Introduction to IPO Offer Documents
When a private company in India decides to raise capital from the public through an Initial Public Offering (IPO), it must follow a structured regulatory roadmap laid down by the Securities and Exchange Board of India (SEBI). Central to this journey are two critical disclosure documents: the Draft Red Herring Prospectus (DRHP) and the Red Herring Prospectus (RHP). While both documents provide comprehensive disclosures about the issuer’s business, management, and financial health, they serve very different purposes in the IPO timeline.
For retail investors navigating the primary market, confusing the draft document with the final offering document can lead to decisions based on outdated figures. Knowing how a company transitions from DRHP to RHP helps you evaluate an IPO with precision.
What is a DRHP (Draft Red Herring Prospectus)?
The DRHP is the initial blueprint of an IPO. Prepared by merchant bankers (Book Running Lead Managers) on behalf of the issuing company, the DRHP is submitted to SEBI and the stock exchanges (NSE and BSE) for formal review.
Under SEBI regulations, once the DRHP is submitted, it is placed in the public domain for at least 21 days to invite comments from investors and market participants. The primary objective of the DRHP is disclosure verification. It details the company’s operational history, promoter background, legal litigations, industry standing, and use of proceeds. However, the DRHP is an incomplete commercial document: it does not contain the price band, the total number of shares being offered, or the dates when the public can bid.
What is an RHP (Red Herring Prospectus)?
Once SEBI reviews the DRHP, issues its observations, and the company addresses all queries, the draft is updated. When the company is ready to launch the IPO, it files the Red Herring Prospectus (RHP) with the Registrar of Companies (ROC), SEBI, and the stock exchanges.
The term “Red Herring” originates from a standard disclaimer printed on the cover page in red ink, stating that the document does not contain complete information regarding the final price and quantum of securities. Unlike the draft, however, the RHP contains the bidding open and close dates, explicit details on the Fresh Issue and Offer for Sale (OFS) mix, and either the price band or a notification that the price band will be announced a prescribed number of working days prior to the issue opening.
Key Differences at a Glance
| Parameter | Draft Red Herring Prospectus (DRHP) | Red Herring Prospectus (RHP) |
|---|---|---|
| Primary Purpose | Regulatory review, public comments, and initial disclosure vetting. | Operational document used by investors to bid for shares. |
| Filing Authorities | SEBI, NSE, and BSE. | Registrar of Companies (ROC), SEBI, NSE, and BSE. |
| Pricing & Price Band | Not mentioned. | Price band or floor price specified (or announced shortly before launch). |
| Issue Dates | Not finalized; market-dependent. | Fixed bidding open and close timelines (e.g., Day T to Day T+2). |
| Financial Data | Latest audited figures available at the time of initial preparation. | Updated with recent stub periods or interim financial reports if required. |
What Changes Between the DRHP and the RHP?
1. Incorporation of Regulatory Observations
SEBI scrutinizes the DRHP to ensure full transparency. If the regulator finds ambiguities in litigation records, related-party transactions, or the stated “Objects of the Offer,” it issues observation letters. In the RHP, the company must explicitly address and incorporate these observations, often providing deeper disclosures or clarifying risk factors.
2. Financial Statements and Material Updates
An IPO process can take several months between the initial DRHP filing and the RHP launch. Under SEBI rules, financial numbers presented to retail investors must not be stale. If a substantial amount of time has elapsed, the RHP will include updated stub-period financials (such as the latest quarterly or half-yearly numbers) that were absent in the DRHP.
3. Offer Structure and Quantums
While the DRHP might state a broad target to raise a certain aggregate amount, the RHP finalizes the precise allocation between the Fresh Issue (new capital going to the company) and the Offer for Sale (existing shareholders selling their stakes). The RHP also provides exact reservation quotas for Retail Individual Investors (RII), Non-Institutional Investors (NII), and Qualified Institutional Buyers (QIB).
4. Anchor Investor Allocation Details
The RHP clarifies the timeline for Anchor Investors (who bid one day prior to the public opening, or Day T-1). It formalizes the allocation rules and lock-in conditions mandated by SEBI for institutional participants.
Worked Example (Illustrative Only)
To understand how the numbers transition, consider an illustrative issuer, Company ABC Limited:
- At the DRHP Stage: Company ABC submits its draft stating an intent to raise up to £500 crore in fresh capital, alongside an Offer for Sale of up to 10,000,000 equity shares by existing promoters. No price per share is stated, and no calendar schedule is fixed.
- Between Filings: SEBI requests additional clarity regarding a pending tax dispute and requires the company to include financial results for the subsequent quarter. A selling shareholder also decides to reduce their OFS component from 10,000,000 to 8,000,000 equity shares.
- At the RHP Stage: Company ABC files the updated document. The RHP clarifies the tax litigation under specific Risk Factors, incorporates the latest quarterly balance sheet, and confirms the fresh issue of £500 crore alongside the revised OFS of 8,000,000 shares. The document sets the bidding window (opening on Day T and closing on Day T+2) and announces a price band of £200 to £210 per share.
Common Mistakes Retail Investors Make
- Bidding Based on the DRHP: The DRHP is an exploratory document subject to regulatory changes. Never make an investment evaluation on a DRHP; always wait for the RHP, which reflects the legally binding offer terms.
- Overlooking Updated Risk Factors: Many investors read the summary in the DRHP and ignore the RHP. Often, the most crucial modifications demanded by SEBI appear in the updated “Risk Factors” or “Outstanding Litigations” sections of the RHP.
- Confusing the RHP with the Final Prospectus: The RHP still lacks the final discovered issue price. Once the bidding closes and the book-building process discovers the final strike price, the company files a final document simply called the “Prospectus” with the ROC, which records the exact allotment price and final share allocation counts.
Frequently Asked Questions (FAQ)
Can an investor submit bids using the DRHP?
No. Bidding is legally impossible under a DRHP because the issue dates, bidding mechanism, and price boundaries do not exist at that stage. Bidding only opens after the RHP is registered with the ROC.
Where can I access the official DRHP and RHP?
Both documents are publicly accessible on the official websites of SEBI, the lead merchant bankers, and the stock exchanges (NSE and BSE).
What is the gap between RHP filing and the IPO opening?
By regulation, the RHP must be filed with the ROC at least three working days before the issue opening date, giving the public time to evaluate the terms of the issue.
SEBI Compliance & Statutory Disclaimer: this guide is for education only and is not investment advice. IPO Bulletin is not a SEBI-registered investment adviser. Rules referred to are set by SEBI, NSE and BSE; check the latest circulars before you apply.
Reusing this article or its images? Credit IPO Bulletin and link to https://ipobulletin.com/guides/drhp-vs-rhp-what-changes-between-the-draft-and-the-final-prospectus/. Content licence.