What are RHP and DRHP? The Difference Between Them 

An IPO (Initial Public Offering) is one of the go-to investment channels for many investors in today’s investment scenario. IPOs offer many advantages, not least of which is the freedom to invest in a potentially expanding company that may likely see some returns in the future. Companies regularly raise capital and go in for public listing through an IPO, especially when they want to grow their operations and evolve. 

While investment in an IPO may be viewed as a potentially positive way to invest, investors must do their due diligence research into companies issuing IPOs. The Indian market regulator, the Securities and Exchange Board of India (SEBI) has mandated that companies issuing IPOs are required to provide investors with a document, the prospectus, filing this with SEBI first. Such a document protects the interests of investors by offering detailed information about the company floating an IPO. Thus, the document arms the investor with information to make an informed decision to invest in an IPO. The document undergoes two stages, and in each stage, takes on a different name: the Draft Red Herring Prospectus (DRHP) and the Red Herring Prospectus (RHP). As an investor, you should know what each of these entails. Read on to learn more.  

What is DRHP? 

In India, if any company wishes to issue an IPO, they must file a document, the prospectus, with SEBI. This document contains details of the company and acts as a guide for investors who wish to subscribe to an IPO of the said company and invest in its stock. The first time such a document is issued by a company that plans an IPO, it constitutes a preliminary or basic document and is known as the Draft Red Herring Prospectus (DRHP). It is filed with the Securities and Exchange Board of India, and this filing occurs before the company launches the IPO. 

Now, you may want to know what the DRHP contains. Simply put, the DRHP is the first informative document that a company floating an IPO has to submit to SEBI and it undergoes revisions till it becomes the final document, the RHP. Coming back to the DRHP, the document contains information about the said company issuing an IPO concerning certain disclosure norms and investor safeguard requirements as regulated by SEBI. On the side of SEBI, the DRHP must be reviewed and scrutinised by SEBI so that market integrity, investor interests, and regulatory and compliance standards are adhered to. In its evaluation of the DRHP, SEBI verifies all the information in the document and gives the company concerned a final nod of approval to make a draft of the RHP, or Red Herring Prospectus, containing more details of the company and the IPO itself. 

What is RHP? 

More or less, the RHP is an amendment to the DRHP. The RHP is also filed with SEBI according to certain regulatory and compliance norms and has to be approved by the chief regulatory body. The “red herring” term reflects the disclaimer that is printed in red ink on the document’s cover. While undergoing the process of issuing an IPO, and establishing the RHP, the disclaimer typically states that any information in the document may be subject to modification and change. It also means that the information in the RHP may be inaccurate and incomplete. 

An updated version of the DRHP, the RHP gives many details of the company to investors, not to mention technical information regarding the IPO itself. Details and information like a company’s industry overview, start and end IPO dates, size of the issue, methods of investor allocation, and more are provided. 

DRHP and RHP: What is the difference?  

Knowing the difference between the RHP vs DRHP is paramount to understanding why you should invest in a said IPO. A significant difference between an RHP and a DRHP stems from their timing. A Draft Red Herring Prospectus is given to SEBI before the commencement of an IPO. After SEBI’s approval is confirmed, the Red Herring Prospectus is submitted to potential IPO investors. The key differences between the RHP and the DRHP are mentioned in the table below for you to get a clear picture: 

What are the requirements of an IPO prospectus? 

The key requirements of a prospectus, as regulated by the norms established by the Securities and Exchange Board of India, are as follows: 

• All relevant company details must be recorded, such as the name, address, contact information, issue registrar, and information about its leadership team.
• Details of the company’s prospective IPO issue must be included, including its purpose, size, price, and more. 
• Certain potential risk variables must be mentioned.
• The company’s business model, industry position, market opportunity, and strategies for further growth must be included. 
• A detailed description of the company’s management and financial operations must be disclosed. 
• Other details and information such as taxation details, market conditions, industry analysis, etc, should be in the RHP and the DRHP. 

Conclusion 

While IPO investment is a potentially positive way to diversify your financial portfolio, the RHP is an important document for investors to gain an in-depth understanding of any company issuing an IPO. putting the investor first, SEBI has mandated that every IPO must achieve approval of its prospectus before it is issued to prospective investors. Operating within the regulatory standards created by SEBI, the prospectus of any IPO must contain as accurate information as possible for the benefit of the investor. This aids investors in making informed decisions about investments and those that are based on their financial goals and risk appetite.