IPO Prospectus
What is an IPO Prospectus?
An IPO prospectus is a formal document made by a firm intending to come into the open market with an Initial Public Offering (IPO). The document contains detailed information regarding the company, such as its finances, business model, risk factors, and the reason behind raising funds. It assists future investors in judging whether or not to invest in the company.
In India, a Draft Red Herring Prospectus (DRHP) has to be filed prior to issuing an IPO. After clearance by SEBI (Securities and Exchange Board of India) and stock exchanges, the final Red Herring Prospectus (RHP) or Final Prospectus is published.
Types of IPO Prospectus
1. Draft Red Herring Prospectus (DRHP)
The Draft Red Herring Prospectus (DRHP), or draft offer document, is the initial prospectus filed by the company to start the IPO process.
DRHP Meaning
DRHP is a preliminary prospectus that includes information like company details, structure of the IPO, management team, financial information, and risks. It does not include the final issue price and the number of shares to be issued.
DRHP Validity
- SEBI issues an observation letter within 1-3 Months of receiving the DRHP.
- This letter remains valid for 12 months.
- The company must respond to SEBI’s queries and proceed with the IPO within this period.
DRHP Filing Process
- The issuing company, along with a Merchant Banker (Lead Manager), files the DRHP with SEBI.
- SEBI reviews and provides comments.
- The company makes necessary modifications and files the Red Herring Prospectus (RHP).
2. Red Herring Prospectus (RHP)
After SEBI clears the DRHP, the firm submits the Red Herring Prospectus (RHP).
RHP Meaning
The RHP is a revised version of the DRHP containing the latest financial data and other regulatory updates. Yet, it does not include the final IPO price or number of shares.
3. Final Prospectus
After finalizing the IPO price and sharing details, the firm submits the Final Prospectus which has final offering details.
4. Abridged Prospectus
An Abridged Prospectus is a shorter version of the IPO prospectus, offered along with the application form for an IPO. It contains key information such as:
- Promoter information
- Price band
- Minimum bid lot
- Business strategy
- Financial summary
IPO Prospectus Requirements & Guidelines
SEBI Guidelines for IPO Prospectus
- The front cover page should be plain white without any images or patterns.
- Should have the Issuer Company's Name, Address, and Contact Details.
- Should have the following sections:
- Risk Factors
- Industry and Business Overview
- Purpose of the Issue
- Regulatory and Statutory Disclosures
IPO Prospectus Template
A typical IPO prospectus has the following major sections:
1. Definitions and Abbreviations
A glossary of definitions of the terms employed in the document, including IPO, DRHP, RHP, Lead Manager, SEBI, etc.
2. Summary of IPO Prospectus
Summary of the company's business, industry, and IPO information.
3. Risk Factors
Spotlights on possible risks associated with business operations, legal proceedings, and market-related factors.
4. Introduction
Financial summary and capital structure.
5. Offer Details
Details of offer size, fresh issue, offer for sale (OFS), and net issue.
6. Objects of the Offer
Describes the use of IPO proceeds, i.e., expansion, repayment of debt, acquisitions, or working capital.
7. Basis of Offer Price
Describes the valuation parameters and how the IPO price is fixed.
8. Company Overview
- Business Model
- Revenue Sources
- Growth Strategies
- Management & Promoters
9. Industry Overview
Includes a market study and the company's position in the industry.
10. Financial Information
- Balance Sheet
- Profit & Loss Statements
- Key Financial Ratios (PE Ratio, Debt-to-Equity, ROE, etc.)
11. Legal and Regulatory Disclosures
Includes information on litigations, legal proceedings, or regulatory actions.
12. Articles of Association (AoA) Provisions
Comprehends significant corporate governance policies.
13. Other Information
Information regarding registrars, lead managers, and issue intermediaries.
DRHP vs RHP: Key Differences
RHP vs Shelf Prospectus for NCDs
For Non-Convertible Debentures (NCDs), companies can use a Shelf Prospectus, which allows multiple offerings under a single prospectus for a certain period.
FAQs on IPO Prospectus
1. What is an IPO Prospectus?
Before issuing shares to the public, companies produce IPO prospectuses that contain extensive financial information along with risk assessments and organizational objectives, and offer specifications.
2. What is the difference between DRHP and RHP?
The main distinction between DRHP and RHP lies in their filing sequence with SEBI.
SEBI receives the Draft Red Herring Prospectus (DRHP) first and then the company distributes the Red Herring Prospectus (RHP) to disclose updated financial statements and offer information.
3. Where can I find an IPO Prospectus?
IPO prospectuses are available for investors to access on SEBI’s website along with NSE/BSE stock exchanges and company websites.
4. What is the purpose of an Abridged Prospectus?
The Abridged Prospectus serves as a condensed version of IPO essentials which allows investors to grasp essential information about the offer efficiently.
5. How long is a DRHP valid?
SEBI authorizes a DRHP through observations that remain effective for twelve months. The period sets a limit for companies to conduct their IPO launch.
6. What is the role of SEBI in IPO Prospectus approval?
SEBI activates two complementary processes prior to approving the IPO Prospectus in the market.
SEBI provides reviews for prospectus examinations to ensure transparency while securing accurate representation of facts which leads to investor protection through its approval process.
