DRHP explained: how to read a company’s IPO document

Before an Indian company can launch an IPO, it files a draft red herring prospectus (DRHP) with the market regulator. The document can run to several hundred pages, but for a pre-IPO investor a handful of sections do most of the work.

Why the DRHP matters

For many unlisted companies, the DRHP is the first time detailed, audited, multi-year financials and a frank list of risks are published in one place. It is also a strong signal that the company intends to list.

Sections to read first

Risk factors. Companies are required to list the risks to their business. Skim the full list, then read the first ten carefully; they are usually the ones the company considers most material.

Our business. How the company makes money, its customers, competition and strategy.

Financial information. Restated financial statements for the last three years, plus key performance indicators. Check revenue growth, margins and cash flow.

Objects of the issue. What the money will be used for. Paying down debt, funding expansion and letting existing shareholders sell are all common. A large offer for sale by existing investors is not necessarily negative, but it tells you who is cashing out.

Capital structure. Past share issues, prices at which investors came in, bonus issues and splits. This shows you how your own purchase price compares.

Outstanding litigation. Material legal cases against the company, promoters and directors.

What happens next

After filing, the regulator may issue observations. The company then files a red herring prospectus with the price band shortly before the IPO opens. Some DRHPs lapse without an IPO if the company changes its plans.

How to use it on Finlaunch

Where a DRHP is available, we attach it to the product page under Documents. Read it alongside the key statistics, and book a call if you want a specialist to walk you through it.