Investment in IPOs or Initial Public Offerings have seen a boom over a span of the last few years because IPOs provide the investors with an opportunity to extract decent profits if the fundamentals of the company are strong enough.
However, rolling out an IPO is a very tedious process for the company. The process of IPO begins when the company files papers with the market regulator – Securities and Exchange Board of India (SEBI). The papers are known as Draft Red Herring Prospectus (DRHP) and it includes important information about the company and its current standings. Once SEBI officials approve the prospectus of the company only then it can process for rolling out its IPO for raising capital from the public. The prospectus includes almost every detail about the IPO and the company and is thus considered to be a very important document when it comes to public offerings.
Today we will take a look at the basics of Draft Red Herring Prospectus and also know about the important aspects which one must check in the prospectus before investing in any public offering.
So, without further ado, let us begin by first understanding what exactly Draft Red Herring Prospectus is.
What is Draft Red Herring Prospectus?
When a firm wants to raise money from the public by selling shares of the company to investors, it files a Red Herring Prospectus, or offer document, with SEBI (Securities and Exchange Board of India). The document is beneficial to investors since it gives thorough information on the company's commercial operations, financials, promoters, and the company's goal of obtaining cash through an initial public offering. It also explains how the firm plans to use the funds raised, as well as the dangers that investors may face.
Why is DRHP Important?
Now since you know what Draft Red Herring Prospectus is, let us understand about the information which it provides and why it is so important.
- Description of Business - This is the first and foremost section which describes the core business operations of the company. If you are planning to invest in the company, you will be a shareholder in the future. Your money will be utilized for the company for its core business and you will be holding the ownership of the company.
- Financial Information - This section contains all the information about the company’s finances including the financial statements and respective audit reports. This information can be very important to understand the profitability of the company which may help you in forecasting the safety of your investment in the future.
- Risk Factors - This section includes all those factors which could affect the business and operations of the company. Most of the time, these risks are routine risks, but sometimes there are few points which requires to be scrutinized. For example, if a company has been involved in a number of legal cases and many of those are still pending, it is better to stay away from the public offering because the future of the company is uncertain.
- Utilization of Raised Capital - The main aim of company behind public offerings is to raise capital from the public. This section of the Draft Red Herring Prospectus will provide you all the information about how the company intends to use the capital raised through the public offering. It will also tell you about all the investors who have recently invested their money in the company.
- Overview of the Industry - This section from the prospectus will have all the information related to the competitors of the company. It will also include information about the company’s position in the sector. Before investing in the IPO of any company it is important to analyze the performance trend of the industry or sector from which the company belongs.
- Management Information - This section provides you with all the information behind the driving force of the company. Who actually are the people who are running the company? What are their qualifications? What are their designations? Also, all the legal proceedings pending individually against these people are also included in this section.
Investing in an IPO can prove out to be a very good opportunity for investors, provided that you invest with proper fundamental analysis of the company. A SEBI registered investment advisor can help you by conducting all the research and analysis and provide you research-based recommendations for your investment.
Happy Investing!
