IPOs: What is red herring prospectus?

Any company while making a public issue of shares i.e. IPO has to file with SEBI, a document which is known as a prospectus, giving all the information of itself and the proposed issue which includes the operations & finances of the company, the current as well as future projects, the details of the promoters of the company, the proposed use of funds raised, and details of the shares being issued and the price band. 

A draft prospectus in the specified format is first filed with SEBI for approval. The modifications (if any) are incorporated and then the final prospectus is filed with the Registrar of Companies (ROC), SEBI, and the stock exchange.

The pricing of the issue may be decided by the issuing company in consultation with the lead managers in a fixed price offer, or through a bidding process once the offer is open. If the final issue price is not known at the time of filing, then an indicative price band for the offer is provided in the prospectus. This document is called the red-herring prospectus (RHP), as it does not have a final price. 

Some of the main factors to lookout for in RHP are:  

Objects of offer – In this segment, the company specifies the details about the offer comprising of fresh issue and offer of sale (if any). It has details about where and how the net proceeds from the issue will be utilised etc thus, specifying the objectives of the issue. 

About the company – Under this segment, the company specifies the details about its nature of business, business model, its strengths & weaknesses, etc. An overview of the industry in which it works is also provided. Also, details about the company’s management are provided including details about its board of directors. If any company has a specific dividend policy, its details are also mentioned. 

Risk factors - In this segment, the company lists out the potential risks that could impact their business and operations. 

Financial statements - This segment contains the company’s audit reports and financial statements which include a balance sheet, statement of profit & loss, statement of cash flows for the last three years, and notes. 

Management discussion & analysis – Under this segment, factors affecting financial condition and results of operations are provided. It also summarises the financials and relays management's insights into the company's performance. 

Legal information - In this segment, the company discloses its legal matters if any, like outstanding litigation and material developments, etc. 

Thus, RHP is very informative and can help any investor to gather significant information about the company and makes it easier to make decisions about the IPO subscription.