All about Red Herring Prospectus (RHP)

26 Apr 2021  Read 1507 Views

Are you one of those who google the review when a company launches an IPO? Don't you want to become Aatmanirbhar? If yes, then you should analyze the prospectus of the company rather than searching on the internet.

But don't know how to analyze this 400-page document? Worry not. We got you covered. In this article, you will know the details to look out for in an RHP.

What is RHP?

It is a document which the company issues while going public to give all the required info to the potential investors and other stakeholders. It is present on the website of SEBI, stock exchanges, and companies.

What's more, the company is also required to announce publicly through a newspaper advertisement. Some companies may also advertise on business channels to create awareness.

Here are the crucial points which you should look out for in an RHP

1. Industry and Business Overview

While reading an RHP, it is the first thing that comes into the picture. It is the best section to give you knowledge about the sector and macroeconomic conditions prevailing in the economy. It also gives you industry-specific knowledge, which becomes the base of your fundamental analysis. So, don't forget to check out this section if you want to invest fundamentally.

2. Strategies

This section presents the future of the company. It depicts the company's strategies regarding products and markets. It helps in analyzing the future potential of the company and making a sound decision. After all, listing gains are temporary. But long-term investing is permanent. So, you have to look at growth prospects.

3. Strengths

The prospectus also mentions the external and internal strengths over its competitors. It's like the company is answering why you should invest in them. It is a good sign if a company has more competitive strengths over its peers. It ensures growth potential in the future and sustainability of the business.

4. Operations

Knowing about the future is exciting. But the future is uncertain. Not even the astrologers could have expected such a pandemic in 2020. That is why it is essential to know about the present.

The Operations section gives us insights into the policies and systems the company follows. It helps in understanding the business of the company in detail.

5. History

It will be unwise for a company to go public in its initial years of operation. How can they expect people to invest when they don't even have the financial data to estimate the intrinsic value? That is why the company launches an IPO after surviving in the industry and generating profits. So, it becomes necessary to know the history of the company to analyze the past growth.

6. Regulation and Policies

India is the land of laws, with the world's longest constitution and highest number of regulations. So, it becomes necessary to know the laws and regulations applicable to the company, which this section states. You won't prefer to invest in a company that breaches the law, will you?

7. Management

This section gives various details about the Board of Directors like their names, tenure, Director Identification Number (DIN), etc. It also contains the remuneration structure and committees.

8. Promoters and Promoter Group

Promoters are the first to get involved in the company. So, it's only natural that they also get a place in the RHP of the company. You can use this section to understand the (unsaid) promoters' version of the company's growth potential.

9. Dividend Policy

The dividend is a vital source of passive income for investors. So, it's necessary to check the dividend policy and the past trends regarding the same. Else, you may have to regret investing in a growth stock for a dividend.

10. Risk Factors

For Scam 1992 fans, this section is their love (literally :). But don't get too emotionally attached, and analyze the risks rationally before investing in the company. As you know, "Investing in shares are subject to market risks. Read all related documents carefully."

11. Capital Structure

If you think that this section gives details regarding the equity and debt in the company, then you are partially wrong. You have to determine it yourself, through financial statements. This section gives info only about the equity share capital of the company. It also contains a long list of the history of shares held.

12. Details of the Offer

As the name suggests, it contains the details of IPO, such as the number of shares issued, the break-up of shares allotted to different categories of investors, etc.

13. Objects of the Offer

This section tells you how the company will utilize its funds raised via IPO. It helps in knowing the company's goal, i.e., whether it focuses on expansion, survival, or other things.

14. Financial Information

Tell us honestly, this is the first section you visit in RHP, isn't it? It's not your fault. Money is the priority for most people. Also, this section is used for the financial modelling of the company. It helps in knowing the fair value of the company. Anyways, it contains the financial statements of the company. It includes Statement of Profit and Loss, Balance Sheet, Cash Flow Statement, and Notes to Accounts.

15. Legal Information

This section gives insights into outstanding litigations against the company and the directors, which may be criminal, civil, and tax-related. It is better to avoid the company with significant litigation, as it may hinder their business.

16. Offer Information

It contains all the relevant details about the IPO, such as the offer price, vital dates, and the procedure to apply in the IPO. So, don't forget to read this section to understand the minute details about the offer.

17. Basis for Offer Price

Did you know how a company decides the offer price of shares? If not, don't worry. The company assumes the same. That is why it also mentions the basis to determine the offer price. It may consider EPS, P/E Ratio of the industry, Return on Net Worth, and other ratios. After all, it's not an easy task to do that. That's why companies follow the book building process to determine the offer price.

Summing Up

Red Herring Prospectus contains a lot of details about the company and the IPO. So you can analyze the company on your own, in place of searching it out all over the internet. They say you can learn a lot about the company, industry and the economy as a whole from the RHP and Annual reports of the company, and that's actually true.

In the end, remember that research gives you knowledge. And knowledge is power.

About the Author: Prasuk Jain | 37 Post(s)

Prasuk is an inquisitive and tenacious person with a mix of enthusiasm and a positive attitude, currently pursuing CA. 

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