Your daily guide to Stock Markets: What is Draft red herring prospectus?

While browsing the news about an Initial Public Offering (IPO) or just scrolling on your phone, you might have come across the term Draft Red Herring Prospectus (DRHP). Now, this term can sometimes leave people confused.

So, here we are to explain what exactly a Draft Red Herring Prospectus is, who puts it out and why it is crucial for both companies and investors. A DRHP is actually the preliminary registration or “offer document” prepared by a company before they plan to sell some shares to investors. The document is filed by the company before the Securities and Exchange Board of India (SEBI).

After SEBI asks the company to make some changes, and then accepts the draft prospectus, the document needs to be approved by the Registrar of Companies (ROC), as well the stock exchanges- the National Stock Exchange and Bombay Stock Exchange.

Only after that, can the Draft Red Herring Prospectus become a Red Herring Prospectus (RHP). The RHP is the final prospectus that lists out how many shares a company is offering, their price, and other details.

Why is the Draft Red Herring Prospectus crucial for investors?

The DRHP is the main link between a company and potential investors. It helps buyers figure out if they want to invest in a company based on its financials, business objectives, market valuation and other details. While the draft prospectus does not list out the exact price of the shares, it is a good way to understand the company’s objectives behind the sale of its stock.

Why is a DRHP important for companies?

For companies, a draft red herring prospectus is the way to attract investors. It is a method for the company to create a buzz before the public issue opens.

What are some important points that a DRHP contains?

The draft red herring prospectus contains data on the company’s financials and how it will utilise the capital from the sale. It also talks about the organisation’s core business operations, the risks associated with investing in the company and the firm’s position compared to its competitors in the industry.

Where can we view a company’s DRHP?

A firm’s Draft Red Herring Prospectus can be found on the company’s website, as well as the sites of SEBI, the BSE and NSE.

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