How does red herring prospectus help investors in evaluating the attractiveness of an IPO

IPOs are either a fresh issuance of equity shares or an offer for sale (OFS) or a combination of both. The first step by a company is to prepare a draft document including details of the IPO which is then filed at Sebi. The companies then modify changes if directed by the market regulator. And once everything is finalised, the companies file an RHP just days before launching an IPO.

According to Ventura Securities, a careful evaluation of RHP is necessary to decide the attractiveness of an IPO. RHP contains comprehensive information about a company planning to raise money through public markets.

Some of the sections in an RHP are — information about the offer; risk factors; company-specific information; financial information; legal information; and other material information.

Ventura’s note explained that for instance, the section on company-specific information comprises an industry overview. It talks about the company’s strengths and weaknesses and offers glimpses of the policy regulation framework. Moreover, a sub-section on promoters contains in-depth information on their background, experience, skills, and directorships at other companies, if any.

Similarly, the brokerage added that the section on financials gives you information on the company’s key numbers and ratios and also touches upon important factors such as its debt and capital allocation strategies.

However, Ventura also pointed out that the information which may not be added to RHP by a company. These are — the exact number of shares of the fresh issue on offer; issue price; lot size; and specific quota for each category of investors (in terms of a number of shares).

Nonetheless, Ventura’s note said, companies usually state explicitly when and where they will advertise the minimum bid and lot size, once finalised.

As per Prime Database report, in 2022, a total of 40 Indian companies raised around ₹59,412 crore via mainboard of IPOs — which is nearly half of the funds raised to the tune of ₹1,18,723 crore with 63 IPOs in 2021. The IPO market was at an all-time high in 2021. Also, the data revealed that overall public equity fundraising also dropped by 55% to ₹90,995 crore from ₹2,02,048 crore in 2021.

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