Before any IPO, the company must publish a detailed offer document. Nobody reads all of it. But skipping it entirely and applying on the basis of a headline is how people get hurt.
Half an hour on the right sections tells you most of what matters.
DRHP vs RHP
DRHP — Draft Red Herring Prospectus. The first version, filed with SEBI. Contains the business description, financials, risks and shareholding — but no price and no dates. SEBI reviews it and issues "observations", which the company must address.
RHP — Red Herring Prospectus. The near-final version, filed after SEBI's observations, with the price band, lot size and issue dates added. This is the document you actually act on.
("Red herring" is an old term for a document that omits the final price — not a comment on its contents.)
Both are free: SEBI's website, NSE and BSE, and the company's investor relations page. You never need to pay anyone for them.
The five sections that matter
1. Objects of the Offer
What will the money be used for? Stated precisely, with amounts.
Good signs: capacity expansion, repaying specific identified debt, clearly defined capital expenditure.
Worth questioning: large amounts under "general corporate purposes", or an offer that is almost entirely an OFS with little coming to the company.
2. Risk Factors
The longest section, and the most useful, precisely because the company is legally obliged to disclose things it would rather not.
Skim past the boilerplate ("economic conditions may affect our business"). Look for the specific ones:
- Heavy dependence on a few customers or one supplier
- Pending litigation or tax demands of material size
- Regulatory approvals not yet obtained
- Promoter shares pledged
- Related-party transactions with promoter-owned entities
- Negative operating cash flow
- Qualified audit opinions
3. Financial Statements
Three years plus a recent stub period. Look at:
- Revenue trend — growing, flat, or lumpy?
- Profit trend — and whether profit growth comes from the business or from one-off items
- Operating cash flow — does reported profit turn into actual cash?
- Debt — how much, and is the IPO repaying it?
- Margins — improving or shrinking?
4. Promoter and shareholding
Who owns the company now, and who owns it after listing?
Watch for: how much promoters are selling in the OFS, the pre- and post-issue promoter holding, whether any promoter shares are pledged, and who the existing investors are and at what price they came in.
The document discloses the price at which recent pre-IPO allotments were made. Comparing that to the IPO price band is one of the most direct valuation checks available to a retail investor.
5. Legal proceedings
Cases against the company, its promoters and directors. A large business will always have some litigation. What matters is the size relative to the company, and whether any case involves regulatory or criminal matters concerning the promoters.
Comparing valuation
The RHP includes a section comparing the company's valuation ratios with listed peers. It is prepared by the company, so the peer set may be flattering, but it gives you a starting point.
The basic check: what price-to-earnings multiple does the issue price imply, using the most recent full-year earnings, and how does that compare with already-listed competitors you can buy today with a full public track record?
A realistic half-hour approach
- Objects of the Offer — 5 minutes
- Risk factors, skimming for specifics — 10 minutes
- Three-year revenue, profit and operating cash flow — 5 minutes
- Promoter holding, pledge, OFS share — 5 minutes
- Peer valuation comparison — 5 minutes
That is more research than most applicants do, and it is enough to avoid the worst decisions.
Key takeaways
- DRHP is the draft with no price; RHP adds the price band, lot size and dates.
- Both are free on SEBI, NSE, BSE and the company's website.
- Read risk factors before the business description — they are written to disclose, not persuade.
- Check whether reported profit is backed by operating cash flow.
- Compare the issue price with the price of recent pre-IPO allotments and with listed peers.
Check your understanding
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