RED HERRING PROSPECTUS

INTRODUCTION

In any IPO, the red herring prospectus, which is the more refined version of the DRHP, is a key document. The RHP in IPO is one of the most important informative documents that can be used by investors to take a call on what to do with the issue; whether to invest or not. In this segment, let us look at what is the red herring prospectus and what is the RHP IPO. Let us look at some of the key components of the red herring prospectus or the RHP and how it fits into the overall scheme of an IPO.

The Red Herring Prospectus is also called the offer document, which has to be filed by a company with SEBI while raising money through an IPO. It provides information about the operations, promoters, financials, objective of raising funds etc. It also explains how the said funds will be applied; that is the purpose of the IPO fund raising, in the case of new issue.

WHERE CAN YOU ACCESS RED HERRING PROSPECTUS

There are different places from where you can access the red herring prospectus. This includes the website of SEBI, on the website of stock exchanges (NSE and BSE) and the website of the merchant banker. The RHP is a public document and can be loaded by any information syndicator quite easily.

The RHP plays an important role in the case of the IPO. When any IPO is launched, investors are curious to know how good the company is and the reasons why they should invest in the IPO. The RHP is an agnostic document giving all the details of the IPO, including the financials, non-financial data, management background, risk factors, basis for valuation of the IPO and other information to enable the investors to take an informed decision.

KEY CONTENTS OF AN IPO RED HERRING PROSPECTUS

A typical RHP provides the following details as in the case of any IPO.

1) Details of the public offer made by the company. This includes details of the number of shares being offered, allocation to retail, HNI and QIB as well as the break up of the IPO into fresh issue and offer for sale. As an added information, the RHP also provides details of the capital structure; including the issued capital and the pre and post IPO capital structure. This includes details of promoter holdings.

2) One of the most important components is the objective of the offer. For an OFS, it is to give an exit and list the stock. In the case of a fresh offer, the RHP contains details of the use of the funds like expansion, purchase of plant & machinery, diversification, repayment of loans, working capital needs and general corporate purposes.

3) Industry overview and business description are the key inputs on the core business proposition. This shows how the company is positioned in the industry versus its competitors, structure of the industry, number of players, trends in the industry etc. The business description includes details of the operations the company, its capacity and the key areas of operations.

4)  Financial information of the IPO is one of the most important components of the RHP. It talks about the company’s financial statements, its audit reports, key ratios, projections of financials for the next few years, ROI and ROE of the company etc. It also underlines any dividend distribution policy followed. Dividend policy is covered separately.

5) This is where the Red Herring Prospectus makes a marketing pitch and highlights the strengths that distinguish it from its competitors. Companies tend to be a little fulsome in praise of their own model, so investors must take it with a pinch of salt. Ideally, this must be view in conjunction with the strategies adopted by the company for achieving growth. These broadly include the product strategy, market strategy, growth strategy, financial and capital raising strategy etc.

6)  It is time to read between the lines of the risk factors. RHP normally makes the risk factors sound too innocuous. The investors should focus on the risks specific to a company in terms of disruption, market share loss, leverage etc. Take a close look at the contingent liabilities and pending legal cases.

7) In any new business you bet on the promoters and the management of the company. The RHP contains details of the designations, roles and financial delinquency of the promoters. Beyond the promoters, look at finer points like how is the company managed, does it have a professional structure, is there a second line of defence, is there succession planning etc.

8)  Finally, the RHP also covers the dividend policy of the IPO company. While declaring dividends is not mandatory, some companies follow a formal dividend policy, which is stated in this section under the RHP. The idea is to have a smooth dividend policy and be predictable.

In short, the RHP is a treasure trove of information, the investors can use to take an informed decision about investing in an IPO.

Disclaimer:ICICI Securities Ltd.( I-Sec). Registered office- ICICI Venture House, Appasaheb Marathe Marg, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code:-07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The non-broking products / services like Mutual Funds, Insurance, FD/ Bonds, loans, PMS, Tax, Elocker, NPS, IPO, Research, Financial Learning etc. are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.