Red Herring Prospectus: What Changes From the DRHP and the Sections Worth Reading Before You Bid

A red herring prospectus is the document you are actually bidding on when you apply in a book-built IPO. Not the draft that made headlines months earlier, not the one-page summary on your broker app, but this one. Most of us skim it, if we open it at all. That is a mistake, because the red herring prospectus (RHP) is where the company’s final, regulator-vetted story sits, and it is usually only a few days old by the time the issue opens.

This guide walks through what the RHP is, how it differs from the draft version, what it leaves out on purpose, and the handful of sections we think every retail applicant should read before putting money in. If you are new to the whole process, our IPO investing in India guide is a good place to start first.

What a red herring prospectus is, in SEBI’s own words

SEBI’s investor FAQ on primary markets defines it simply. A red herring prospectus is an offer document used in a book-built public issue. It contains all the relevant details except the price or the number of shares being offered, and it is filed with the Registrar of Companies (RoC) before the issue opens.

Read that twice. Everything is in it, except the two things you most want to know: the final price and the final share count. That is not sloppiness. In a book-built issue the price is discovered from bids, so it can’t be printed in advance.

The name comes from the bold red-ink notice that traditionally appeared on the cover of such documents, warning readers that the information is not final and may change. Investopedia’s explainer covers that history, though it describes the US version filed with the SEC, so treat it as background rather than Indian rules.

Three documents, three stages

The same company goes through three offer documents on the way to listing, and people mix them up constantly. SEBI’s FAQ separates them like this:

• Draft offer document (DRHP). Filed with SEBI (or with the stock exchanges for SME issues) so that changes can be specified before it goes to the RoC. It is put in the public domain, on the websites of SEBI, the exchanges, the merchant banker and the company, so the public can comment on it within a specified period.
• Red herring prospectus (RHP). Used in a book-built issue, complete except for price and number of shares, filed with the RoC before the issue opens.
• Prospectus. Has every detail including the price and number of shares. In a book-built issue it is registered with the RoC after the issue closes; in a fixed-price issue it is registered before the issue opens.

We went through the first stage in detail in our piece on what the DRHP tells investors. The short version: the DRHP is the first draft, the RHP is the version after SEBI’s observations, and the final prospectus is the RHP with the blanks filled in.

There is also the abridged prospectus, which SEBI describes as a shortened version of the offer document issued along with the application form, carrying the salient features. Handy, but it is a summary. When the abridged version and the RHP seem to say different things, the RHP is the one to trust.

The DRHP is what the company hoped to say. The RHP is what it was allowed to say after the regulator had its turn.

What usually changes between the DRHP and the RHP

Months can pass between the draft and the red herring, and businesses don’t stand still. So when we compare the two, these are the places we look for movement:

• Financials. The RHP can carry a more recent period than the draft did. Fresh numbers can tell a different story, good or bad, from the ones that were in the news when the DRHP was filed.
• Issue size and mix. The split between the fresh issue (money going into the company) and the offer for sale (money going to selling shareholders) can shift. Our explainer on fresh issue vs offer for sale explains why that split matters.
• Objects of the issue. What the company says it will do with the money can be trimmed, expanded or reworded.
• Risk factors and litigation. New cases, new risks, sometimes risks that quietly drop off.
• Pre-IPO placements. If the company sold shares privately after filing the draft, the updated capital structure is where you would spot it. Our note on pre-IPO placements explains why that matters.

There is no official “track changes” version, sadly. The practical method is to open both PDFs side by side and compare the summary of the offer, the capital structure table and the latest period’s financials. That takes about twenty minutes and is often more revealing than any number of video reviews.

What the red herring prospectus leaves blank, and when the blanks fill in

The RHP may carry a floor price or a price band, but the issuer can also choose to announce it later. SEBI’s FAQ says the floor price or price band must be announced at least two working days before an IPO opens (one working day for a further public offer), in all the newspapers that carried the pre-issue advertisement.

The band itself has guard rails. According to the same FAQ, the spread between the floor and the cap of the price band must be not less than 5% and not more than 20%. If the band is revised, the bidding period is extended by three more days, and the total bidding period can’t run beyond ten working days.

Worked example: reading a price band against the rules

Take a hypothetical company whose floor price is ₹200. These are made-up numbers, purely to show the arithmetic.

• The cap has to be at least 5% above the floor: ₹200 × 1.05 = ₹210.
• The cap can be at most 20% above the floor: ₹200 × 1.20 = ₹240.
• So any band from ₹200–210 up to ₹200–240 is within the rules. A band of ₹200–250 is not.

Now say the RHP shows (again hypothetically) earnings per share of ₹10 for the latest full year. At the floor you would be paying ₹200 ÷ ₹10 = 20 times earnings. At a ₹240 cap, it is ₹240 ÷ ₹10 = 24 times. Same company, same profits, a fifth more expensive depending on where the price lands. Since most retail bids go in at the cut-off, you should assume you are buying at the top of the band and do your valuation from there. Our note on the IPO cut-off price explains why.

SEBI’s FAQ also notes that SEBI plays no role in fixing the price. The issuer decides it with the merchant banker, and the offer document has to disclose the parameters used, such as EPS, the P/E multiple, return on net worth and how those compare with listed peers. That comparison sits in the “basis for issue price” section, which brings us to what to actually read.

The sections of a red herring prospectus worth reading before you bid

An RHP can run to several hundred pages. Nobody expects you to read it cover to cover. SEBI’s own guide to the structure of an offer document lists the main heads, and these are the ones we would prioritise, in this order.

1. Risk factors

SEBI’s FAQ says this is where management gives its view on internal and external risks, that it appears in the initial pages of the document and in the abridged prospectus, and that investors are advised to go through all the risk factors before deciding. Don’t just read the headings. The useful risks are the specific ones: a single customer making up a large share of revenue, a pending tax demand, a licence up for renewal. Generic risks like “competition may increase” tell you nothing.

2. Objects of the issue

Where does the fresh money go? Debt repayment, a new plant, “general corporate purposes”? A large general corporate purposes bucket isn’t automatically bad, but it gives you less to hold management to later. We have a full explainer on reading the objects of the issue.

3. Basis for issue price

This is the company’s own case for its valuation, with ratios and a peer table. Check two things: are the peers genuinely comparable, and are the ratios calculated on the upper end of the band? If the peer set is padded with richer-valued companies from a different line of business, the comparison flatters the issue.

4. Financial statements

SEBI’s guide notes that this section carries the restated financials. Look at three or four years of revenue, operating profit and cash flow from operations together. Profit rising while operating cash flow stays flat or negative is the pattern that deserves a second look.

5. Legal and other information

Outstanding litigation involving the company, its promoters, subsidiaries and group companies sits here, along with material developments since the last balance sheet date, according to SEBI’s description. Count the cases, but pay more attention to the amounts and who the other party is. A tax authority is a different animal from a customer dispute.

6. Capital structure and the offer for sale table

Who is selling, how many shares, and at what average cost they bought. When early investors are exiting at many times their entry price, it isn’t a red flag by itself, but it tells you who benefits most from a high band.

If you only have an hour, spend it on risk factors, objects of the issue and the basis for issue price. Those three answer most of what a retail applicant needs to know.

Timelines you can read straight off the RHP

The RHP also tells you the issue calendar: opening date, closing date, anchor bidding date and the expected dates for allotment, refunds and listing. SEBI’s FAQ puts the bidding window for a book-built public issue at three to seven working days, extendable by three days if the price band is revised. A short window is normal, so plan your ASBA application early rather than on the last afternoon when bank servers get crowded.

The document also shows the reservation split between qualified institutional buyers, non-institutional investors and retail investors, and whether there is an employee or shareholder quota. If you hold shares of a listed parent, the shareholder quota can improve your allotment odds, and the RHP is where the eligibility cut-off date is spelt out.

Where to find the red herring prospectus

The RHP is usually linked from the websites of the stock exchanges and the book-running lead managers once it is filed. SEBI’s public issues filings page is the regulator’s own library of offer documents and is a reliable place to start your search. Always download from an official source; screenshots and “key highlights” circulated on messaging apps are not the document.

A quick checklist before you bid

1. Download the RHP and the DRHP and compare the offer summary and latest financials.
2. Note the price band and work out the valuation at the upper end.
3. Read the top ten risk factors in full, not just the headings.
4. Check the objects of the issue and how much is fresh money versus offer for sale.
5. Scan the litigation section for large amounts and regulators as counterparties.
6. Look at who is selling and their cost of acquisition.
7. Note the closing date and apply a day early.

None of this guarantees a good IPO. It does mean you know what you are buying, which is more than many applicants can say. And once you have read a few RHPs, the patterns start jumping out fast.

Disclaimer: This article is for information and education only and is not investment advice. Please do your own research or consult a SEBI-registered adviser before making any investment decision.