DRHP vs RHP: Understanding IPO Documents Before You Invest

When you invest in an IPO, a company has to disclose everything about itself. This happens through documents called DRHP and RHP. Most new investors are confused about what a DRHP is, what a red herring prospectus is, and why it is important. Just a simple understanding of the difference between DRHP and RHP, this type of process allows you to make a wise investment instead of gambling around blindly.

Here is a quick roadmap to help you understand about  DRHP (Draft Red Herring Prospectus), which comes first. It's filed with SEBI(Securities and Exchange Board of India) to review.

RHP full form in the stock market is (Red Herring Prospectus) is filed just before the IPO opens. Finally, a final prospectus is issued after the IPO opens, with confirmed pricing provided immediately after it closes. 

To think about it this way, DRHP is a rough draft, the RHP is your rough draft but polished, and then finally the Final Prospectus is your published book. Let me walk you through the three documents.

What Is a Draft Red Herring Prospectus (DRHP)?

The full form for Draft Red Herring Prospectus is DRHP. It is the first official document that a business submits to SEBI in preparation for an IPO.

Everything is included in this document, including the business plan, financial statements, risks, and management information. It is prepared by a group of legal counsel, auditors, and merchant bankers.

The phrase originates from the days of hunting when dogs were diverted from the true scent by red herrings. In a similar vein, the majority of the information in this document is not final, except for the final price.

The regulatory review process begins when a DRHP is submitted to SEBI, indicating that the company is serious about going public.

What Is a Red Herring Prospectus (RHP)?

RHP full form in the stock market is Red Herring Prospectus. It is the finalised, SEBI-approved version of the DRHP. 

What exactly is a red herring prospectus in practical terms? It provides you with all the necessary information about the company before you invest - its business details, financials, risks, and fund usage. 

The only thing that is not mentioned is the final price, which is determined after the book-building process. 

When comparing DRHP and RHP, the major difference is that the DRHP is a draft open for comments, while the RHP has legal implications. Any false statements in the RHP may result in the company facing legal actions. 

I have seen a lot of investors confusing these terms, but RHP is always the most up-to-date and reflects the company's latest stance just before the subscription opens. 

The DRHP Filing Process: Step-by-Step

Now, we’ll understand how a DRHP filed with SEBI moves through the system. This process helps me to understand how you appreciate the timing of IPOs and why some take longer than others.  

• Step 1: Company Preparation

The company goes through a process that takes months, even before filing. This involves engaging merchant bankers, getting the auditors to confirm the financial statements, and having the compliance lawyers involved. The management, along with these advisers, prepares each part of the DRHP. This preparation stage could be as long as three to six months.

At this stage, businesses usually focus on making their foundations stronger. Companies prepare detailed financial analysis to showcase their performance, including balance sheet, income statement, and cash flow statements that meet regulatory standards.

In case you want to know stock analysis fundamentals and how companies set up their financial stories, websites like Dhanarthi.com can guide you through the process of forming an attractive investment case.

• Step 2: Filing with SEBI and Stock Exchanges

After the DRHP is finalized, it is lodged with SEBI and the stock exchanges (BSE and NSE) at the same time. The document is also accessible to the public through SEBI's, the company's, and the merchant bank's websites.

• Step 3: Public Consultation Period

It is a fact that very few people know. The moment the DRHP is submitted to SEBI, there is a period of 21 days in which any person can air his opinions or objections.

If you detect any defect in a company's DRHP, you can write directly to SEBI with your complaint. The purpose of this public consultation is to protect investors through the process of due diligence being done by the public.

• Step 4: SEBI Review and Observation Letter

SEBI carefully reviews the Draft Red Herring Prospectus. The financial disclosures are checked for compliance with the listing regulations, and SEBI also assesses if the company has sufficiently disclosed the various risks involved.

Once the review process is completed, SEBI sends out an observation letter. This letter is neither an approval nor a disapproval; it is a compilation of observations and questions the company needs to answer.

• Step 5: Addressing SEBI Observations

Every issue brought up by SEBI is now being addressed by the company and its advisors. This can occasionally involve updating financial data, clarifying specific statements, or making additional disclosures. SEBI gives its approval once all issues have been satisfactorily resolved.

• Typical Timeline: How Long from DRHP to IPO?

I'm frequently asked this question. The entire process from DRHP filing to the actual IPO usually takes three to six months, but the SEBI review process usually takes four to six weeks. This timeline is influenced by a number of factors, such as the detail of SEBI's observations, the state of the market, and the company's own preparedness.

From DRHP to RHP: The Evolution

Transition from DHRP to RHP combines several important steps. Let’s understand what happens during this transition, as this helps to clarify the difference between DRHP and RHP.  

• What Is UDRHP?

UDRHP is the term that you might come across, sometimes it is abbreviated as the Updated Draft Red Herring Prospectus. After the initial DRHP submission, if there are significant changes in the situation of the company, this is what they submit to the market. To visualize it, you can consider it the draft's version 1.1.

• Incorporating SEBI's Observations

The moment the company gets SEBI's observation letter, the actual work starts. Queries will have to be responded to, disclosures will have to be checked, and the company's situation will have to be updated if there are any changes. 

Furthermore, the market feedback received during the public consultation period will be taken into account.

• When Is the RHP Filed?

The RHP is submitted to the ROC and stock exchanges a minimum of three days prior to the opening of the IPO. This provides investors with the opportunity to download and go through the final document before deciding on their investment.

• Validity Period

One important thing to keep in mind is this. After SEBI gives its observation, the company is granted one year to carry out its IPO. The directors can’t finish the IPO in that period, the observation letter will lose its effect, and they will have to resubmit the DRHP and go through the whole process again.

• What Happens If a Company Withdraws Its DRHP?

In some situations, businesses may pull back their Draft Red Herring Prospectus (DRHP) before the Initial Public Offering (IPO) is completed. Several reasons could lead to this decision, for example, bad market conditions, not being able to satisfy the Securities and Exchange Board of India (SEBI) concerns, shifting of the business strategy, or even some internal problems. It may simply be a matter of timing sometimes.

DRHP vs RHP vs Final Prospectus: Complete Comparison

Understanding the difference between DRHP and RHP becomes easier with a clear comparison. Here's a table that breaks it down:

• When to Use Each Document:

By using DRHP when you want to research a company a month before the IPO opens, it may be probably be changed. Use RHP when you’re deciding whether to invest or not. Use our final prospectus after IPO closes to verify our final pricing and allocation details.

In the DRHP vs RHP comparison, our core content remains similar. This RHP simply reflects all updates and corrections which made during SEBI’s review process.  

What's Inside DRHP and RHP Documents?

Both documents are structured similarly. Let me walk you through the most important parts to keep on the lookout for all the key information required for those sections.

• Company Overview

In this segment, we discuss the business description, the history of the company, and its operations. To put it differently, you will know the company's activities, its origin, and the places it is active in, as well as the functioning of its business model.

From my viewpoint, staying in this area brings you closer to the situation wherein you are not only getting the right info but also understanding the business well enough to make a good investment or not.

• Financial Information

Companies have to provide three years of audit-reviewed financial statements. The financial statements consist of the balance sheet, income statement, and cash flow statement. This portion informs you about the company's profitability, growth rate, and financial management skills.

At this moment, financial statement analysis has a unique importance. For instance, I have been relying on Dhanarthi's financial analysis section as a valuable tool to compare different companies' data. It significantly simplifies the process of comprehending intricate financial reports, particularly for novices who are grappling with three years of consolidated statements. 

• Objects of the Issue

This is the point at which you get to know the precise manner in which your money will be employed to purchase other companies. The distribution is typically very exhaustive, displaying the intended distribution of each crore being collected.

• Management Details

This section provides information about the promoters, directors, and senior management. It also details their backgrounds, educational qualifications, experience, and mr's compensation. You will also see the portion of the stake being retained by the promoters after the IPO.

• Risk Factors

I can't stress how important it is to read this section carefully. Every internal and external risk that could have an impact on a company's operations must be disclosed. Everything is listed here, including operational difficulties, regulatory risks, and competitive threats. Some businesses have a thirty-page list of risk factors. Don't omit them.

• Industry Overview

The market size data, competitive landscape analysis, and growth projections for the industry are given in this section. It allows you to see the opportunity and where the company ranks in comparison to the competitors.

• Legal Proceedings

This section reveals all outstanding litigations, regulatory actions, and legal obligations. Being aware of court cases or compliance problems before investing can help you avoid bad surprises.

• Capital Structure

The diagram illustrates the distribution of shares before and after the initial public offering. It will be easy to identify the exact proportion of ownership for each shareholder and the impact of dilution of existing holdings.

• Issue Details

Here is the allocation breakdown for Qualified Institutional Buyers (QIB), Non-Institutional Investors (NII), and retail investors. Moreover, the lot size and application amounts are also provided.

• Dividend Policy

Businesses reveal their past dividends and future dividends policy. Some growth companies clearly announce that they will not pay any dividends in the coming years and will rather reinvest profits.

How to Read and Analyse DRHP Before Investing

So how can one ever create a summary of a 400-page document? I have got a method which is pretty effective and I’m going to tell you about it.

• Priority Sections to Focus On

First of all, understand the business model. Could you describe the revenue streams of this company to a friend? If no, it means the business is either too complicated or you have not gotten it well enough. In both cases, be careful and take your time.

Next, analyze the financial performance trends. Observe the revenue growth for the last three years. Is the firm always growing? How about profitability—are margins getting better or worse? Also, look at the debt levels using the debt-to-equity ratio. A company heavily loaded with debt must have an exceptional reason for that debt.

Understanding valuation metrics is crucial. Check the PE ratio compared to industry peers to assess if the IPO is reasonably priced. Also evaluate price-to-book ratio to understand how the market values the company's assets.

Calculating intrinsic value helps you determine if the IPO price offers a margin of safety. Understanding book value per share provides insight into the company's net worth on a per-share basis.

Accessing an adequate stock screener is one of the basic requirements for the evaluation of financial trends. I usually rely on the Dhanarthi Stock Screener, among other things, when comparing financial data of different companies. It really cuts down the manual effort to hours and allows you to spot movements in incomes, profits, and debt ratios very fast.

• Red Flags to Watch Out For

You develop a sense for certain warning signs as you gain more experience. Large debts or negative cash flows are pretty good indicators of financial stress. When the use of the proceeds of the offering includes ambiguous terms like "general corporate purposes," the company isn't being forthright about its intentions.

A high level of promoter pledging is a concern because it means the promoters have borrowed against their shares, which can lead to a forced sale. Understanding insider trading regulations helps you recognize when promoter transactions might raise red flags.

When promoters are selling a high percentage of their stake in the IPO, one needs to ask: does the promoter want to bail out? Analyzing the financial leverage and current ratio helps assess the company's ability to meet short-term obligations.

How to Compare DRHPs from Different Companies

When there are multiple IPOs open at the same time, comparison becomes important. Develop a simple framework that looks at financials (revenue growth, profit margins, debt ratios), valuation (price-to-earnings multiple compared to peers), and growth potential (the size of the market opportunity, competitive advantage).

When measuring industry-specific metrics, look at whatever is most relevant in the industry. For instance, in an IT company, look at employee cost as a percentage of revenue; in a manufacturing company, you look at capacity utilisation and expansion plans.

If you enjoy learning about the fundamentals of stock analysis, sites like Dhanarthi.com can assist you in creating systematic comparison frameworks. Having structured approaches to analysis can re-warrant efficiency in your evaluation.

How Does DRHP Affect Stock Prices Before Listing?

This is one question indeed, leaving many investors fascinated. How does a document type affect prices when the stock under consideration is not even listed yet?

• Grey Market Premium and DRHP Filings

The grey market is an unofficial, over-the-counter market where IPO shares trade before listing. When a DRHP filed with SEBI shows strong financials and growth potential, the grey market premium (GMP) typically increases. A high GMP is a sign of strong demand and also indicates that the stock can list at a premium.

Nevertheless, I have observed that the GMP can be deceptive at times. Besides fundamentals, it is mainly driven by speculation and sentiment. For instance, some IPOs with high GMP, which were heavily hyped, have suffered losses on the listing day.

• Market Sentiment Impact

A properly prepared DRHP from a company in a hot sector can attract a lot of attention. There is an increase in media coverage, the IPO gets discussed by the analysts, and the investors show more interest. The positive mood around the issue can have a favorable impact on the number of subscriptions as well as on the performance of the stock at the time of listing.

• Institutional Investor Signals

The smart money moves ahead of retail investors. The visible participation of anchor investors indicates a strong interest of qualified institutional buyers, which in turn serves as a sign of confidence in the public offering. The quality of the Draft Red Herring Prospectus (DRHP) has a direct impact on institutional investors' decision-making process.

• The Reality Check

Here is my main point: the filing of a DRHP does not assure success for the IPO. It happens that many companies file their DRHPs but never go on with their IPOs. The conditions of the market can vary, SEBI may issue its objections, or there could be problems within the company that impede the process. Therefore, do not place your emotions or financial resources just on a DRHP.

Where to Find DRHP and RHP Documents (Free Download)

One of the questions I get most often is, "How can I access them?" That is the spirit of these words.

One of the questions that comes to my mind that “How can I access them?” Let’s understand step-by-step, which is considered efficient.  

• Official Free Sources

The Securities and Exchange Board of India's website (sebi.gov.in) has a separate section for offer documents. Go to the "Filings" part and check "Offer Documents" to see all the latest DRHPs and RHPs.

nseindia.com has an IPO section where you can download the documents for issues listed on it, while the BSE website (bseindia.com) does the same for its listings.

Any company applying for an IPO must also make documents available on its official website, usually in the "Investor Relations" or "IPO" section.

The lead merchant banker’s website also provides these documents. The name of the merchant banker is usually on the cover page of the document.

• How to Download

The process is straightforward. On SEBI's website, go to the homepage, click on "Filings," then select "Offer Documents." You can search by company name or browse recent filings. Each entry provides direct download links in PDF format.

Stock exchange websites have similar navigation. Look for the "Primary Market" or "IPO" section, find the company you're interested in, and download the relevant documents.

All these documents are free. You don't need to pay anyone for access. If a website asks you for money to view a DRHP or RHP, find another source; you're probably being scammed.

Latest DRHP Filings and Upcoming IPOs in India

Keeping track of the latest DRHP submissions allows you to make your IPO investments proactive. I'm assuming this to be an educational tool, specific applications would be different by the time you go through this.

• How to Track Recent DRHP Submissions

The website of SEBI represents the most trustworthy option for you in finding the latest filings. They refresh the offer documents area straight away once the new DRHPs are received. Create a weekly reminder to go to this page if you are directly tracking IPOs.

Besides, stocks' exchange websites announce new IPOs and also provide links to the connected documents. The calendar of IPOs that shows what is coming up is held by both NSE and BSE.

Financial news portals such as Moneycontrol, Economic Times Markets, and Bloomberg Quint are very much active and inform the people by frequent coverage of the new DRHP filing. Staying in touch with these sources keeps you informed about the movements in the market.

• Resources for Upcoming IPO Tracking

There are a number of different websites and trackers on the internet that provide IPO and offer comprehensive information about new issues, i.e., their dates, price bands, and other important details.

You can get a general idea of the future IPOs in India by just typing in the above-mentioned phrase, which will lead you to many options but when you combine this data with fundamental analysis tools, you get a holistic view of the market. 

The public offer pipeline from SEBI, which can be accessed through their website, lists the companies that have been granted observation letters and are allowed to go ahead with their IPOs.

DRHP Analysis Services and Tools for Investors

It must be admitted that not everyone has enough time or is skilled enough to scan through reams of lengthier prospectus documents, and some services can perform this task.

• Brokerage Research Reports

If you are holding a demat account with a well-known brokerage, it is very probable that you are availing of their research analyst team's IPO analysis.

 Usually, these reports give a summary of the major issues, enumerate the risks, and sometimes even suggest the amount of subscription. Some brokerages give this as a complimentary service with your account, while others ask for a fee to access research reports of premium quality.

• Financial News Platforms

Market news devoted websites frequently report IPO reviews on new issues opening. The quality of these reviews differs a lot; thus, it is advisable to consider different opinions instead of depending on one source only.

• IPO-Focused Newsletters

There are a number of independent analysts and Financial Educators who run blogs with the sole purpose of providing information about IPOs. They make the documentation of the DRHPs understandable and give their opinions on the investments. Following a couple of trusted professionals working in this area can help you in addition to your own research.

• Using Analyst Reports Effectively

My recommendation is to take these reports as the beginning of your journey rather than the ending. Each analyst has his/her preferences, and they might not always match yours. Go through their analysis, and take note of their point,s but make sure to confirm the most important statements by looking at the actual DRHP yourself.

• DIY Analysis vs Professional Recommendations

Both methods have their advantages. The time-saving and specialised viewpoints offered by professional analysis are the pros of the practice. However, investing in the strengthening of one's personal analytical capabilities pays off in the long run.

Dhanarthi.com is among the online resources that help new learners in interpreting financial statements when their goal is to increase their analytical skills. Moving from guided analyses to more independent research is the way most successful investors learn.

It would be good to start with professionals’ reports to see how masters assess IPOs, and then to do more and more independent analyses as your confidence grows.

Why Are DRHP and RHP Important?

Let's take a step back and consider why various stakeholders find these documents important.

• For Investors

There is no other source of transparency like these prospectus documents. In DRHPs and RHPs, businesses are required to reveal information that they might not otherwise share. This makes it possible to make well-informed decisions instead of making investments based on rumours or hype.

The part about risk assessment is especially useful. Where else could you find an exhaustive list of all the things that could go wrong in a business? You can better understand what you're getting into by reading this disclosure.

You can assess the viability of the company's growth narrative by reading these documents. Marketing collateral will always present a positive image. You get the whole picture, including the thorns in the prospectus.

• For Companies

According to SEBI guidelines, filing a DRHP is required for regulatory compliance. Beyond compliance, however, the procedure benefits businesses.

Market testing takes place during the public consultation period. Before committing to particular timelines and pricing, companies assess investor appetite and media response.

Investor confidence is increased by a well-written prospectus. It shows that the business is organized and takes governance and transparency seriously.

Free publicity is also generated by the media coverage of DRHP filings. Potential investors are made aware of the company through the analysis and writing of financial journalists.

• For Regulators

The DRHP review procedure is used by SEBI as a safeguard for investors. They guarantee that investors have access to important information by mandating comprehensive disclosures and examining them before IPOs.

By prohibiting businesses with insufficient disclosures from entering public markets, the procedure preserves market integrity. It establishes a degree of consistency that investors can trust.

Verifying disclosure compliance also assists SEBI in identifying businesses that may be attempting to conceal negative information, shielding the larger market from possible fraud.

SEBI's Role in DRHP and RHP Review

You can better understand why this process takes time and what it means when a company gets clearance if you are aware of SEBI's role.

• Review Process and Timeline

The Division of Issues and Listing at SEBI is in charge when it receives a DRHP. The SEBI (Issue of Capital and Disclosure Requirements) Regulations are examined in relation to the document. Although complicated cases may take longer, the review process usually takes four to six weeks.

• What SEBI Looks For

SEBI verifies the accuracy and completeness of all required disclosures. They confirm that financial statements adhere to accounting standards and are audited. They verify that risk factors are sufficiently disclosed and that the issue's objectives are well-defined.

Additionally, they search for coherence among the document's various sections. Companies occasionally unintentionally give contradicting information in various locations, and SEBI detects these disparities.

• Observation Letter and Its Implications

Instead of issuing an approval letter following review, SEBI issues an observation letter. This distinction is crucial. SEBI does not attest to the validity of the company's claims or that the IPO is a wise investment. They merely attest to the fulfilment of disclosure obligations.

There may be questions in the observation letter that the business needs to answer. It might also include requirements that need to be met before moving forward.

• Common Reasons for SEBI Queries

Businesses frequently get questions about related-party transaction details, inconsistent financial data, unclear use of proceeds, and incomplete risk disclosures. Information about promoter groups and their backgrounds is often scrutinised. Complete disclosure is required for any ongoing legal action or regulatory action.

• Stock Exchanges' Role

The DRHP is examined by stock exchanges in addition to SEBI, which performs the primary review. Listing requirements and operational readiness are their main priorities. The company can move forward with the IPO once SEBI and the exchanges are satisfied.

Special Considerations and Edge Cases

The IPO process consists of various intricacies that are not applicable to all the filings. I would like to give you an overview of the specific instances that you may come across.

• Confidential DRHP Filing

Some companies opt for the pre-filing route, where they submit a confidential DRHP to SEBI before making it public. This allows them to address any major concerns privately before the document becomes available for public scrutiny. Once SEBI's initial observations are addressed, the DRHP is made public.

• Main Board vs SME IPO DRHPs

Companies intending to get listed on the main board and those that want to be on the SME platform have different requirements. In the case of the main board, the operating history must be longer, the minimum issue size must be higher, and disclosures must be more extensive. IPOs in the SME segment have somewhat relaxed requirements but also involve higher risk because of the smaller size of the companies.

The document structure is almost the same, but the level of detail and regulatory scrutiny are different. For an investor, it is logical to impose stricter personal due diligence on SME IPOs since the regulatory requirements are lower.

• DRHP Withdrawal

It is possible for firms to retract their DRHP at any point prior to the opening of the IPO. The reasons for this may be bad market conditions, failure to properly respond to SEBI observations, alterations in promoter plans, or even changes in business direction.

The retraction doesn't bar the company from submitting a new application later on. Nevertheless, they will have to repeat the whole process with a new DRHP that shows the present situation.

• DRHP Validity and Refiling

The moment SEBI issues its observation letter, the company has a period of one year to finish the IPO. Sometimes companies decide to wait in case the market conditions are not good. Nevertheless, if they take too long, the observers’ note becomes invalid, and they will have to refile along with financials and disclosures that are updated.

• Addendum to DRHP

An instance or a series of material events may happen in between the time of DRHP filing and that of the IPO. To name a few, a major contract win, a regulatory change, or a significant development might necessitate the disclosure. Companies usually file a supplementary document to the DRHP to inform about such developments. It is good practice to look for such supplementary documents while going through the prospectus.

Common Misconceptions About DRHP and RHP

In my opinion, there are still some misconceptions that retail investors have. I want to deal with them one by one.

The first misunderstanding is that if SEBI has granted approval, the IPO is risk-free. This is absolutely untrue. SEBI only checks if the company provides the required disclosures. They don't make a judgment if the company is a good investment or the price is fair. SEBI approval is all about compliance with procedures, not a recommendation for investment.

Another misconception is that a high grey market premium means that the IPO will definitely give profits upon listing. Although GMP depicts the market's mood, it is a gamble in an unregulated environment. There have been instances where IPOs with high GMPs listed at par or even at a discount. GMP, therefore, is a sign and not a certainty.

The very common misconception is that in DRHP and RHP, different pieces of information are provided. Comparing DRHP to RHP, the very structure and the majority of the content are virtually the same. The RHP merges updates based on SEBI’s comments and any substantial changes since the filing of the DRHP. Thus, it is a document's evolution, and not a completely new one.

Some investors think that they are not required to read the prospectus if the IPO is recommended by analysts. This is a dangerous way of thinking. Analysts can be wrong, they might create biased opinions, and their investment timeline or risk acceptance might differ from yours. The prospectus supplies you with information to make your own choice.

Lastly, there is a misunderstanding that only financial professionals can comprehend these papers. The documents are very detailed, but they are also written in such a way that the average informed investor can grasp their content. Patience and following my tips in this article will allow anyone to uncover the key information they need.

Conclusion

DRHP is the first draft a company submits to SEBI when planning an IPO, while RHP is the final, approved document released before the IPO opens. These papers explain the company's business, financials, and risks.

Always check risk factors, financial statements, promoter details, and valuations instead of relying on hype or grey market premium. Use financial analysis and financial ratio analysis to evaluate companies objectively.

Understanding DRHP and RHP helps you make safer investment decisions. Tools like Dhanarthi can also help you compare companies easily using the Dhanarthi Stock Screener and learning how Dhanarthi helps you analyze financial reports.

Before investing in any IPO, download the DRHP and read it—you'll feel more confident about where your money is going.

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