What is DRHP in IPO

Are you thinking about investing in an IPO in India? If so, one of the key documents you’ll come across is the Draft Red Herring Prospectus (DRHP). Think of it as the first draft version or a pitch of a company’s offer to its investors. It gives you an insight into the business, finances, risks and how the company plans to spend your money. 

Companies submit this draft to SEBI so regulators can review it, and you get a chance to read all the important information before the final version is unveiled. In this article, we’ll break down everything about DRHPs, why they exist, what’s inside, where you can find them, and why they matter. Let’s start! 

What Is DRHP

A Draft Red Herring Prospectus (DRHP) is a preliminary document filed by a company with the Securities and Exchange Board of India (SEBI) when it wants to raise money from the public through an IPO. It includes detailed disclosures about the company’s business, financials, promoters, risk factors, and proposed use of funds. 

However, it does not include the final issue price, the number of shares offered, or total issue size, as those come later in the Red Herring Prospectus (RHP) or final prospectus. 

Regulators scrutinise the DRHP and may ask for changes, and the company can receive feedback or objections from the public. Only after SEBI’s approval does the “final” prospectus (RHP) go live. 

DRHP Preparation Process 

When a firm decides to go public, it hires merchant bankers to prepare the DRHP. Here is how the preparation process works: 

Preparation Process

• Merchant bankers/lead managers help the company compile the DRHP.
• The company provides detailed information about its business, finances, management, and risks.
• This draft is submitted to SEBI for regulatory review. It is also uploaded on SEBI and stock exchange websites for public access.
• SEBI may seek clarifications, and the company must address these before the final approval.

Here’s what you’ll typically find in the DRHP:

Business Description

This section gives an in-depth look at what the company actually does. It explains the products and services offered, business segments, competitive strengths, and the company’s strategy for future growth. You’ll often find the company’s mission statement, its vision for expansion, and how it positions itself within its industry in this section. It also sets out how your funds would support business operations.

Financial Information

A key section for any investor, the DRHP contains audited financial statements like profit & loss statements, balance sheets, cash flow reports, and key financial ratios, usually for the last three to five financial years. This can help you assess whether the company is profitable, consistent, or struggling. If the company has any outstanding debts or contingent liabilities, they’ll be listed here. 

Risk Factors

No investment comes without risks. This section spells out all the possible risks that could affect the company, from regulatory or legal hurdles and market fluctuations to dependency on certain suppliers or regions. It lists everything from pending legal cases to potential disruptions in the supply chain. Reading this part closely can help you identify what might go wrong.

Use Of Proceeds

Companies must indicate how they intend to use the money raised from the IPO. Typical reasons include funding expansion, paying off existing debts, acquiring new assets, or general corporate purposes. Knowing where the cash will go helps you judge whether the IPO will actually benefit the company’s growth. 

Industry Overview

The DRHP provides context for the company’s performance by describing the broader industry trends, market size, competition, growth opportunities, and macro drivers. This lets you compare the company with the overall industry outlook and weigh whether it’s an attractive sector or not.

Management

This section presents background information on the company’s promoters, board of directors, and senior management. You’ll find their qualifications, experience, shareholding, and whether they’ve ever been involved in legal trouble. Leadership transparency is essential for building investor trust, and it can allow you to assess governance. 

Why Do Companies File DRHP?

Filing a DRHP isn’t just a legal requirement; it’s a crucial first step for any company going public in India. Companies file DRHP: 

• To comply with SEBI regulations and disclose mandatory information. 
• To invite public feedback and address concerns early. 
• To provide investors and analysts with enough information to assess the company. 
• To set the stage for the IPO by building credibility and transparency. 

Companies must pass SEBI’s regulatory checks and are only allowed to move forward if their disclosures meet all standards.

Where Can You Find DRHPs?

Finding DRHPs is easier than you might think. Here’s where you can look:

• SEBI’s Official Website: All filed DRHPs are listed under “Public Issues.”
• Company Websites: Most companies upload their DRHPs for investors.
• Stock Exchange Websites: BSE and NSE both maintain updated lists of DRHPs.
• Merchant Bankers’/Lead Managers’ Portals: Sometimes, you’ll find DRHPs on these portals too.

RHP vs DRHP

Here’s a detailed comparison to highlight the differences between RHP and DRHP:

Why Is DRHP Important?

• Transparency: You get comprehensive insight into the company’s operations, finances and risks before any price is revealed. 
• Informed Decision-Making: You can assess whether the company’s growth plans, leadership and industry thesis align with your goals.
• Risk Awareness: The risk factors section is mandatory, so you get to see potential issues straight from the company itself.
• Regulatory Oversight: SEBI ensures compliance via DRHP review, protecting investors from misleading disclosures. 
• Market Feedback: Companies use DRHP to gauge demand, price sensitivity and investor appetite, helping structure the IPO better.
• Level Playing Field: Open, public disclosures help ensure all investors, big and small, have access to critical information at the same time.

Conclusion

The DRHP is the company’s open book to investors well before the IPO price is finalised. It offers transparency on business strategy, financial health, risk factors and fund usage. By reading the DRHP, you get a solid foundation to decide if an IPO aligns with your investing goals. 

This document can help you make a conscious and informed bet on a company’s future. Make sure that you go through the DRHP thoroughly before making any decisions. Want to start investing? Open a Demat account with Share.Market right away! 

FAQs

1. What is the full form of DRHP, and what does it mean?

DRHP stands for Draft Red Herring Prospectus. It’s a preliminary IPO document filed with SEBI, disclosing company details but not the final price or issue size. 

2. Where exactly can I download a company’s DRHP?

You can download DRHP from SEBI’s website, BSE/NSE IPO sections, or the company’s and merchant banker’s websites. 

3. Why does SEBI review the DRHP?

SEBI reviews DRHP to ensure the company’s disclosures comply with legal/financial norms and protect investors by catching missing or misleading data early. 

4. Are all DRHPs public documents?

Yes, once filed, DRHPs become publicly available so that investors can read them before SEBI issues final approval and the IPO dates are set. 

5. Is it mandatory for all IPOs in India to file a DRHP?

Yes, as per SEBI regulations, all companies must file a DRHP to launch an IPO in India.

6. What should I look for in a DRHP as an investor?

Focus on business strengths, financials, risk disclosures, management background, and how the funds are proposed to be used.