Red Herring Prospectus (RHP)

A Red Herring Prospectus, or RHP, is an offer document issued before an IPO opens. It provides material company and issue-related information,  but does not state the final issue price.

• The company must file the RHP with the Registrar of Companies at least three days before the subscription list opens and the offer opens.

  
  

• It includes details about the business, financial statements, management, promoters, industry, litigation, and risk factors.

  
  

• The document explains how the company plans to use the IPO funds and describes the offer structure.

  
  

• It may include a price band, but it does not mention the final issue price.

  
  

• Investors can use the RHP to understand the company and assess the risks before applying for the IPO.

  
  
• The RHP carries the same statutory obligations as a prospectus.

A Red Herring Prospectus is an offer document issued by a company before launching an Initial Public Offering. It contains information about the company and the proposed public issue, except for certain final details such as the final issue price.

The RHP is generally prepared after SEBI provides observations on the Draft Red Herring Prospectus. The company then files the RHP with the Registrar of Companies before the IPO opens.

Under Section 32 of the Companies Act, 2013, the company must file the RHP with the Registrar at least 3 days before the opening of the subscription list and offer.

The document helps you examine:

• The company’s business model
• Historical financial performance
• Promoters and management
• Industry conditions
• IPO objectives
• Material litigation
• Company-specific risks

• The proposed use of funds

  
  

An RHP supports due diligence, but it does not indicate whether the IPO will perform well after listing.

The red herring prospectus is prepared through several stages of the IPO process.

• Prepare the DRHP: The company and its merchant bankers prepare the Draft Red Herring Prospectus.
• Submit it to SEBI: The DRHP is filed with SEBI for observations and review of the required disclosures.
• Address observations: The company may revise the document based on regulatory observations or updated information.
• File the RHP: The revised RHP is filed with the Registrar of Companies before the public issue opens.
• Publish issue information: The company makes the RHP available to potential investors and publishes the relevant IPO details.
• Open the bidding process: Investors can review the RHP and submit bids within the announced price band.
• Determine the final price: The final issue price is decided after the book-building process.

• Issue the final prospectus: The final document includes the issue price and other completed offer details.

  
  
  

SEBI’s investor education material also explains that the RHP is issued before the IPO begins and that bidding occurs within the announced price band.

A Red Herring Prospectus gives you access to material information before you apply for an IPO. It supports comparison, risk assessment and due diligence.

The RHP provides information, not assurance. You should assess the disclosures together rather than relying on one financial figure or business claim.

The RHP brings important company information into one document. It allows you to assess the business, financial position, management and risks before making an IPO decision.

1. Capital details

This section explains the company’s capital structure before and after the IPO.

It may include:

• Authorised share capital
• Issued and paid-up capital
• Promoter shareholding
• Pre-offer capital
• Proposed post-offer capital
• Changes in the company’s share capital

These disclosures help you understand existing ownership and how the IPO may change the shareholding structure.

2. Offer details and objectives

The RHP explains why the company is raising money through the IPO.

The proposed use of funds may include:

• Repaying borrowings
• Funding capital expenditure
• Supporting working capital
• Investing in subsidiaries
• Financing expansion

• Meeting general corporate purposes

  
  

You should check whether the stated objectives support business growth, debt reduction or an offer for sale by existing shareholders.

3. Industry overview

The company operates within a wider industry that can affect its growth and risks.

This section generally discusses:

• Industry size
• Growth trends
• Market conditions
• Demand drivers
• Regulatory factors

• Competitive environment

  
  

You can use this information to compare the company’s claims with broader industry conditions

4. Detailed financial information

The financial section presents the company’s historical performance and financial position.

It may include:

• Restated financial statements
• Revenue and profit
• Assets and liabilities
• Cash-flow statements
• Borrowings
• Auditor reports
• Accounting policies

• Related-party transactions

  
  

Review several financial years rather than relying only on the most recent period.

5. Business description and strategies

This section explains how the company earns revenue and plans to grow.

It usually covers:

• Main products and services
• Customer segments
• Manufacturing or operating facilities
• Distribution channels
• Competitive strengths
• Growth strategies
• Dependencies on customers or suppliers

• Intellectual property

  
  

You should assess whether the strategy is supported by the company’s financial performance, operational capabilities and market conditions.

6. Company management

The RHP provides information about the company’s directors and senior management.

It may disclose:

• Names and designations
• Qualifications
• Professional experience
• Remuneration
• Directorships in other entities
• Interests in the company
• Material legal or regulatory proceedings

These details help you assess the experience and governance background of those managing the company.

7. Risk factors

The risk-factor section is one of the most important parts of an RHP.

Risks may relate to:

• Pending litigation
• Outstanding borrowings
• Dependence on major customers
• Dependence on key suppliers
• Regulatory changes
• Industry competition
• Business concentration
• Promoter-related matters
• Past financial losses
• Operational disruptions

The presence of risk does not automatically make an IPO unsuitable. However, you should consider the likelihood and possible impact of each material risk.

8. Promoter information

This section contains information about the company’s promoters and promoter group.

It may cover:

• Background and experience
• Existing shareholding
• Other business interests
• Related entities
• Past transactions
• Litigation and regulatory matters

• Shares being sold through the IPO

  
  

This information can help you understand promoter control and whether promoters are reducing their holdings through the offer.

9. Dividend policy

The RHP may explain the company’s dividend policy and past dividend payments. However, past dividends do not guarantee future payouts. Future dividends depend on profits, cash requirements, business plans, legal requirements and board approval.

You can usually access a Red Herring Prospectus through the following sources:

SEBI maintains separate categories for draft offer documents, red herring documents filed with the Registrar of Companies and final offer documents. The company must also make the required public announcements regarding the IPO and availability of the offer documents.

Consider a hypothetical software company, XYZ Ltd., that plans to raise funds through an IPO. Its RHP may disclose the following information:

As an investor, you could use these disclosures to assess the company’s revenue model, financial stability and growth strategy. You would also need to examine risks such as dependence on a few customers, rapid technological change and competition. The RHP would not confirm whether the company’s shares will rise after listing. The securities quoted are for example purposes only and not a recommendation.

An RHP is not merely an informal marketing document. Section 32 of the Companies Act states that it carries the same obligations as a prospectus. Any variation between the RHP and the final prospectus must be highlighted in the final document.

A Red Herring Prospectus is an important source of information when evaluating an IPO. It explains the company’s operations, finances, management, promoters, offer objectives and material risks before bidding begins. However, the document does not predict listing performance or future returns. You should read the financial statements, risk factors, use of funds and promoter disclosures together before making an investment decision.