raise money through a public offering, it (through a lead merchant bank) sends SEBI and Stock Exchange a formal preliminary prospectus called the “Draft Red Herring Prospectus (DRHP)“. SEBI considers the DRHP as “an IPO fitness request” for the company, i.e., whether the company is ready for an IPO. SEBI can direct changes or reject the request. This process is generally under closed doors².

Once DRHP has reached a consensus, it is made available to the general public for comment.

RHP

The company is ready to launch the IPO after receiving approval from all parties involved; the prospectus is delivered to ROCs; at this point, the prospectus is referred to as the “Red Herring Prospectus (RHP)“.

RHP has additional information about an IPO that investors might want to know, like bid dates and issue size. Also, it can have updated financial data.

FP

After the initial offer, the prospectus becomes the Final Prospectus (FP). It is also known as Statutory Prospectus.

How to find filed DRHPs, RHPs, or FPs

Go to SEBI site.
Under FILLINGS Menu > Public Issues > Red Herring Documents filed with ROC or Draft Offers Document filed with SEBI.

Or

Summary

Even though the information inside RHP can change, it is still an essential document as it acts as a knowledge factory about the company raising capital. Always use the latest RHP for making financial decisions.

References

1. ICDR Regulation 
   https://www.sebi.gov.in/legal/regulations/jan-2022/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-last-amended-on-january-14-2022-_56069.html
2. The detailed process of DRHP 2022
   https://www.lexology.com/library/detail.aspx?g=0eed5a6f-49f6-4112-ab8d-b191b6c9cfa5

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