How to Read a DRHP Before Applying to an IPO in India
A DRHP, or Draft Red Herring Prospectus, is the document a company files with SEBI when it wants to go public. It contains the business description, three years of restated financials, the risk factors, what the company plans to do with the money, and how the price has been justified. It does not contain the price band, which is why it is called a draft.
You do not need to read all 600 pages. Five sections carry most of the signal, and they are the ones most IPO commentary skips. Reading them takes about an hour and is the single best defence against applying to a bad issue because a WhatsApp group was excited about it.
Where the DRHP Sits in the IPO Timeline
The document evolves through three versions, each filed at a different stage under the SEBI ICDR Regulations, 2018.
| Document | Filed with | Contains the price | Stage |
|---|---|---|---|
| DRHP | SEBI, and the exchanges | No price band | Draft, open to public comments for 21 days |
| RHP | Registrar of Companies, after SEBI observations | Price band and issue dates | Final offer document for bidding |
| Prospectus | Registrar of Companies, after allotment | Final issue price | Post issue record |
SEBI issuing observations on a DRHP is not an endorsement. The regulator checks disclosure adequacy, not whether the business is good or the price is fair. That sentence is printed in every offer document and ignored by most readers.
The Five Sections That Actually Matter
1. Risk Factors
Start here, not with the business overview. Risk factors are drafted by lawyers to protect the company, which means they are unusually honest. Skip the boilerplate about monsoons and interest rates. Hunt for the specific ones: a single customer contributing 40% of revenue, a pending tax demand, a promoter with a criminal case, a manufacturing licence up for renewal, or negative operating cash flow.
2. Objects of the Issue
This tells you where your money goes. Read the split between the fresh issue and the offer for sale. Fresh issue proceeds go to the company for expansion, debt repayment or working capital. Offer for sale proceeds go to existing shareholders who are selling, and the company receives nothing. An issue that is entirely an offer for sale is not necessarily bad, but you should know you are buying someone’s exit.
3. Basis for Issue Price
ICDR requires the company to justify its pricing with earnings per share, return on net worth, net asset value and a peer comparison of price to earnings multiples. It also requires disclosure of key performance indicators certified by the auditor, and the weighted average cost of acquisition at which the promoters and selling shareholders picked up their shares over the preceding period.
That last one is the most useful number in the entire document. If insiders bought at an average of Rs 180 a share eighteen months ago and the price band is Rs 1,100 to Rs 1,150, the document itself is telling you what has changed and you get to judge whether the business justifies it.
4. Financial Statements and Related Party Transactions
Restated consolidated financials for three years plus a stub period sit near the back. Check revenue growth against cash flow from operations, not just profit. Then read the related party transactions note. Sales to promoter owned entities, rent paid to family members, loans given to group companies and royalty payments are all disclosed here, and they tell you how cleanly the company is run.
5. Outstanding Litigation and Material Developments
Look for the aggregate rupee value of tax and criminal matters against the company, promoters and directors, and compare it with net worth. A Rs 400 crore tax dispute in a company with Rs 500 crore of net worth is a different proposition from the same dispute in a company with Rs 8,000 crore.
A Quick Red Flag Checklist
- Revenue growing much faster than operating cash flow for three straight years.
- Receivable days stretching while revenue climbs.
- Large offer for sale with almost no fresh issue, plus a vague objects section.
- Heavy dependence on a commissioned industry report for market size claims. That report is paid for by the issuer.
- Recent pre IPO share transfers at prices far below the band, with no operational change to explain the jump.
- Promoter group entities in the same line of business, creating a conflict of interest.
- Objects of the issue dominated by “general corporate purposes”, which ICDR caps as a share of the fresh issue.
Where to Get the Document
DRHPs and RHPs are published on the SEBI website under filings, on the NSE and BSE websites, and on the sites of the book running lead managers. Downloading the PDF and using search for “related party”, “contingent liabilities”, “weighted average cost of acquisition” and “customer concentration” gets you to the substance in minutes.
Frequently Asked Questions
Does SEBI approval of a DRHP mean the IPO is safe?
No. SEBI reviews whether the company has disclosed enough for an investor to make an informed decision, and issues observations that the company must address. It does not vet the quality of the business or the fairness of the price.
How long after a DRHP does the IPO usually open?
It varies widely. SEBI observations typically take a few weeks to a few months, and the company then has a window in which to launch, so an issue may open anywhere from a couple of months to nearly a year after filing. Some approved companies never launch at all.
Can I send comments on a DRHP to SEBI?
Yes. The DRHP is made public for at least 21 days specifically to invite comments from the public, and the filing includes an email address for them. This is a real channel, and material comments have led to added disclosures in the past.
What is the difference between a DRHP and an abridged prospectus?
The abridged prospectus is a short summary attached to the application form, covering the issue structure, key risks and financial highlights in a few pages. It is useful for orientation, but the detail you need for a decision is only in the full document.
Why does the DRHP not have a price?
In a book built issue the price band is fixed close to the launch, based on market conditions and feedback from institutional investors. It appears in the RHP, and the final cut off price is set after bidding closes and printed in the prospectus.
Key Takeaways
- A DRHP is the draft offer document filed with SEBI under the ICDR Regulations, without a price band.
- Read risk factors, objects of the issue, basis for issue price, related party transactions and litigation first.
- Fresh issue money reaches the company; offer for sale money goes to selling shareholders.
- The weighted average cost of acquisition disclosure shows what insiders paid, which frames the price band.
- SEBI observations confirm disclosure, never the quality or fair value of the business.
