Why Read a Red Herring Prospectus Before Investing in an IPO

Why Read a Red Herring Prospectus

The initial public offering (IPO) has always been a buzz among investors. One of the major examples of recent IPOs, except through the Indian Railway Catering and Tourism Corporation (IRCTC). But when many companies announce regular IPOs, it can be very difficult to identify the right company to invest in.

Doubtless, the company’s draft red herring prospectus (DRHP) can help the investor at this time to cut the volatility. As soon as you read this draft, the investor can understand how good or bad the prospects are.

This time the question is, what is the red herring prospectus? A process of raising money from the public by selling company shares to investors is a red herring prospectus, or offer document. Which a company files with the National Securities and Exchange Board (SEBI).

DRHP is a very useful document for investors as it provides detailed information about the company’s business activities, finances, promoters and the company’s future intent to raise funds by filing an IPO. As well as How the company intends to raise money, the potential risks for investors are described in detail in this document.

So what, as an investor, should you look for in a draft Red Herring prospectus or DRHP?

Business Description

This section provides detailed information about the core activities of a company and how it conducts business. As a potential shareholder, this part of the individual should be considered. Because this investment of the concerned investor will be used by the company in the main business and if he wants to be a shareholder, he will be entitled to own this part.

Financial Information

This is one of the most important categories. And it contains the company’s audit report and financial statements. As an investor, the draft helps you get a better idea of ​​the company’s financial statements and future dividends based on profits. The person concerned can measure the security and profit margin of his future investment based on the financial statements.

Risk Factors

Companies list potential risks under a section entitled ‘Risk Factor’. Which may affect the business, activities and operations of the company concerned in the future. Some risks need to be verified extensively. For example, if you find that the company has a number of lawsuits, it is advisable to avoid that IPO. As an investor, you should read well to identify the types of risks that could pose a risk to the company’s future growth.

Use of income

Companies announce IPOs for various reasons. Find out what the company wants to do with the capital it wants to raise through IPO. Does the company plan to reduce its debt, purchase new assets, improve infrastructure, or meet its working capital needs? This is something you need to know. Also check the capital structure of the company to see if any large private investors have invested in the company.

Company and its Surroundings

DRHP carries information about the position of the company as compared to its competitors. The performance trends of the industry in which the company is involved are also included in the document. If you are looking for an IPO of a particular company, then you need to analyze various business and economic variables, demand and supply arrangements and future prospects.


The future of a company depends exclusively on those who control it, the growth of the company. Management is always responsible for planning various things like management growth, expansion, reform, marketing etc. This section should also include names, qualifications, directors, promoters and key management staff. It may also contain information about a criminal case or a financial offense or pending case against these individuals. It is important to examine this section because all of these factors can also be a risk factor.

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