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By IPOCheckr Editorial TeamLast reviewed
The red herring prospectus (RHP) is the offer document an IPO company files before bidding opens. It is long, but most of what a retail investor needs sits in a handful of sections: Objects of the Offer, Risk Factors, Restated Financial Information, Basis for Offer Price, Outstanding Litigation, Capital Structure and the related-party note. You can download it free from SEBI, NSE, BSE or the lead managers' websites.
The draft filed with SEBI. It is made public for comments for at least 21 days.
Filed with the Registrar of Companies before the issue opens. It has everything except the final price and exact share count.
The final document filed after pricing, with the issue price filled in.
All three are posted on SEBI's Filings section and on the exchange websites.
A company planning a book-built IPO first files a draft red herring prospectus (DRHP) with SEBI. Under the ICDR Regulations the draft has to be made public for comments for at least 21 days, so it is posted on SEBI's website, the exchanges' websites and the lead managers' websites.
After SEBI issues its observations and the company updates the document, it files the red herring prospectus (RHP) with the Registrar of Companies. The RHP is called ‘red herring’ because it does not yet contain the final issue price or number of shares. Bidding happens on the basis of the RHP.
Once the book closes and the price is fixed, the company files the prospectus with the final price. For investment decisions the RHP is the document to read, because it is what you are bidding on.
You never need to pay for an offer document.
RHPs often run past 400 pages. Read in this order and you will cover what matters in a couple of hours.
Objects of the Offer: SEBI caps the amount kept for ‘general corporate purposes’ at 25% of the money raised by the company, and caps general corporate purposes plus unidentified acquisitions at 35% combined. A large share in vague categories means less is committed to specific uses. If the fresh issue is above ₹100 crore, a credit rating agency must monitor how the money is spent and report quarterly; the RHP names the agency.
Risk Factors: look for concentration – one customer, one supplier, one product, one state or one government licence providing most of the revenue. Look for negative operating cash flow, pending regulatory approvals and dependence on promoters' personal guarantees.
Financials: compare revenue growth with growth in receivables and inventory. If receivables grow much faster than revenue, the company may be extending generous credit to book sales. Check whether profit is converting into operating cash flow.
Basis for Offer Price: check which peers have been chosen and whether they are genuinely comparable in size and business mix. Note the price at which shares were issued or transferred in the 18 months before the IPO, which the RHP discloses.
Litigation: a long list is not automatically alarming for a large company. Focus on criminal proceedings, tax demands that are material relative to net worth, and regulatory actions against promoters.
Suppose an RHP shows a ₹1,000 crore IPO made up of a ₹400 crore fresh issue and a ₹600 crore offer for sale. Of the ₹400 crore, ₹180 crore is to repay borrowings, ₹120 crore is for a new plant and ₹90 crore is general corporate purposes, with the remainder covering the company's share of issue expenses.
Here only ₹400 crore reaches the company. General corporate purposes are 22.5% of that amount, within the 25% limit. Majority capital expenditure would also lengthen the promoter lock-in under SEBI's rules, which the Capital Structure section will confirm. The ₹600 crore offer for sale goes entirely to the selling shareholders named in the RHP, so your next question is who they are and how much of their stake they are selling.
Print this or keep it open alongside the PDF.
Primary rules and official pages this guide was checked against. Rules change, so the official text always prevails.
General information, not investment advice. Rules set by SEBI, RBI and the exchanges can change, so confirm current limits with your broker or the offer document.