Businesses often raise funds by offering equity shares or debentures to the public. To safeguard investors, SEBI, the Indian market regulator, mandates companies to file a prospectus. This document provides detailed company and securities information. We can divide the process of issuing a prospectus into two stages: Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP).
Let us study what these stages are, see how a prospectus helps investors, and learn the differences between DRHP and RHP.
What is a prospectus?
In India, it is a legal requirement to file a prospectus with the market regulator (SEBI) at the time of issuing:
- New equity shares via Initial Public Offering (IPO)
- Bonds/Debentures, or
- Units of mutual funds
It is a formal document providing detailed information about the:
- Securities on offer
- Investment opportunity
- Risks associated with investing in those securities
What does a prospectus contain?
A prospectus contains comprehensive information about the company issuing the securities. It provides the following details:
- What does a company do?
- How was the financial performance of the company?
- Who is included in the management team of the company?
- What are the future prospects of the company?
This information helps investors evaluate the company's financials and potential for growth. Additionally, a prospectus outlines the specifics of the securities being offered, such as:
- The type of securities (e.g., stocks, bonds, or mutual fund units)
- The number of securities available for purchase, and
- The offering price
How does a prospectus protect investor’s rights?
A prospectus provides detailed information about the securities offered by the issuing company. It also outlines investors' rights, such as:
- Voting rights for shareholders and
- Interest payments for bondholders
By thoroughly analysing a prospectus, investors can make informed decisions about whether to invest in the company.
How is a prospectus distributed?
Mostly, prospectuses are distributed to investors as part of the marketing and distribution process. Also, they are distributed electronically through:
- Company websites
- Regulatory filings, or
- As printed copies provided by intermediaries like brokers or underwriters.
What are DRHP and RHP?
We can broadly divide the process of issuing a prospectus into two stages:
Stage I: DRHP
- DRHP stands for Draft Red Herring Prospectus.
- It is a preliminary prospectus filed by a company with the Securities and Exchange Board of India (SEBI).
- This filing usually happens before launching an Initial Public Offering (IPO).
Stage II: RHP
- RHP stands for Red Herring Prospectus.
- It is the final prospectus issued to investors after SEBI's approval.
- It contains details about the:
- Company's business
- Financials, and
- Securities offered
Now, let us have a detailed understanding of both DRHP and RHP.
What is a Draft Red Herring Prospectus (DRHP)?
A draft red herring prospectus is a preliminary disclosure document filed with SEBI. It undergoes review and scrutiny to ensure compliance with:
- Disclosure norms, and
- Investor protection requirements
What is the role of SEBI in filing a DRHP?
SEBI's involvement in the DRHP filing process helps in:
- Maintaining market integrity
- Protecting investor interests, and
- Ensuring compliance with regulatory standards
- Let us see some crucial steps performed by SEBI:
Step I: Review and draw comments
- SEBI reviews the DRHP submitted by the company
- It provides comments and feedback on its content
- The company must address SEBI's suggestions and incorporate necessary changes before SEBI grants final approval
Step II: Monitoring compliance
- SEBI ensures that the DRHP adheres to its:
- Disclosure norms, and
- Investor protection guidelines
- It verifies that the company and its promoters meet the eligibility criteria to undertake the IPO
Step III: Granting approval
- Upon SEBI's approval, the company converts the DRHP into the final Red Herring Prospectus (RHP)
- This conversion happens by incorporating additional details such as the:
- Issue size
- Price, and
- Number of shares offered
What is a Red Herring Prospectus (RHP)?
A red herring prospectus is a preliminary prospectus filed with the SEBI. The term "red herring" refers to the disclaimer printed in red ink on the cover page of the document. This disclaimer usually states that the information contained therein is subject to change and may be incomplete or inaccurate.
How a RHP helps investors?
The RHP is more or less an updated version of the DRHP. It provides investors with detailed information about the company and the terms of the offering. A typical RHP usually contains the following:
- Opening and closing date of the offering
- Company and the industry overview
- Offer details
- The total issue size (number of shares offered to the public)
- Pre and post-share capital structure
- Investor allocation methods, and
- Other pertinent information regarding the securities offered
- Record of share capital held by promoters
- Subscribed, issued, and paid-up capital before the IPO
- Updated financial statements and offer details
What are the differences between DRHP and RHP?
A significant distinction between a DRHP and an RHP lies in their timing:
- A DRHP is submitted to SEBI by a company before the IPO process commences.
- On the other hand, RHP is the final prospectus issued to potential investors after SEBI's clearance.
Let us have a look at some other key differences as well:
| Parameters | DRHP | RHP |
| Completeness of content | Can contain incomplete or tentative information. | Contains finalised information about the company to provide an accurate picture to investors. |
| Confidentiality | Companies can choose to file a DRHP confidentially. | Post approval, an RHP must be made available to the public. |
| Approval | Requires regulatory approval from SEBI. | Issued only after regulatory approval has been obtained. |
Conclusion
The issuance of a prospectus is mandatory for companies seeking to raise funds from the public. Divided into the DRHP and RHP stages, this process ensures transparency and investor protection. A prospectus provides comprehensive information about the company and the securities offered that helps investors decide whether to invest in the company.
Are you looking to expand your IPO-related knowledge? Understand how to check IPO allotment status and explore the key differences between NFO and IPO.
