Understanding DRHP, RHP, and Prospectus
Author: Denny B Justin
Understanding what an IPO entails is essential before delving into the documents. IPO is the process through which a private company offers shares of its stock to the public for the first time. This allows the company to raise capital by selling ownership stakes to investors. IPOs are often used by companies to raise funds for various purposes such as expansion, debt repayment, or investing in research and development. Filing the DRHP with the regulatory body marks the initiation of the IPO process. As the company progresses to the RHP and, finally, the Prospectus, it ensures compliance with disclosure requirements mandated by regulatory authorities. The Disclosure Document, the Red Herring Prospectus (RHP), and the Prospectus are important documents that reveal essential information for potential investors. The information these documents disclose significantly influences a company’s valuation and attractiveness to investors. They serve as comprehensive sources of information about the company, its operations, financial health, risks, and prospects. Investors rely on the information provided in the RHP and Prospectus to gauge the company’s credibility, financial stability, growth potential, and risk factors associated with investing in the company. In India, all the documents are reviewed by the Securities and Exchange Board of India (SEBI), whereas in the USA, they are done by the U.S. Securities and Exchange Commission (SEC).
DRHP
The Draft Red Herring Prospectus is an initial document filed with regulatory bodies by a company intending to launch an Initial Public Offering (IPO) or a public issue. The DRHP contains essential information about the company’s business, operations, financial performance, and prospects. This document provides preliminary insights into the company’s fundamentals but does not disclose all the information required for investors to make investment decisions. It offers insights into the company’s fundamentals, operations, and prospects but lacks the offer price and the number of shares or securities to be offered. It is usually circulated to potential investors for initial assessment and feedback before finalizing the offering details in the subsequent stages, such as the Red Herring Prospectus (RHP) and the final Prospectus. SEBI mandates that companies planning to go public must file a Draft Red Herring Prospectus (DRHP) with them. SEBI reviews the DRHP to ensure it complies with all the regulatory requirements, including disclosure norms and investor protection guidelines.
RHP
Once SEBI approves the DRHP, it is revised and finalized into the Red Herring Prospectus (RHP). The Red Herring Prospectus (RHP) is an evolved version of the DRHP, is a more comprehensive document. It includes details about the company, its operations, the IPO specifics (such as issue size, and price band), and the risks associated with the investment. The RHP provides more comprehensive information about the company, its operations, financials, and risks associated with the investment. The RHP acts as an intermediary stage between the preliminary DRHP and the Final Prospectus, aiming to provide a more comprehensive understanding of the investment opportunity while still withholding the exact pricing details until the final stages of the offering. SEBI also scrutinizes the RHP to ensure that it provides accurate and adequate information for investors to make decisions. SEBI’s oversight ensures that the information disclosed in the RHP aligns with regulatory standards, safeguarding investors’ interests and maintaining market integrity. Companies utilize strategies such as roadshows, presentations, and investor meetings during the RHP stage to engage potential investors. They leverage the RHP as a key document to communicate the investment opportunity, highlighting the company’s strengths and growth prospects to generate interest and build investor confidence.
Prospectus
Upon SEBI’s approval of the RHP, the company can proceed with the IPO, making the RHP available to potential investors during the offer period. The Prospectus is the finalized document that discloses all pertinent information about the offering. It includes the offer price, the quantum of securities, and other essential details. The Prospectus is filed with the regulatory authority and is distributed to potential investors to enable them to make informed investment decisions. SEBI’s role concerning the Prospectus involves evaluating its content, verifying compliance with regulations, and ensuring that it contains all essential details for potential investors. Finalized pricing details and information on the number of shares/securities offered are incorporated, impacting the financial statements and use of proceeds sections. Once SEBI approves the Prospectus, the company can proceed with offering its securities to the public, allowing the approved Prospectus to be disseminated to prospective investors during the offer period. Companies and underwriters conduct extensive due diligence to verify the accuracy and completeness of information in the Prospectus.
Common sections found in a final Prospectus: Cover Page, Risk Factors, Offering Details, About the Company, Management Discussion and Analysis (MD&A), Financial Information, Final Pricing, Legal and Regulatory Information, Corporate Governance, Other Information (tax considerations, industry analysis, market conditions, use of proceeds, and any other disclosures crucial for making investment decisions).
Overall, these documents represent a progressive disclosure of information. The DRHP initiates the disclosure process, offering preliminary insights into the company. The RHP provides deeper information, building upon the initial disclosure. The Prospectus culminates this process, offering a comprehensive view, including critical details required by potential investors. They help investors navigate the complexities of offerings while fostering transparency and informed decision-making. Offering transparent and positive disclosures about a company’s financial health, growth prospects, and risk management strategies can enhance its valuation and attractiveness to potential investors.
