What Is a DRHP?
The Draft Red Herring Prospectus (DRHP) is the document a company files with SEBI before launching its IPO. Once SEBI approves it (with observations), it becomes the Red Herring Prospectus (RHP) — the final document available to investors during the subscription window.
Think of the DRHP as a company's full financial and business confession. It contains everything from how the company makes money to the risks that could wipe out your investment. Reading it systematically — even just the key sections — gives you a massive edge over investors who skip it.
Section 1: Objects of the Issue (Use of Proceeds)
This section answers: What will the company do with the money raised?
There are two fundamentally different IPO types based on this:
- Fresh Issue: New shares are created, and the money goes to the company. Used for capex, debt repayment, working capital, or expansion.
- Offer for Sale (OFS): Existing shareholders (promoters, PE funds) sell their shares. Money goes to the sellers, not the company. The company gets nothing.
Red flag: An IPO that is 100% OFS with promoters selling large stakes is often a warning sign. It means insiders are exiting, not building. Always check who is selling and how much they are retaining after the IPO.
For fresh issues, read the specific allocation: how much for debt repayment, how much for capex, how much for "general corporate purposes." A large "general corporate purposes" allocation (more than 25% of issue size) is ambiguous and concerning.
Section 2: Risk Factors
SEBI mandates that all material risks be disclosed. Companies typically list 30–80 risk factors. Do not skip this section.
Categories of risks to watch:
- Customer concentration: "Our top 5 customers account for 70% of revenue." Loss of one customer could be devastating.
- Regulatory risk: Businesses in pharma, fintech, edtech are especially vulnerable to regulatory changes.
- Litigation: Check for ongoing legal disputes, tax demands, or SEBI/NCLT proceedings against the company or its promoters.
- Related-party transactions: Excessive transactions with promoter-controlled entities can signal fund diversion.
- Negative cash flows: If the company is burning cash every year, understand the path to profitability.
Section 3: Financial Statements
The prospectus includes three years of audited financials. Key numbers to review:
- Revenue growth: Is it consistent? Or did revenue spike artificially in the year before the IPO?
- EBITDA and PAT margins: Are they improving or declining over three years?
- Debt levels: What is the debt-to-equity ratio? Is the company raising IPO money to pay off debt?
- Cash flow from operations: A profitable company with negative operating cash flow is a red flag — check for aggressive revenue recognition.
- Restated financials: If the company has restated its historical financials (common in India), understand why.
Section 4: Business Overview
This section describes the company's products, services, markets, and competitive position. Key questions:
- What is the addressable market size, and how much does the company control?
- What is the company's competitive moat — pricing power, IP, switching costs, network effects?
- Is the growth story dependent on macro tailwinds (favorable) or does it require the company to displace entrenched players (harder)?
Section 5: Promoter Background
Promoter quality is often the single most important factor in long-term IPO success. Check:
- Their educational and professional background
- Past companies they have run — successes and failures
- Any criminal cases, SEBI orders, or debarments
- Promoter pledging: if promoters have pledged their shares as loan collateral, it signals financial stress
- Post-IPO promoter holding: do they retain a majority stake, or are they diluting significantly?
Section 6: Valuation — Price Band and P/E
The RHP (not DRHP) specifies the price band. Use this to calculate valuation multiples:
- P/E Ratio: Issue price ÷ EPS (earnings per share). Compare to listed peers.
- EV/EBITDA: Enterprise value ÷ EBITDA. Useful for capital-intensive businesses.
- P/S Ratio: Used for loss-making companies to value on revenue.
Be skeptical of companies that compare themselves to global peers when Indian listed peers trade at lower multiples. The prospectus will include a peer comparison table — study it critically.
Section 7: IPO Structure and Reservations
This section tells you how many shares are reserved for each investor category:
- QIB (Qualified Institutional Buyers): At least 75% of the net offer in book-built issues
- NII (Non-Institutional Investors): HNIs applying above ₹2 lakhs, typically 15%
- Retail Individual Investors: Maximum 10 lots per application, typically 10% of issue
- Employee reservation: Often at a discount to issue price
- Anchor investors: Institutional investors allotted shares one day before subscription opens
Common DRHP Red Flags — Quick Checklist
- High OFS component (promoters selling aggressively)
- Customer concentration above 50%
- Revenue or profit spike only in the year before IPO
- Negative operating cash flows despite reported profits
- Large "general corporate purposes" use of proceeds
- Multiple related-party transactions
- Promoter with a history of failed ventures or legal issues
- Valuation premium significantly above sector peers
Where to Download the DRHP/RHP
All prospectuses are publicly available on:
- SEBI website: sebi.gov.in → Filings → DRHPs
- BSE/NSE IPO page for the specific company
- The company's own investor relations page
Reading the DRHP takes 2–3 hours for a complex company. Even reading just the key sections above — 30–45 minutes — puts you ahead of 90% of retail IPO investors.
Loading comments...