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What is Red Herring Prospectus?

As per the Securities and Exchange Board of India’s (SEBI) mandate, all companies going public (for an initial public offering (IPO)) must disclose certain facts regarding their business, finances, promoters, risks, the objective of IPO etc. in a document known as the Red Herring Prospectus (RHP).

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A corporation submits a Red Herring Prospectus or offers a document to SEBI when it intends to generate funds from the public by offering shares to investors. The document is extremely valuable to investors since it contains in-depth information about the company that is necessary for investors to decide whether to purchase shares in the IPO. Typically, the RHP gives investors all relevant information, beginning with the company’s business plan, its business operations, financials, promoters’ information, business risks, and the company’s aim for filing an IPO. It also describes how the firm intends to use the funds collected, the potential risks for investors, etc.

Relevance of a Red Herring Prospectus in IPO

When an IPO is approaching, there is a lot of buzz regarding the quality of the company and whether investing in it is the right option or not.

Instead of going by others’ opinions and analyses, you can do your own research about the company.

The red herring prospectus contains details about the organization’s operations and future prospects. However, it lacks critical information regarding the offering, such as the price and number of shares available. A red herring prospectus must comply with the same requirements as a prospectus, and any differences between the two must be highlighted.

The prospectus reflecting the total capital raised, whether via equity or debt, and the closing prices of the securities must be filed with the RoC and the Securities and Exchange Commission. Also, any other undisclosed information must be immediately filed after the conclusion of the securities offering.

Recommended Read: What is IPO Listing?

Things to Look for in a Red Herring Prospectus RHP

Red Herring Prospectus is a long document. Reading it thoroughly is a tedious job. To assist you, we have compiled a list of the sections of the red herring prospectus. The following parts will aid in performing the company analysis. You will also be able to identify a company’s advantages and any potential red flags. Following are the things to look for in a RHP:

Company and Industry Overview

You may not be aware of all industries and sectors as an investor. The Industry Overview part of the prospectus provides a macroeconomic perspective on the Indian economy, including GDP growth and consumption patterns. Furthermore, it provides an industry-specific perspective on growth drivers, favourable demographics, potential opportunities and threats. And also macro- and micro-level study of the industry and its subsegments. Moreover, the section provides a comprehensive overview of the industry to which the company belongs.

After describing the industry trends, the prospectus provides a comprehensive overview of the issuer and its business operations. Also, it often describes the company’s product and service offerings, size, and guiding corporate principles.

Strengths

The Red Herring Prospectus also discusses the company’s internal and external strengths. These strengths highlight the company’s uniqueness and how it is different from its rivals. Thus, it is essential to read this section upon understanding the company’s business and its competitors. The company’s strengths might assist you in comprehending its growth potential in the near future.

Risk Factors

Investing in equity shares involves risk. This section outlines all the risks that the company’s shareholders may face.

Strategies

Here you can know the company’s strategies for establishing and expanding its business. The section is not limited to high-level operational strategies; it also includes strategies at the product level, geographic level, market level, etc. Thus, you can gauge the profit-generating strategies of the company.

Operations

The Operations section provides information about the company’s processes and methods for providing its customers’ products and/or services. Thus, you can understand the manufacturing procedures, internal procedures, quality monitoring systems, marketing strategies, pricing policies etc. You can also understand how the company operates and runs its business.

Policies and Regulations

This section summarises the applicable laws and regulations relating to the company, such as employment restrictions, tax laws, and environmental regulations. Under-regulated industries and companies can have a negative impact.

History

The company’s history will help you understand how it made profits and operated in the market over the years. By knowing the history, you can get an understanding of the company’s growth trajectory.

Management

This section lists the company’s Board of Directors and provides the following information about each member:

  • Name
  • Address
  • Date of Birth
  • Nationality
  • Director Identification Number (DIN)
  • Term

Furthermore, you can read a brief biography of each Director, know their salary information of Directors, and a list of Board committee members.

Promoters and the Promoter Group

This section contains detailed information on the company’s promoters and/or promoter group.

Capital Structure

You will know the information regarding the issuing company’s Equity Share Capital as of the date of the Red Herring Prospectus. This covers the authorized share capital as well as the issued, subscribed, and paid-up capital prior to the offering. Furthermore, it also gives information regarding the company’s promoters’ equity shareholdings history.

Dividend Policy

Declaring dividends is not mandatory for any company. However, some companies have a dividend policy. Furthermore, you can know the company’s dividend history, i.e., if applicable. 

This section lets you know the legal information regarding pending litigation and such. It lists any outstanding civil, criminal, or tax-related lawsuit involving the company, its subsidiaries (where applicable), and also its promoters.

Financial Information

This section contains all the financial information pertaining to the company. An examination report by an independent auditor on restated consolidated financial information.

Restatement of Consolidated Financial Statements of the following:

  • Assets and Liabilities
  • Profit and Loss
  • Changes in Equity
  • Cash Flows
  • Property, plant, and equipment
  • Other Intangible assets
  • Non-Current Loans
  • Non-Current Financial Assets
  • Other non-current assets
  • Inventories
  • Current Investments
  • Trade Receivables
  • Cash and Cash Equivalents
  • Other current financial assets
  • Other current assets
  • Share Capital
  • Reserves and Surplus
  • Borrowings, etc.

Each of the statements gives you insights into a certain area of the company’s finances. Moreover, if you don’t have the expertise to analyze the financial information, you can consult an expert and take their help.

Details of the Offer

This section provides comprehensive information regarding the IPO, including the number of shares offered by fresh issue and also offer for sale. Furthermore, it also gives a breakdown of the QIB, Non-Institutional, and Retail components.

Objective of the Offer

In this section, you’ll know how the company intends to utilize the capital/ money raised through the IPO. As an investor, you can use this to conclude whether the company is focused on growth, stabilization, or any other objective.

Offer Information

Here you get to know the following information about the terms of the offer:

  • Ranking of the equity shares
  • Mode of payment of dividend
  • Face value, offer price, and price band
  • Rights of the shareholders
  • Offer details include:
    • Structure of the Offer
    • Offer Procedure
    • Important dates
    • Do’s and Don’ts
    • Technical rejection grounds
  • General terms and conditions pertaining to the offer

Hence, it is crucial for all investors to read this part to get some clarity on the offer’s minute details.

Basis for the Offer Price

This section describes the qualitative and quantitative considerations used by the company to determine the Offer Price.

While the qualitative variables account for the company’s strengths, the quantitative factors are as follows:

Thus, it is necessary to have a look at this section carefully as you’ll know if the IPO is correctly valued, overvalued, or undervalued.

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