DRHP, RHP, and why there are two
The draft red herring prospectus is filed with SEBI months ahead. It has the business, the financials and the risks, but no price band and no dates. SEBI reviews it and issues observations; the company responds, sometimes with substantial changes.
The red herring prospectus is the final version, filed close to the issue, and it is the one to read. It carries the price band, the lot size, the dates and the revised financials. If you are reading a DRHP because it is what came up in a search, check whether an RHP exists — the numbers may have moved. Our pipeline page tracks both.
1. Objects of the issue
Start here, not with the financials. This section says what the money is for, and it is the single most informative page in the document.
The critical distinction is between a fresh issue, where new shares are created and the proceeds go to the company, and an offer for sale, where existing shareholders sell their own shares and the company receives nothing. An issue that is entirely an offer for sale is a liquidity event for the current owners. That is not improper — early investors are entitled to exit — but you should know that none of your money is going into the business.
Within the fresh portion, look at what it funds. Capacity expansion and debt repayment are specific and checkable. “General corporate purposes” is a legitimate line item but a large share of it tells you less.
2. Basis for the issue price
This is where the company justifies its own valuation, and it is required to show its working: earnings per share before and after dilution, return on net worth, net asset value per share, and the price-to-earnings ratio the band implies. It also lists a peer set with the same ratios.
Two things to do with it. First, check the peer set is honest — companies sometimes choose comparables that flatter them. Second, note that the EPS after the issue is lower than before, because the same profit is now divided across more shares. A P/E quoted against pre-issue EPS understates what you are paying.
3. Risk factors
The first several are usually the real ones. Companies are required to order risk factors by materiality, and while the section runs long and much of it is boilerplate, the opening entries are where genuine problems get disclosed — customer concentration, pending litigation, regulatory dependence, a promoter issue.
Read for specifics. “We may be affected by adverse economic conditions” is filler. “Our top three customers accounted for 71% of revenue” is information.
4. Restated financial statements
Three years of accounts, restated to a consistent basis. What matters is the shape of the trend rather than any single year, and in particular whether the most recent year is an outlier. A profit that jumps sharply in the year immediately before an IPO deserves an explanation, and the document usually contains one somewhere.
Check that profit is converting into cash. A business with rising profit and falling operating cash flow is financing its growth through receivables or inventory, which is a different and more fragile position than the profit line suggests.
5. Promoter holding and pledges
How much the promoters own before and after, and — importantly — whether any of it is pledged against borrowings. Pledged promoter shares are a known source of sudden pressure on a stock. This section also records the price at which promoters and early investors acquired their shares, which can be startling next to the issue price.
6. Related party transactions
Business done with entities the promoters also control. Some of this is entirely normal. Large or growing related-party revenue is worth understanding, because it can make a business look like it has customers when it mostly has affiliates.
7. Outstanding litigation
Cases against the company, its directors, its promoters and its subsidiaries, usually with amounts. Scan for tax disputes and regulatory proceedings, and check the amounts against the company’s net worth rather than reading them in isolation.
8. Capital structure
The share history: bonus issues, splits, preferential allotments and the prices at which they happened. A recent round done at a fraction of the IPO price is not automatically a problem, but it is a fact worth having.
How we use these documents
The fundamentals on our IPO pages are read from the offer document itself rather than from another website. We publish a figure only when the document’s own numbers agree with each other — the individual line items have to add up to the totals the filing declares, and ratios have to be consistent with the components they are derived from.
When they do not reconcile, we publish nothing for that field and link the prospectus so you can read it yourself. That is why you will see blanks on some pages: a blank means we could not verify it, not that it does not exist.