Learn 6 guiding steps for DRHP in IPO filing for beginners and retail investors

6 guiding steps in DRHP for beginners

“6 guiding steps in DRHP for beginners and retail investors” is an article aimed to educate retail investors and beginners in the stock market. DRHP documents are always associated with IPO. Understanding the document is very interesting for IPO investors.

In simple terms “DRHP meaning in share market” is a draft red herring prospectus. But then, what kind of information does DRHP document contains on? Is it useful for stock market beginners or retail investors to read and understand the DRHP document? This article will help you to understand the DRHP filing and the importance of DRHP in IPO filing.

DRHP or draft red herring prospectus is a document that each company has to file with market regulator SEBI before the company goes for Initial Public Offering (IPO). It is also known as an offer document. The document is prepared by the merchant bankers or lead managers of the IPO issuer company. This is a preliminary registration document for companies looking to float an IPO for book-building issues.

DRHP is very important for promoters as it includes important information about the company’s financials, business operations, the company’s objective for raising funds by filing IPOs, its promoters, and listed or unlisted peers. The document also describes the visibility of the utilization of the money raised through IPO along with the probable risks for investors.

DRHP in IPO filing Vs RHP in IPO filing

DRHP is the initial document filed with SEBI. That is the reason it is called a draft. On the other hand, RHP, or the red herring prospectus is the updated version of DRHP which contains IPO dates, IPO price, and updated financial data. RHP document files with SEBI as a final document before the company opens the subscription date.

As the current IPO process, the issuer company has to make public both DRHP in IPO filing and RHP. Bot the documents available on the SEBI site for the public to comment on. However, SEBI is now mulling over confidential IPO filing where the initial document may not be available to the public for comments.

RHP documents will be available to the public just before the subscription time. However, confidential IPO filing may be an option for issuer companies. The final policy is yet to be announced by SEBI. Both draft red herring prospectus (DRHP) and red herring prospectus (RHP) are associated with Initial Public Offerings (IPO).

How does DRHP help beginners or retail investors?

Understanding DRHP’s meaning in the share market is most important for retail investors and beginners. The DRHP is the most important document for retail investors and stock market beginners interested in investing in IPOs. Investors must read through the document to get all of the information about the company to make an informed investment decision.

A typical DRHP document can range anywhere between 300 to 500 pages. This may not be practical to read through the entire document. However, you need to understand the significance of DRHP in IPO filing. Therefore, we endeavor to share a detailed analysis of the companies that are coming up with IPOs so that you can take an accurate and informed decision before investing in that IPO.

However, if a retail investor or a beginner in the stock market wants to review the DRHP document, make sure to read through all of the sections listed above that are mentioned below. Since the document can tell you a lot about the environment that the company is operating in, make sure to analyze the below points in the document before investing in the IPO.

6 guiding steps in DRHP for beginners

Information about Business Overview

DRHP helps in understanding the description of the business of the IPO issuer company. The retail investor needs to understand the company’s core operations available in section on information about business overview. DRHP shares information about the company below.

  • Business description about the company – headquarters, history of company establishment, etc.
  • About its products or services – product portfolio or services it offers to the consumers
  • Geographical presence – where the company operates currently both locally and globally, its manufacturing facilities.
  • Performance of its product/ service segments over the years.
  • Company’s strengths and weaknesses.

Company insights for Investment and Financial information

Out of the 6 guiding steps in DRHP for beginners, the financial information and strategic insights on the company are also most important for the retail investor to understand the IPO. DRHP document provides information about the company.

  • DRHP document provides the company’s financial reports about the assets and liabilities.
  • Detailed borrowings and how the company is planning to reduce debt. The net debt to equity ratio is the most important parameter to understand the company.
  • Revenue from the operation, Profit after tax, EBITDA margin, and earnings per share – these parameters are most important to understanding the position of the company.
  • Return on capital and return on equity along with Net Asset Value or return on asset tells us about the returns that we can expect from the company if invested

Understanding the risk factors

Risks are a vital part of any business. This is one of the most important steps in 6 guiding steps in DRHP for beginners’ factors have the potential to impact the success of the business.

  • The most important risk factor is to scrutinize the number of pending legal cases against the company. Are there any major legal cases pending against the promoters of the company?
  • Who are the competitors of the company – are they local players – listed on stock exchanges and can they challenge the company in terms of products and services
  • Learn about the customers, and how the company is earning its revenue. Is the company depending too much on a few customers or a few geographies? Any problem with these geographies or any clients will have an impact on the company’s business.

Usage of Net Proceeds from the IPO

The most important factor is understanding how the company will utilize the net proceeds from the IPO. There are many reasons why companies announce IPOs. A retail investor must know what the company intends to do with the capital it raises through the IPO.

  • The company may come up only with an offer for sale (OFS). In that case, the company will not receive any amount for its growth. The net proceeds will go to the promoters who are selling their stake.
  • In case of a fresh issue of IPO, we need to understand why the company is selling its stake in the market.
  • Is it only to reduce its debt or purchase new assets or meet its working capital needs?
  • The most important part here is to understand if the company is utilizing the proceeds to acquire a new company, expand its business, or launch new products. This would help the company to grow further and help us to understand the strategy of the company.
  • It is also necessary to check the capital structure of the company to see if any big private investors have put money into the company and want to exit.

Industry overview or uses of business research on the industry

DRHP carries information about the position of the company relative to its competitors in the industry it belongs to. The retail investor needs to understand the various business and economic variables at play, the demand and supply mechanism, and the prospects. This section gives a broader picture or top-down approach of the company from the B2B research perspective. This step has a significant impact among the 6 guiding steps in DRHP for beginners.

Knowledge about the promoters and key management

It is necessary to understand who the promoters are as well as the management of the company. Do they have enough experience and qualifications to run the business in the long term? The company’s management is responsible for planning strategies and driving growth. Understanding their personality and thought process is important for a long-term investment. This includes information about the legal cases pending against them or any fraud they have been involved in in the past.

There is strong importance of DRHP document in IPO filing. DRHP is one of the most important documents to understand before applying for any IPO. The company usually submits this document with SEBI much before the real initiation of the IPO. This is available in the public domain. Hence, retail investors or beginners have enough time to read and understand the document before investing in the IPO of that company. Along with this, “RHP document” is also important to understand the IPO pricing. These are the most important documents to understand the company insights for Investment. The above factors will tell us how does DRHP help beginners or retail investors.

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We endeavor to help you to understand different aspects of a company before you invest in the company’s IPO. To know more information about business overview of each company, here are some suggested readings on company insights BIBA Fashion Limited IPOSSKL IPOMankind Pharma IPOUpcoming IPOs ReviewIPO Companies.