What is Draft Red Herring Prospectus DRHP
A way to reduce risks from investments is to review all the facts and details before investing. Before you decide to invest in a company's initial public offer (IPO), you need to analyse its Draft Red Herring Prospectus (DRHP). Through its DRHP, the company lets you judge its financials, quality, valuation, etc., based on its past and present performance. It will provide you with all the details to make an informed investment decision.
The document is split into several sections. While it is essential to analyse all the information provided carefully, let us look at a few key things that you need to look at in the DRHP.
Important Aspects that You need to Look at in the DRHP
About the company:
This section lets you know the company's history and its market opportunities. It also mentions the business operations, value propositions, growth strategy, and critical metrics. Read through the regulations to know the laws in India that apply to the business. Find out how any changes in these laws will affect the company's operations and industry.
The industry overview will provide you with an understanding of the sector. It lets you know the business and economic factors at play. Check the company's position in comparison to its peers and competitors.
Understand the company's strengths, present and future risks, and opportunities. It is crucial to know the company's risks and check if it is prepared to face these risks.
Additional Read:Difference between IPO and FPO
The company's financial information can provide you with an idea of how it might perform in the future. You can look at the company's profits and check for consistency in growth. Also, check the amount of debt and the capital structure post the IPO. The document also has a summary of all financial statements. Ask for assistance from professionals if you are unable to understand the figures.
Management and promoters:
Check if the founders still run the company or there are new faces on the board. Get to know the level of expertise and experience of the key personnel of the board. Check for any pending litigations or criminal cases in their names. Also, it is good to know the background of company's promoters. Check their idea of the company's growth potential.
Additional Read:What is an IPO? How can I apply in an IPO with my Demat account?
Objects of the offer:
You need to know what the company plans to do with the money you invest in it. This section mentions how the company will use the raised funds. Some companies will use the funds to repay old debt. Before investing in these companies, you need to analyse the impact of these things on the company’s financials. Others will want to use that money for expansion and re-investment. That might increase their revenues and, in turn, increase your chances of a good return.
One of the ways you can earn income from your investment is through dividends. This section lets you know the company's interim and financial dividends policy. It also mentions the previous dividends declared on equity shares.
Additional Read:How to track upcoming initial public offerings (IPOs)
There is a boom of IPOs in the market, and as an investor, you have several options. The DRHP serves as a valuable tool to help you choose a good investment among all those options. You need to find value among many IPOs and choose the one that can provide good returns to you.
Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.