Things to know in RHP

What is RHP?

The RHP (Red Herring Prospectus) is the offer document of the issuing company, which outlines its goals concerning the initial public offering. It also contains other information about the issue, such as the number of shares available and their face value. The RHP, however, makes no mention of the final price at which securities are issued and their numbers. Hence, RHP is the merchant banker's version of the complete analysis of the company that must be filed with SEBI for the company to list on the market.

The merchant bankers prepare a draft RHP (DRHP) and submit it to SEBI. The company will refile the updated document, the RHP (Final Prospectus) once it gets approval from the capital market regulator.

10 key elements to analyse in RHP

RHP may even extend to 500 pages. However, investors should attempt to look into some finer details. Here are some key elements to look for in RHP.

Company background 

As a potential shareholder, you should focus on the core business of the company. You must know how the company conducts its business operations and what are its future growth prospects. It is necessary because the money you are investing will be utilised by the company to operate and grow its business. It even informs the investors about the current competitors of the company and its current position in the industry.

Management

RHP contains information about the Board of Directors and the management of the company. Important details include their name, designation, date of birth, nationality, tenure, and Director Identification Number (DIN). Moreover, RHP includes the remuneration of every director and various committees of the Board.

Dividend Policy

Since dividends are a crucial source of income for investors, it is essential to review dividend policies and past trends.

Financial Information

The RHP contains a section that includes the balance sheet of the company. It is necessary to know how the company has done financially, its debts, reserves, and other aspects of financial statements. It includes information on assets and liabilities, profit and loss, cash flows, statements of changes in equity, intangible assets, borrowings, shareholding, related party transactions, capitalisation statements, income statements, and various financial ratios.

Legal and other information

Investors should remember that a company that has a lawsuit is not an attractive investment option. In the RHP, you can find all the data on the legal matters in which the company is currently involved. The lawsuits against the company, its subsidiaries, promoters, directors including criminal proceedings can be obtained.

Objects of the issue

Before investing, you need to find out the purpose of raising such funds. If the funds are for future growth, then the IPO may be worth investing in as in the long run, company revenues would boom enabling you to get a good return. However, it might not be a good investment option in terms of growth prospects in case the company is planning to raise money to repay its debt.

Offer Information

The investors should be careful while going through the details regarding the terms of the offer. The RHP provides various essential details: general terms and conditions about the offer, ranking of the equity shares, mode of payment of dividend, rights of the shareholders, face value, offer price, price band, important dates, technical rejection grounds, offer structure and offer procedure.

History

Generally, a company floats an IPO after a long time while generating profits. To comprehend the direction of development of the company, you should take at into account its past progress as well.

Strengths and disclosures about risks

The RHP includes the internal as well as external strengths of the company. Investors can ascertain whether the investment would be productive or unproductive for him.

The most important part of this document is that it gives information on risk factors and the future risks of the company. It majorly has data regarding the threats to the business of the company. In particular, RHP shares the data about their competition, legal troubles with the company, regulatory dangers, and other risks related to capital. Moreover, this includes market risks, interest rate risks, and credit risks.

Promoter holdings

The investors need to understand who owns the company. They must be careful of those promoters selling off their holdings heavily within the IPO. It is unusual for promoters to dilute substantial amounts if he believes that the corporates have growth potential.

Knowing what to look for in an IPO is not as difficult as it seems. It may be easier to base your investment decisions on what others say; by reading the red herring prospectus, you can make a better-informed decision.