Draft Red Herring Prospectus (DRHP) is a preliminary document filed by a company planning to raise funds through an Initial Public Offering (IPO) in India. It provides investors with critical information about the company’s business, financial standing, and future prospects. The offer document (DRHP) is submitted to regulatory authorities like the Securities and Exchange Board of India (SEBI) for in principle approval of IPO. A company has to fulfil the IPO Eligibility criteria for listing on NSE Emerge, BSE SME stock exchanges of India.

DRHP filing is assisted by IPO Advisors who are an important intermediary to assist in meeting regulatory requirements, structuring the IPO, and ensure that DRHP includes information as required under SEBI ICDR Regulations (2018).

The DRHP includes the cover page with the below content in the cover page:

 

Content to be included:

Front Outside Cover Page :- Issue & Issuer details

Front Inside Cover Page

a) Offer Document Type

b) Date of Offer Document

c) Type of Issuance

d) Public Issue Clause

e) Issuer Details

f) Promoter(s) Name

g) Offer Details

h) Amount to Be Raised

i) Risks involved First Issue

j) General Risk

k) Issuer’s Absolute Responsibility

l) Lead Manager(s) Details

m) Registrar to the Issue

n) Issue Schedule

o) Credit Rating

p) IPO Grading

q) Stock Exchanges for Listing

 

Below is an in-depth look at the key sections typically included in draft red herring prospectus:

1. Company Overview

This section includes the details of the company, description about the product and services provided by the company, outlining its mission, vision, and background. It includes the following mention details in more depth;

• Business History: This provides a description of the company’s journey from its incorporation, key milestones, and growth, including important product launches, expansions, and leadership changes. It provides investors with insights into the company’s development and the factors shaping its success.
  
   
• Core Products and Services: An in-depth look at the company’s product and services, whether it's in technology, engineering, manufacturing, or any other industry. This also provides industry details and future approach of the company.
   
• Market Position: Includes details about the company’s market share, competitive advantages, and unique selling propositions.
   
• Achievements: Key accomplishments, awards, and recognitions that highlight the company's success and credibility in the industry.

This section aims to provide investors with a solid understanding of the company’s identity and its competitive standing within its respective market.

 

2. Business Model and Strategy

The Business Model and Strategy section is crucial in presenting how the company operates and plans to achieve future growth. It typically covers:

• Revenue Model: This section explains how the company generates revenue, whether through direct sales, licensing, subscription services, or other streams.
   
• Target Market: Provides detailed description of the market segments the company serves, including geographic and demographic factors.
   
• Strategic Initiatives: An overview of the company’s long-term vision and growth strategies, including expansion plans, new product developments, technological innovations, and market diversification.

This section is key for investors to gauge the company’s potential for growth and its plans to navigate an ever-evolving marketplace.

 

3. Financial Information

This section of DRHP contains details of restated financials, other financial information and Management Discussion and Analysis of Financial Position and Results of Operations. Following form part of financial information:

• Audited Financial Statements: This section provides all details related to financials of the company. It includes Balance sheets, profit & loss statements, cash flow statements for the last three to five years, audited by a statutory auditor.

• Key Financial Ratios: Ratios such as Return on Equity (ROE), Earnings Before Interest, Depreciation, Tax and Amortization (EBITDA), debt-to-equity ratio, Price to Equity ratio (P/E ratio) and profitability margins.

 

• Growth Trends: It gives insights about future revenue growth, profitability trends, and cash flow analysis over the past performance of the company.
   
• Financial Projections: In this section company provides projections for the coming years, also shows the expected revenue, profits, and capital expenditure.
   
• Capital Structure: In this part information related to capital structure, including equity and debt components is mentioned.

Investors can closely examine the details provided in this section to assess the company’s financial stability, potential for growth, and ability to handle future challenges.

 

4. Risk Factors

The risk factors include:

• Market Risks: In this section companies mention their economic downturns, industry-specific fluctuations, or changes in consumer demand that could impact the company’s revenue.
   
• Regulatory and Legal Risks: This gives information about legal risks including potential changes in laws, taxes, or compliance issues that could affect the company’s operations or profitability.
   
• Operational Risks: This provides details about risks such as supply chain disruptions, technology failures, or high dependence on key personnel.
   
• Competitive Risks: The emergence of new competitors, technological advancements by rivals, or changes in market dynamics.

This section provides information regarding the risks. It is very useful for investors to evaluate the inherent risks before making a decision to invest in the IPO.

 

5. Objects of Issue of IPO and Utilization of IPO Proceeds

The Use of IPO Proceeds section outlines how the company plans to utilize the funds raised through the IPO. Common uses include:

• Debt Repayment: It provides important information about the company’s efforts to strengthen its financial results by reducing existing liabilities. Debt repayment reduces financial leverage, improves liquidity, and ensures long-term financial stability.
   
• Expansion and Growth: It gives details about the company's plans for growth, including investments in infrastructure, new product development, geographic expansion, or increased production capacity.
   
• Working Capital: It provides insights into how the company plans to improve its day-to-day operational liquidity, ensuring smooth business operations. Adequate working capital is crucial for maintaining efficiency, covering short-term obligations, and sustaining growth.

This section helps investors understand how the company plans to strategically allocate the raised capital to foster long-term value creation and also it highlights the company’s commitment to managing its finances responsibly, which can enhance investor confidence.

 

6. Management and Governance

The Management and Governance section provides an overview of the company's leadership, governance practices, and organizational structure:

• Board of Directors: Profiles of key executives, their qualifications, experience, and roles within the company.
• Corporate Governance: Information on the company’s governance practices, including board independence, committees, and policies ensuring ethical management.
• Leadership and Vision: A description of how the leadership team is aligned with the company's long-term strategy and its role in steering the company toward success.

This section provides information regarding leadership, governance practices, and strategy of a company and it helps investors in assessing competence and integrity.

 

7. Offer Details/Issue Related Information

This section provides very important information about the details of IPO:

• Number of Shares: Total number of shares being offered to the public.
• Price Band: The range within which the shares will be priced for investors. However, it should be noted that the price band is not mentioned in the DRHP.
• Issue Size: The total value of the IPO, representing the funds the company expects to raise.
• Underwriters: The investment banks or financial institutions managing the offering and guaranteeing the sale of shares.
• Listing Details: The stock exchanges where the shares will be listed after the IPO.

The section gives details about the IPO offer given by the company. It is very useful for investors to determine how they can participate in the IPO and what to expect in terms of pricing and timing.

 

8. Legal and Regulatory Disclosures

This section includes following details about Legal and compliance requirement of company:

• Compliance with SEBI Guidelines: Confirmation that the company follows the regulations set by SEBI for IPOs.
• Legal Proceedings: Disclosure of any pending or potential litigation that could impact the company’s financial health or operations.
• Contingent Liabilities

Regulatory Approvals: Information about any approvals needed for the IPO, such as from SEBI, the stock exchanges, or other regulatory bodies.