Red Herring Prospectus

Red Herring Prospectus

A Red Herring Prospectus (RHP) is a preliminary document issued by companies intending to go public. It is a critical guide for investors about the company’s business operations, financial status, and future plans. However, it doesn’t contain details about the price or the number of shares to be issued, making it a “red herring” for investors.

Contents:

Full Form of RHP

The full form of RHP is Red Herring Prospectus. It gets its intriguing name from the tradition of marking preliminary prospectuses with a red warning stating that the information contained is incomplete and subject to change. This document is an initial step in the IPO process, providing crucial data to potential investors but excluding specifics like the price or the amount of securities offered.

For example, when Paytm decided to go public in India, it filed a Red Herring Prospectus with the Securities and Exchange Board of India (SEBI) detailing its financial condition, planned use of funds, and risk factors associated with the investment. It, however, did not mention the price or number of shares to be issued, which would only be determined closer to the actual IPO date.

Red Herring Prospectus Example

For an illustrative case study, consider the recent IPO of Zomato, a leading food delivery company in India. Before the IPO, Zomato issued its Red Herring Prospectus outlining important details about its financial status, business operations, and strategy. This included its revenue growth, net losses, and details about its business model and competitive landscape. 

However, it did not provide the final price or the number of shares it intended to issue until a later date. The RHP was an essential resource for investors to assess the potential risks and benefits of investing in Zomato’s IPO.

Importance Of Red Herring Prospectus

A Red Herring Prospectus plays an important role in the investment decision-making process. It equips potential investors with comprehensive insights about a company planning an Initial Public Offering (IPO).

  • Transparency: It discloses essential aspects of the company, like its financial health, business operations, management, and potential risks. This transparency helps investors make informed decisions.
  • Regulatory Requirement: An RHP is required in many jurisdictions, including India. It is a part of the IPO process, aiding regulatory bodies like SEBI to ensure the company’s compliance with necessary laws.
  • Investor Protection: By presenting a company’s potential risks and liabilities, it helps investors to gauge the investment’s suitability, thereby protecting their interests.
  • Business Plan Overview: It gives investors a sneak peek into the company’s future plans, growth strategy, and objectives.

Difference Between Draft Red Herring Prospectus And Red Herring Prospectus

The primary difference between draft red herring prospectus and red herring prospectus lies in their stages of submission. DRHP is filed before RHP and does not contain details about the issue size or price of shares. RHP, on the other hand, includes issue size but not the final price of shares. 

ParametersDraft Red Herring Prospectus (DRHP)Red Herring Prospectus (RHP)
PurposeFiled with SEBI for review and approval before the IPO announcement.Released post-SEBI’s approval and just before the IPO launch.
InformationPreliminary information about the company’s financials, operations, and strategy.Includes all DRHP details and SEBI’s suggestions.
Submission TimeBefore the IPO announcement.After SEBI’s approval and before the IPO launch.
PricingDoes not mention the IPO price.Provides the IPO’s price band.
LegalityNot legally binding, subject to SEBI’s review.Legally binding, official document for the IPO.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:

Deemed Prospectus
Shelf Prospectus
Abridged Prospectus
What Is DRHP?
Capital market meaning
Book building
Issue Price
Non institutional investors
Qualified Institutional Buyer
Types of IPO
Over Subscription Of Shares
Under Subscription Of Shares

RHP Full Form – Quick Summary

  • The full form of RHP is Red Herring Prospectus, a preliminary document shared before an IPO.
  • It is also known as “Red Herring” due to a red disclaimer on its cover page, indicating the document does not have complete details about the security’s price.
  • An RHP offers in-depth information about a company’s operations, financial status, and management team.
  • The importance of an RHP is manifold: it ensures transparency, meets regulatory requirements, protects investors, and offers an overview of the company’s business plans.
  • A Draft Red Herring Prospectus (DRHP) and an RHP serve different purposes in different stages of an IPO. DRHP is for an initial review by the regulator, while RHP guides investors just before the IPO.
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Red Herring Prospectus Meaning – FAQs

1. What Is RHP?

RHP stands for Red Herring Prospectus, a preliminary document filed by a company before an Initial Public Offering (IPO). It contains details about the company’s operations, financials, and key management personnel but not the price or number of shares to be issued.

2. What are the types of prospectus?

There are various types of prospectuses, including Red Herring Prospectus, Final Prospectus, and Shelf Prospectus. Each has a unique role in the process of a company going public.

3. What is the red herring technique?

The red herring technique refers to issuing an RHP before an IPO. It’s designed to provide investors with as much information as possible, except the final details about the share price and number of shares to be issued.

4. Who prepares red herring prospectus?

An RHP is prepared by the company planning to go public in collaboration with their legal advisors and underwriters. It’s then filed with the Securities and Exchange Board of India (SEBI) for review and approval.

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