What is DRHP? Draft Red Herring Prospectus Explained

What is a DRHP (Draft Red Herring Prospectus)?

What is a DRHP?

A Draft Red Herring Prospectus (DRHP) is a preliminary document filed by a company with the Securities and Exchange Board of India (SEBI) before launching an Initial Public Offering (IPO).

It provides detailed information about the company’s:

• Business model
• Financial performance
• Management structure
• Risk factors
• Legal and regulatory status

However, it does not include the final issue price or the number of shares being offered. While the DRHP does not mention the final price or share quantity, a tentative price band may be introduced later before the IPO opens.
This is why it is called a “Red Herring” document.

In simple terms, the DRHP is the company’s first formal introduction to the public market.

Who Needs to File a DRHP? (Applicability)

1. Companies Planning an IPO in India

Any company that wants to list its shares on Indian stock exchanges must file a DRHP with SEBI.

This applies to:

• Private companies converting into public companies
• Large corporates planning public fundraising
• Growth-stage businesses seeking expansion capital

2. Startups & Growth-Stage Businesses

Startups that have reached scale often use IPOs to raise long-term capital.

For them, the DRHP:

• Builds investor confidence
• Explains business sustainability
• Showcases financial strength

3. Companies Issuing Fresh Shares or OFS

DRHP is required whether the IPO includes:

• Fresh issue of shares
• Offer for Sale (OFS) by promoters
• Or a combination of both

Why is the DRHP Important?

The DRHP plays a crucial role in the IPO journey.
It protects investors, ensures regulatory compliance, and builds market trust.

1. Regulatory Review: The SEBI DRHP review process ensures that companies disclose all material information honestly.

This includes financial data, business risks, and legal matters.

If any information is missing or misleading, SEBI asks for corrections before allowing the IPO to proceed.

2. Investor Transparency: Investors rely on the DRHP to understand how a company operates and earns revenue.
It helps them evaluate whether the business is financially stable and worth investing in.

Clear disclosures reduce uncertainty and improve investor confidence.

3. Market Feedback: Once published, the DRHP allows analysts and investors to review the company’s plans.
Their feedback helps companies refine their IPO strategy before finalising pricing.

This improves the chances of a successful IPO launch.

Key Contents of a DRHP

A DRHP is a detailed compliance document.
It typically includes the following sections:

1. Company Overview

This explains:

• Company history
• Nature of business
• Industry background
• Competitive strengths

It helps readers understand who the company is.

2. Business Model

This section explains:

• Revenue sources
• Key products or services
• Growth strategy
• Market positioning

It answers the question: How does the company earn money?

3. Financial Statements

This includes:

• Audited financials (3–5 years)
• Revenue and profit data
• Cash flow statements
• Debt and liabilities

Investors assess financial health using this section.

4. Promoters & Management

Details include:

• Promoter background
• Board of Directors
• Senior leadership
• Shareholding pattern

Strong management builds investor confidence.

5. Risk Factors

This is a critical section.

It lists risks related to:

• Market conditions
• Regulatory changes
• Financial stability
• Business dependencies
• Legal disputes

Investors use this to assess downside risk.

6. Legal & Regulatory Disclosures

This covers:

• Pending litigations
• Regulatory approvals
• Compliance status

Full transparency is mandatory.

7. Objects of the Issue

This explains how IPO funds will be used, such as:

• Business expansion
• Debt repayment
• Working capital
• Acquisitions

DRHP Filing Process (Step-by-Step)

Filing a Draft Red Herring Prospectus (DRHP) is a structured regulatory process.
Each step ensures transparency, legal compliance, and investor protection.

Below is how the process works in practice.

Step 1: Document Preparation

The company begins by preparing the DRHP with the help of:

• Merchant bankers (lead managers)
• Legal advisors
• Auditors
• Compliance professionals

This draft includes:

• Business overview
• Financial statements
• Risk factors
• Management details
• Legal disclosures
• Object of the issue

Why this step matters:
SEBI expects full, accurate, and verified information. Any gaps here can delay approval later.

Step 2: Filing the DRHP with SEBI

Once the draft is ready, it is filed with SEBI through the official filing system.

At this stage:

• The document is still “draft”
• No issue price is mentioned
• No share quantity is disclosed

What SEBI looks for:

• Accuracy of disclosures
• Compliance with IPO regulations
• Adequate risk reporting
• Financial clarity

Step 3: SEBI Review & Examination

SEBI reviews the DRHP in detail.

The regulator checks:

• Whether risks are fully disclosed
• Whether financial data is reliable
• Whether the business model is clearly explained
• Whether legal matters are transparently mentioned

This step protects investors from misleading information.

Step 4: SEBI Observations & Queries

SEBI usually issues observations or queries.

These may ask the company to:

• Clarify certain statements
• Expand risk disclosures
• Correct financial figures
• Add missing legal details

The company must respond and revise the DRHP accordingly.

Important:
IPO approval does not move forward until SEBI is satisfied.

Step 5: Public Disclosure of DRHP

After filing, the DRHP is made public on:

• SEBI’s website
• Stock exchange portals
• The company’s website

This allows:

• Investors to review the company
• Analysts to study the business
• Market feedback to be collected

Public access increases transparency.

Step 6: Filing the Final RHP

Once SEBI’s comments are addressed, the company files the:

Red Herring Prospectus (RHP)

This final document includes:

• Issue price
• Number of shares
• Final offer structure

Only after this step can the IPO be launched.

Common Mistakes and Practical Tips

Mistake 1: Incomplete Risk Disclosure

Some companies downplay risks.

Tip: Always disclose all material risks honestly.

Mistake 2: Outdated Financial Data

Using old financials delays approval.

Tip: Use audited and updated statements.

Mistake 3: Confusing DRHP with RHP

DRHP is not the final document.

Tip: Remember: Pricing details come in RHP.

Mistake 4: Poor Business Explanation

Unclear models reduce investor trust.

Tip: Use simple and structured explanations.

Mistake 5: Ignoring Legal Issues

Pending cases must be disclosed.

Tip: Transparency avoids regulatory trouble.

Penalties for Incorrect or Misleading DRHP

Filing a Draft Red Herring Prospectus (DRHP) is a serious legal responsibility.
SEBI expects companies to provide accurate, complete, and transparent information to protect investors.

If a DRHP contains false, misleading, or incomplete disclosures, SEBI can take strict action.

1. Revision and Clarification Orders

SEBI may first ask the company to:

• Revise incorrect statements
• Add missing disclosures
• Clarify misleading information

This can delay the IPO timeline and increase compliance costs.

2. Delay or Suspension of IPO Approval

If the issues are serious, SEBI can:

• Put the IPO on hold
• Stop the approval process
• Require extensive re-filing

This can affect investor confidence and company valuation.

3. Financial Penalties

SEBI has the authority to impose monetary fines on:

• The company
• Promoters
• Directors
• Key management personnel

Penalties are imposed for misrepresentation, non-disclosure, or regulatory violations.

4. Legal Action Against Promoters

In cases of intentional misrepresentation, SEBI may initiate:

• Regulatory proceedings
• Legal action
• Investigation into promoter conduct

This can have long-term legal and reputational consequences.

5. Investor Claims and Reputation Damage

If investors suffer losses due to misleading information, they may:

• File legal claims
• Seek compensation
• Raise regulatory complaints

Even if legal action is avoided, the company’s public image can suffer permanently.

A DRHP is not just a formality.
It is a legally binding disclosure document.

Companies that:

• Hide risks
• Misstate financials
• Ignore legal obligations

Expose themselves to serious regulatory, financial, and reputational risks.

How Investors Use a DRHP

Investors use the DRHP as a research tool before deciding to invest in an IPO.

They study the document to understand:

• How the company makes money
• Whether the business is profitable
• What risks are involved
• How funds will be used

Special attention is given to:

• Financial statements
• Risk factors
• Objects of the issue

By reviewing the DRHP carefully, investors can avoid emotional or uninformed decisions.

Conclusion: Why DRHP Matters

The Draft Red Herring Prospectus (DRHP) is the foundation of the IPO process in India.

It ensures:

• Regulatory transparency
• Investor protection
• Legal compliance
• Market confidence

For companies, it is a credibility test.
For investors, it is a risk assessment tool.
For regulators, it is a compliance checkpoint.

Without a DRHP, an IPO cannot move forward.

FAQs: What is a DRHP (Draft Red Herring Prospectus)?

1. What does DRHP stand for?

DRHP stands for Draft Red Herring Prospectus. It is a preliminary IPO document filed with SEBI that provides detailed company information without including the final issue price or number of shares.

2. Why is it called a Red Herring Prospectus?

It is called “Red Herring” because important details like the issue price and share quantity are intentionally missing in the draft version.

3. Is DRHP mandatory for all IPOs?

Yes. Any company planning to launch an IPO in India must file a DRHP with SEBI for regulatory review before proceeding further.

4. Who prepares the DRHP?

The DRHP is prepared by the company with the help of merchant bankers, legal advisors, auditors, and compliance professionals.

5. Where can I access a company’s DRHP?

DRHPs are available on SEBI’s website, stock exchange portals (NSE/BSE), and the company’s official website.

6. Does a DRHP include the IPO price?

No. The IPO price is disclosed later in the Red Herring Prospectus (RHP), not in the DRHP.

7. What is the difference between DRHP and RHP?

DRHP is a draft document without pricing details. RHP is the final prospectus that includes the issue price, number of shares, and offer structure.

8. How long does SEBI take to review a DRHP?

There is no fixed timeline. The review duration depends on the complexity of the filing and how quickly the company addresses SEBI’s observations.

9. Can SEBI reject a DRHP?

Yes. If the disclosures are misleading, incomplete, or non-compliant, SEBI can delay or stop the IPO process.

10. What information must be disclosed in a DRHP?

The DRHP must disclose financials, business details, risk factors, management information, legal issues, and how the IPO funds will be used.

11. Why are risk factors important in a DRHP?

Risk factors help investors understand potential challenges and uncertainties related to the company’s business and industry.

12. Can a company change its DRHP after filing?

Yes. Companies often revise the DRHP based on SEBI’s observations and market feedback before filing the final RHP.

13. Is DRHP useful for investors?

Yes. Investors use the DRHP to evaluate the company’s financial health, risks, and growth potential before deciding to invest.

14. What happens after the DRHP is approved?

After addressing SEBI’s comments, the company files the RHP with final pricing details and proceeds with the IPO launch.

15. What are the risks of misleading information in a DRHP?

Misleading disclosures can lead to IPO delays, penalties, legal action, and loss of investor trust.