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What is DRHP - Meaning, Importance and Full Form

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Gaurav Seth
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WHAT IS DRHP? 

The DRHP is a mandatory and primary registration document prepared by the investment bankers appointed by the IPO entity in case of a book building issue. It inculcates information which is needed to issue an IPO. Here is a comprehensive article to understand different aspects of DRHP and its importance in the IPO procedure.

DRHP - FULL FORM AND MEANING

The Draft Red Herring Prospectus (DRHP) is a preliminary document submitted by a private entity to SEBI as a part of its IPO journey. This includes information about the company’s operation, business, promoters, financials, comparison with listed and unlisted peers, standing in the sector or industry among others. 

It is required when the private company is planning to raise money from the general public, and provides full and detailed information about its financials and business operations. This document also clarifies the reason why the company is raising an IPO and how the raised funds will be utilized and what is the associated risk with investing in the company.

It is to be remembered that the DRHP does not contain information on the size or the prize of the offering. To download DRHP of any company which is offering its securities via an IPO, investors can visit the official SEBI website and get it.

IMPORTANCE OF DRHP

The SEBI has made it compulsory for companies to file DRHP before going to the Registrar of Companies. The SEBI reviews the offer documents i.e. the DRHP and checks whether adequate disclosures are made or any further disclosures are to be made. SEBI’s final recommendations and comments are given to the investment banks and the private entity, who makes the required and necessary changes and final DRHP which is referred as RHP is filled with SEBI, ROC and the Stock Exchange. 

KEY SECTIONS OF THE DRHP

1. Risk Factors:

This section lists the uncertainties and risks of investing in the entity. The idea is to disclose every single possible risk and uncertainty which the business comes across and which could have a material impact on securities pricing (Post listing).

2. Use of funds raised:

As an investor, this is the most significant section for the investors to focus. This is where the entity mentions its reason for going public and doing an IPO (i.e. why does the company is raising funds?). It signifies where the company intends to use the funds raised in the IPO.

3. Industry Description:

This area includes forecasts, predictions and estimates related to the whole industry in which the entity operates. 

4. Business Description:

This section is all about what the company does. Its core activity. i.e. this is how the company makes its revenue. We can think of it in this way that as a shareholder this is the main and core business in which we are investing and hoping to gain from. This is what you will own a part of. 

5. Management:

This area lays out the details like names, qualification and other details about the faces behind the company, i.e. directors, promoters, KMPs among others. Moreover, any litigation and criminal records as well as financial delinquency of any of these are also mentioned as a risk factor if such may be the case. 

6. Financial Information:

This section includes auditor’s report and the financials of the entity for the previous 5 years. To be eligible for an IPO, the entity must have net assets (tangible) of 3 crores in each of the preceding 3 years and must also have a track record of profits (distributable) in 3 out of the last 5 years. 

WHO MAKES THE DRHP

One of the most thinkable aspects of the DRHP is its reliability and genuineness. While it is drafted by a team of independent legal counsels, auditors, investment bankers and the entity entrusted with the job of selling the securities offered, they are all remunerated by the company. Evidently, there is an omnipresent spectre of favour and bias in making of the DRHP and in the process of due diligence. 

But as the DRHP goes through multiple reviews by all of them and also SEBI reviews it and passes comments on it, it is taken utmost priority to make sure that the DRHP is drafted correctly without any misleading information. 

 

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