What is DRHP? Way to know how to read a DRHP?

New investors entering the stock market need to start by performing research on their target companies and implementing fundamental analysis ratios. New companies preparing for their Initial Public Offering should be scrutinized carefully. The DRHP acts as the essential document to fulfil this need. The DRHP stands as an important corporate document which delivers essential company information to stakeholders. This article provides information about the DRHP along with explaining the essential parts that need special attention.

What is the meaning DRHP in the stock market?

A Draft Red Herring Prospectus (DRHP) functions as a corporate document which companies submit to the Securities and Exchange Board of India (SEBI) for seeking approval to conduct share offerings through an IPO to the public. The DRHP provides the investors with all the essential company details including financial activity, operation data, management information and stock offering plans. This document provides significant information to potential investors who use it to evaluate companies for their investment decisions.

The term “Draft” indicates that some parts of the content could undergo modifications until the official final version becomes available. The Indian top securities regulator SEBI reviews the DRHP to ensure it fulfills regulatory demands and contains adequate disclosure materials. A company can proceed with its initial public offering process after SEBI provides its approval and after that the organization will execute roadshows, conduct book-building and finalize the prospectus.

Understand DRHP with an example

A mineral firm intends to submit its Draft Red Herring Prospectus (DRHP) for a ₹500 crore initial public offering. The document must describe the company’s business model together with its market position, financial outcomes, planned growth as well as risks and fund allocation practices which should meet the regulatory requirements. The example shows how detailed disclosure is needed which includes operational data, competitive insights, leadership history, management practices, economic projections, and a comprehensive risk evaluation.

This DRHP document needs to categorize information in a standardized layout that satisfies regulatory standards while ensuring investor protection and maintaining a procedure to prepare for an initial public offering.

Key points to consider for evaluating the DRHP  

A firm needs to file a DRHP document before starting its IPO launch process. The document provides vital information regarding the company. The investor needs to read a prospectus before making any investment. The DRHP contains the following important sections which investors need to carefully read.

1. Overview of a company 

This part presents an overview of how the company operates regarding its business model with its industry position and market rivals along with future expansion possibilities. The overview of the company indicates how the company performs with its current market position and planned initiatives.

2. Industry insights  

The DRHP delivers information about the company’s standing in its industry and includes details on industry performance trends. If you are thinking about investing in an IPO, it’s important to evaluate various business and economic factors to measure the company’s future.

3. Objective of the IPO  

This explains how the company will use funds that are obtained from the IPO. The document explains how funds will be distributed and describes the expected business advantages.

4. Management staff  

Any company’s expansion depends on proper management practices. A DRHP must contain complete information about organizational management including individual team member contacts along with their current roles and existing legal matters. The evaluation of company operations and related risks requires proper understanding of the management system.

5. Financial information  

Financial statements such as the balance sheet, income statement and cash flow statement disclose the company’s performance while showing profitability status along with liquidity position and market solvency. Understanding the financial standing of the company represents a critical component in filing paperwork for a DRHP.

6. Risk factors  

The risks section in a DRHP highlights the potential challenges and uncertainties related to investing in the company. It provides valuable insights into the risks involved.

What are the main differences between DRHP And RHP

The main difference between DRHP and RHP exists as DRHP (Draft Red Herring Prospectus) serves as an initial submission to SEBI but RHP (Red Herring Prospectus) stands as the finalized version approved by SEBI which includes broad IPO details including pricing and allotment information.

 

Aspect	DRHP (Draft Red Herring Prospectus)	RHP (Red Herring Prospectus)
Definition	An introductory paper filed with SEBI before an IPO.	A conclusive paper was filed with SEBI after an IPO authorization.
Purpose	The paper provides essential information which includes financial risks alongside industry insights.	Contains all the essential information, such as prices, allocation of shares, and the final terms of the proposal.
Content	The document does not reveal the offer price nor specify share allocation methods.	A company presents its final offer price details and shares information along with other essential details.
Regulatory Approval	Sent in for SEBI’s review and approval.	Authorized by SEBI and selected to be passed on to the investors.
Investor Information	The document contains an initial overview yet lacks comprehensive final information.	This document  provides investors with detailed accurate information required for making well-informed decisions.
Status	This is only a draft and may be edited later.	The final version is now set for the public.
Impact on IPO	The pricing and issuance of the IPO have not been verified.	It verifies the expenditures, allotment, and plan for the IPO.

Why do companies need to file the DRHP?

A company intending to sell shares to public investors must comply with an initial public offering (IPO) procedure. Before approaching the Registrar of Companies (ROC) an organization must submit its Draft Red Herring Prospectus (DRHP) to Securities and Exchange Board of India (SEBI) serving as the stock market regulatory authority.

Companies need to provide all key information related to their business in the DRHP about management structure, financial records, possible risks, funding purposes and planned capital utilization. After that, SEBI reviews this essential document before possibly requesting modifications to it. The document proceeds for final approval by SEBI, ROC and the stock exchanges after making necessary adjustments to the document. The approved document obtains its name as the Red Herring Prospectus (RHP) from its common usage.

In summary 

A DRHP contains all essential information any investor needs to understand about the company. An individual should carefully review the entire DRHP while seeking guidance from financial professionals with any unclear points. Investor understanding of these parts will enable them to select investments wisely and measure IPO-related risks together with potential returns. New investors should begin their journey with a free Demat account available on many platforms.

• Author: Religare Broking
• Last Updated: March 4, 2025