Understanding what DRHP is and its components: Thanks to the bull market, Indian markets have gone crazy with IPO raising billions. If your current strategy is to listen to friends and family or apply allot to any IPO in an effort to get allotted and make short-term profits, sorry to break it to you, but it turns out to be disastrous for you. could. long run. But then what should one do?
Enter DRHP! It is one of the most powerful tools in the hands of investors to help them make informed decisions. In this article, we understand what is DRHP and its important components.
What is DRHP (Draft Red Herring Prospectus)?
Before we jump straight into its definition, let’s understand why the need for it arises. Whenever a company plans to raise funds from the public, they approach merchant bankers to prepare an offer document. This document is known as the draft red herring prospectus.
The DRHP document serves as a source of information to enable investors to know why they should consider investing in a company’s IPO. This document is filed with Securities and Exchange Board of India (SEBI), which has made it mandatory for companies to file DRHP. SEBI will then review this document and ensure that adequate disclosures are made.
It should be remembered that the document is a draft review, which SEBI may ask merchant bankers to make adequate disclosures, if required. SEBI does this in the interest of the investors otherwise, the prepared DRHP may also offer the company favorably.
DRHP Includes important information about the company, its business, the industry it is in, its current shareholders, and its financial information among various other important information that is not otherwise available to the public.
The document also explains the reasons why the company is raising the funds and where these funds will be used. DRHP however does not include important details about the issue such as the price at which the securities will be offered.
Why is it called a draft red herring prospectus?
The document was initially called a red herring because it contained a bold disclaimer in red stating that the document has been filed with the SEC and is still not effective or complete and that information may be subject to change.
But even today we can see parts of the cover page printed in red. for example. We can see this in the DRHP filed by DRHP zomato.
|Looking for Best Demat and Trading Account To start your stock market journey? Open your Demat account with No.1 Stockbroker in India – Join +5 million investors and tradersZero brokerage on investments in stocks and mutual funds, instant paperless online account opening. Click Here to Start Now!!|
What to Look for in a Draft Red Herring Prospectus (DRHP)?
Reading DRHP completely can be a daunting task as the document can be up to 500 pages long. To make it easy some fine details which are very important and which should not be missed.
However, it is still advised to skim through the document looking for pertinent details which can be a deal maker or breaker for the company. Some key details to look for in DRHP:
1. About the company and its industry
This is one of the most important sections in DRHP. This is because it provides details about the company that explain its background and how it operates. Investors will get a better idea if they think the company’s business idea is really worth it.
In addition, the prospectus also includes information on the industry in which the company is. This allows investors to assess what a company’s future prospects might be if the industry is actually growing and to what extent.
DRHP also informs investors about the company’s current competitors and its current position in the industry.
2. Purpose of the IPO
As investors, we clearly want to know what our money is going to be used for. The ‘Objects of Offer’ section gives us this information.
It is very important to go through this section as no one would want to invest in a debt-ridden company that is only going to use the money to pay off the debt and fund its internal working capital. This is a looser option than investing in a company that is going to use the money to fuel further growth.
Investors should look at this to find out which investment can be productive and unproductive for him.
3. Strength and Risk
Some companies develop moats that give them an added advantage over their competitors in the industry. This section lists the forces that a company may already have.
In addition, the company also covers the risks that it faces or may possibly face in the future. This gives investors a clear picture of what they are doing. The company also includes the legal cases it is fighting.
4. Management of the company
This section gives you insight into who actually runs the company. This includes their name, age and even their qualifications and remuneration.
This would also include scams or frauds that individuals have committed in the past and make it more transparent to the promoters.
5. Promoter Holdings
Here investors will get to know who actually owns the company. Investors should keep an eye on the promoters who are drastically reducing their stake in the IPO.
Promoters sell a small portion of their stake in each IPO. But investors should pay attention when a substantial portion is being sold by the promoters.
It is rare that a promoter will sell large amounts if he or she believes the company has the potential of billions of dollars. A substantial stake sold could mean that she doesn’t believe the company has what it takes.
6. Major Financial Position of the Company
Finally the most important part of DRHP. The information contained here may not have previously been available elsewhere if the Company were private. It shows us the company’s profitability, cash flow and its assets and liabilities.
The section includes income statement, balance sheet, cash flow statement. All these give a better idea of the financial position of the company.
Where can you get the brochure?
Investors can find DRHP on any of the following websites:
- SEBI website.
- stock exchange website.
- Website of the respective company.
- Merchant Banker.
In this article, we covered what DRHP is and how to read DRHP from an investor’s prospectus. DRHP is not just some regular document and should not be treated as such. While it may be easier to base your investments on what others have to say, reading DRHPs helps you make more informed decisions. or in the words of Peter Lynchhandjob “Behind every stock there is a business. Try to understand what business is.”
That’s all for this post. Let us know if this is helpful to you in the comment section below. Happy investment!
Save up to 90% on brokerage charges
Trade Brains Recommended Top Brokers for Demat & Trading Account Opening in India
A graduate in commerce from Mangalore University, Aaron entered the world of equity research to explore his interests in the financial markets. Outside of work, you can dream of him running a show, supporting RCB, and soon moving to Kasol. He also believes that the best way to teach kids how to do is to eat children’s ice cream.
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of knews.uk and knews.uk does not assume any responsibility or liability for the same.