The DRHP, or Draft Red Herring Prospectus, is a preliminary document filed by a company with the Securities and Exchange Board of India (SEBI) before it proceeds with an initial public offering (IPO). This document contains detailed information about the company’s operations, financials, promoters, and plans for the raised funds.
Contents:
- DRHP Full Form
- What Is A Prospectus?
- What is a Red Herring Prospectus?
- Benefits of Draft Red Herring Prospectus
- Difference between DRHP and RHP
- What are the 4 types of prospectus?
- What Is DRHP – Quick Summary
- DRHP Full Form – FAQs
DRHP Full Form
A Draft Red Herring Prospectus (DRHP) is a preliminary document that a company prepares when it plans to go public via an initial public offering (IPO). This document is submitted to the SEBI for review. It provides an overview of the company’s business, key risks, financial statements, and intended use of the funds raised.
However, it does not include information about the price or number of shares to be issued. Once SEBI reviews and provides its observations on the DRHP, the company can finalize the document into a Red Herring Prospectus (RHP).
For example, if a company XYZ files for an IPO, their DRHP would include vital financial statements, details about the company’s business model, potential risks, and how they plan to utilize the proceeds from the IPO.
What Is A Prospectus?
A prospectus is a legal document issued by companies that are offering securities for sale. It is designed to provide potential investors with detailed information about the company, including its operations, financial statements, details of the offering, the management team, and any legal problems the company might have.
The structure of a typical prospectus includes the following:
- Overview of the company
- Information on the offering
- Risk factors
- Business description
- Financial data
- Management and corporate governance
- Legal and regulatory aspects
What is a Red Herring Prospectus?
A Red Herring Prospectus (RHP) is a prospectus that a company issues to the public, but it doesn’t have details about the quantity or the price of the securities offered. This document informs potential investors about the company’s operations, financial health, and future plans. These details are added after the book-building process, and the document becomes the final prospectus.
- For example, suppose ABC Ltd. is planning to launch an IPO. It first files a DRHP with SEBI detailing its financials, business, risks involved, and intended use of the IPO proceeds but does not include the price or number of shares to be issued.
- SEBI reviews the DRHP and provides its observations. After addressing these observations, ABC Ltd. finalizes the document into an RHP. This document is then circulated among potential investors for feedback.
- Once the book-building process is complete, the final price and number of shares are included, and the document becomes the final prospectus.
Benefits of Draft Red Herring Prospectus
The Draft Red Herring Prospectus (DRHP) promotes transparency by offering comprehensive company data, thus aiding informed investment decisions. It enhances investor confidence through its detailed disclosure, signifying the company’s transparency. Additionally, filing the DRHP ensures compliance with the norms set by SEBI, India’s market regulator.
- Transparency: The DRHP provides detailed information about the company’s financial health, operational efficiency, and business model. This transparency helps investors make informed decisions.
- Investor Confidence: Detailed disclosure in the DRHP increases investor confidence as it signifies that the company has nothing to hide.
- Regulatory Compliance: The DRHP filing is a regulatory requirement by SEBI, ensuring that the company is adhering to the norms set by the regulatory body.
For instance, when the popular Indian startup Zomato filed its DRHP in 2021, it shared comprehensive insights into its business operations, financial health, and plans for the future, which helped investors make informed decisions.
Difference between DRHP and RHP
The main difference between DRHP and RHP is that a DRHP is a preliminary document submitted to the regulatory authority for review and approval before a public offering. On the other hand, an RHP is the final version of the prospectus issued to potential investors, incorporating any necessary changes and updates from the regulatory review process.
| Parameters | DRHP | RHP |
| Definition | DRHP is a preliminary document that a company files with SEBI before an IPO. | RHP is a prospectus issued to the public that lacks details about the quantity or price of the securities offered. |
| Status | It is in the draft stage and subject to revisions. | It is the final document before the IPO, containing most of the IPO details except the issue price and quantity. |
| Approval | Needs approval from SEBI. | Issued after getting SEBI’s approval on DRHP. |
| Objective | To get observations from SEBI. | To inform potential investors about the company and the IPO. |
| Availability | Available to the public. | Available to the public for understanding the company and its IPO. |
What are the 4 types of prospectus?
- Red Herring Prospectus (RHP): This is a preliminary prospectus filed before the IPO and lacks details about the price or quantity of shares.
- Green Shoe Prospectus: This type of prospectus allows underwriters to sell more shares than originally planned by the issuer if the demand is higher.
- Shelf Prospectus: This prospectus allows a company to issue securities in parts without re-issuing a prospectus each time.
- Abridged Prospectus: This is a shorter version of the prospectus that contains all the salient features of a prospectus.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, ipo and hence we bring you the important topics and areas that you should know:
What Is DRHP – Quick Summary
- DRHP, or Draft Red Herring Prospectus, is a preliminary registration document prepared by a company planning to go public.
- The full form of DRHP is Draft Red Herring Prospectus. It offers comprehensive insights into the company’s operations and financial health.
- The Red Herring Prospectus (RHP) is a more developed version of DRHP, which lacks only the final details about the price and number of shares to be issued.
- Benefits of DRHP include increased transparency, enhanced investor confidence, and adherence to regulatory compliance.
- The main difference between DRHP and RHP lies in their stages of development and the details they contain.
- The four types of prospectus include Red Herring Prospectus, Green Shoe Prospectus, Shelf Prospectus, and Abridged Prospectus.
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DRHP Full Form – FAQs
DRHP stands for Draft Red Herring Prospectus. It is a document that a company intends to go public files with the Securities and Exchange Board of India (SEBI). It contains details about the business, financial statements, information about promoters, and the reason for raising funds.
The term “Red Herring” is derived from the red warning label initially used on such prospectuses in the United States, indicating that the document is still in a “draft” phase and information can be incomplete and subject to change.
The key difference between a DRHP and a prospectus is that a DRHP is a preliminary document filed with SEBI. In contrast, a prospectus is a final document that contains all necessary details about the company and is presented to the public when the company decides to issue shares or debentures.
DRHP is prepared by the company intending to go public in consultation with their Merchant Bankers, who are registered with SEBI.
A DRHP is filed to inform SEBI about the company’s intent to go public. It also provides a detailed view of the company’s operations, financial status, and future plans. The information is thoroughly reviewed by SEBI before approving the IPO.
The approval process can take anywhere from a few weeks to a few months, depending on the complexity of the case and the quality of disclosure in the DRHP. SEBI can also seek additional information or clarification, which can extend the process. As per SEBI norms, it should provide its observations within 30 working days of receiving the DRHP. However, this period may extend if SEBI has any queries or requires additional information.
