Red Herring Prospectus (RHP): A Hand Book for IPO Investing

Red Herring Prospectus
IPO
by Nikita Bhoota 05/05/2021

Initial Public Offerings (IPOs) create a lot of buzz among investors. The recent IPOs such as Kalyan Jewellers, Nazara Technologies, are great examples. But when so many companies announce IPOs regularly, it can be tough to identify the right company to invest in. Therefore, reading the company’s Red Herring Prospectus (RHP) is a great way to identify whether it has good potential or not.

Now first let’s understand what is RHP?

A Red Herring Prospectus, or offer document, is filed by a company to SEBI (Securities and Exchange Board of India) when it plans to raise money from the public by selling shares of the company to investors. The document is very useful to investors because it provides detailed information about the company’s business operations, financials, promoters and the company’s objective for raising funds by filing an IPOs. It also explains how the company aims to use the money that will be raised, the possible risks for investors etc.

Also Read: List of Upcoming IPOs

Where Can You Find an RHP?

You can find an RHP at any of the following places:
The official website of SEBI. You need to go through the “Offer Document” section to find it. 
Websites of Stock Exchanges and select Merchant Bankers 

Additionally, the issuing company has to make a public announcement through at least one newspaper after submitting the RHP to SEBI. It can be a Hindi, English, or Regional language newspaper.

As an investor, here are a few things to look at in a Red Herring Prospectus:
 

  • Details of the Offer

This section offers the details about the IPO including the number of shares offered via fresh issue and offer for sale. It also offers a break-up of the QIB, Non-Institutional, and Retail portions.

  • Capital Structure

This section offers details about the Equity Share Capital of the issuing company as of the date of the Red Herring Prospectus. This includes the authorized share capital and issued, subscribed, and paid-up capital before the offer. It also has information about the history of the equity share capital held by the promoters of the company.

  • Objects of the Offer

This section offers details about how the company plans to utilize the funds collected via the IPO. As an investor, this can be used to evaluate if the company is focusing on growth or will use the raised funds to repay debt, to meet working capital requirements or any other goal.

  • Industry overview:

A red herring prospectus carries information about the position of the company, in comparison to its competitors. The performance trends of the industry to which the company belongs is also included in the document. If you are planning to invest in a particular company’s IPO, you should analyse the various business and economic variables at play, the demand and supply mechanism and the future prospects.

  • Business Description:

This segment talks about a company’s core operations and how it conducts business. As a potential shareholder, you should pay attention to this part as your investment will be utilised by the company in its core business.

  • Financial information:

This is one of the most important segments and contains the company’s audit reports and financial statements. As an investor, the financial statement will help you get an idea about the company’s financial performance in the past. It will also help to get an idea of future dividends based on the profits disclosed. You can project the safety and profitability of your future investment based on the financial statement.

  • Strengths

The Red Herring Prospectus also lists the strengths of the company – both internal and external. These strengths distinguish the company from its competitors. It is essential to go through this section only after understanding the company’s business and its competition. The strengths of the company can help you understand the potential it has to grow in the near future.

  • Strategies

This section lists the strategies adopted by the company to establish and grow its business. This can include product-level strategies, geographic strategies, market-level strategies, etc. This can help you know the approach taken by the issuing company to generate profits.

  • Risk Factors:

Companies lists out the potential risks that could impact their business and operations under a section titled ‘Risk Factors’. While many are routinely listed risks, some risks need to be examined. For example, if you find that the company has several pending legal cases, it may be a good idea to avoid the IPO. As an investor, you should be able to read between the lines to identify the real risks that could pose a threat to the company’s growth in the future.

  • Management:

This section has details such as names, qualifications, designations about directors, promoters and key management personnel. It may also have information about any criminal cases or that of financial delinquency or pending litigations against these people. It is important to check this section because all these can be a risk factor.

  • Promoters and Promoter Group

You can find complete details about the promoters and/or promoter group of the company in this section.

  • Dividend Policy

It is not compulsory for a company to declare dividends. However, some companies have a formal dividend policy that is declared in this section. You can also look at the dividend declared by the company on equity shares in the previous financial years if applicable.

Conclusion:
The RHP has a lot of information about the company. If an investor goes through the entire RHP carefully, evaluating its fundamental strength can be easy. Spend some time analysing the information before investing in an IPO.

See more about RHP in this video:

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