What is the Difference Between RHP and DRHP ?

When a company in India decides to go public and raise money through an Initial Public Offering (IPO), it must prepare specific documents to comply with regulations set by the Securities and Exchange Board of India (SEBI). Two critical documents in this process are the Red Herring Prospectus (RHP) and the Draft Red Herring Prospectus (DRHP). If you're new to the world of IPOs, these terms might sound confusing, but they play a vital role in helping investors make informed decisions. Curious about what sets them apart? Let’s break it down in simple American English, explore their differences, and keep you hooked with insights into how these documents shape the IPO journey in India.

In this blog, we’ll dive into the definitions, purposes, and key differences between RHP and DRHP, why they matter, and how they fit into the Indian IPO process. By the end, you’ll have a clear understanding of these terms and their significance in the financial world. Let’s get started!

What is a DRHP?

The Draft Red Herring Prospectus (DRHP) is the initial document a company files with SEBI when it plans to launch an IPO. Think of it as the first draft of a book—a detailed plan that outlines the company’s intentions, financial health, and business model. The word “draft” is key here because the DRHP is not final. It’s a preliminary document that SEBI reviews to ensure the company meets regulatory standards before moving forward with the IPO.

The DRHP contains almost all the information an investor needs to know about the company, such as:

• Company Background: Details about the business, its history, and operations.
• Financial Statements: Balance sheets, profit and loss statements, and cash flow details.
• Risk Factors: Potential challenges or risks the company might face.
• IPO Details: The purpose of raising funds, the number of shares to be issued, and how the money will be used.
• Management and Promoters: Information about the company’s leadership and key stakeholders.

However, the DRHP does not include critical details like the final share price or the exact number of shares to be offered. Why? Because these details are still being worked out. The DRHP is like a teaser trailer—it gives you a glimpse of the IPO but keeps some details under wraps to maintain flexibility.

Why is the DRHP Important?

The DRHP serves as a starting point for SEBI’s scrutiny. Once a company submits its DRHP, SEBI reviews it to ensure transparency and compliance with regulations. This step protects investors by ensuring the company provides accurate and sufficient information. The DRHP is also made public, allowing potential investors, analysts, and the media to evaluate the company’s prospects.

Fun fact: The term “red herring” comes from the financial world’s tradition of marking preliminary documents with a red cover to indicate they are not final. This keeps everyone on the same page about the document’s status. Intrigued? Let’s see how the RHP builds on this foundation.

What is an RHP?

The Red Herring Prospectus (RHP) is the next step in the IPO process. It’s a more polished version of the DRHP, filed with SEBI closer to the IPO launch date. Unlike the DRHP, the RHP includes additional details, such as the price band (the range within which the share price will be set) and the final number of shares to be offered. However, it’s still not the final document—hence the “red herring” label, indicating that some details might still change.

The RHP is circulated to potential investors during the IPO marketing phase, often called the “roadshow.” It’s like the final trailer of a movie, giving investors a clearer picture of what they’re signing up for. The RHP builds on the DRHP by incorporating SEBI’s feedback and refining the information to make it more investor-friendly.

Key Contents of the RHP

The RHP includes everything in the DRHP, plus:

• Price Band: The range of prices (e.g., Rs. 100 to Rs. 120 per share) within which investors can bid.
• Issue Size: The total number of shares the company plans to offer.
• IPO Timeline: Key dates, such as when the IPO opens and closes for subscription.
• Underwriting Details: Information about the banks or financial institutions managing the IPO.

The RHP is a crucial tool for investors to make informed decisions. It’s the document they rely on when deciding whether to invest in the IPO and at what price. But why does the RHP come after the DRHP, and how do they differ in practice? Let’s explore that next.

Key Differences Between RHP and DRHP

Now that we’ve covered the basics, let’s dive into the differences between RHP and DRHP to clear up any confusion. These documents may seem similar, but they serve distinct purposes in the IPO process. Here’s a breakdown of the key differences:

1. Stage in the IPO Process

   • DRHP: Filed early in the IPO process, it’s the first document submitted to SEBI for review. It’s a draft, meaning it’s subject to changes based on SEBI’s feedback.
   • RHP: Filed closer to the IPO launch, after SEBI approves the DRHP. It’s a more refined document with finalized details like the price band and issue size.

2. Level of Detail

   • DRHP: Lacks critical details like the share price and exact number of shares. It’s a preliminary overview meant to provide a broad picture.
   • RHP: Includes the price band, issue size, and other specifics, making it more actionable for investors.

3. Purpose

   • DRHP: Acts as a regulatory checkpoint. It allows SEBI to review the company’s plans and ensure compliance before the IPO moves forward.
   • RHP: Serves as a marketing tool for the IPO, shared with investors to help them decide whether to participate.

4. Public Availability

   • DRHP: Made public for transparency, but primarily used by SEBI, analysts, and institutional investors for evaluation.
   • RHP: Widely distributed to retail and institutional investors during the IPO roadshow to attract subscriptions.

5. Finality

   • DRHP: A draft that can undergo significant changes based on SEBI’s feedback or market conditions.
   • RHP: Closer to the final version but still labeled a “red herring” because minor details (like the final share price) may change in the final prospectus.

Curious about how these documents fit into the bigger picture of an IPO? Let’s take a closer look at the IPO process in India to see where RHP and DRHP come into play.

The IPO Process in India: Where Do RHP and DRHP Fit?

To understand the roles of RHP and DRHP, it’s helpful to know the steps involved in an Indian IPO. Here’s a simplified version of the process:

1. Company Decides to Go Public: The company hires investment banks (called “book-running lead managers”) to manage the IPO.
2. Filing the DRHP: The company prepares and submits the DRHP to SEBI, detailing its business and IPO plans. SEBI reviews the document and may suggest changes.
3. SEBI Approval: Once SEBI is satisfied, it approves the DRHP, allowing the company to move forward.
4. Filing the RHP: The company files the RHP with updated details, such as the price band and issue size, and begins marketing the IPO to investors.
5. IPO Launch: The IPO opens for subscription, and investors bid for shares within the price band.
6. Final Prospectus: After the IPO closes, the company files a final prospectus with the finalized share price and other details.
7. Share Allotment and Listing: Shares are allotted to investors, and the company’s stock begins trading on exchanges like the BSE or NSE.

The DRHP kicks off the regulatory process, while the RHP is the bridge between regulatory approval and investor participation. Together, they ensure transparency and protect investors by providing critical information at different stages.

Why Do RHP and DRHP Matter to Investors?

If you’re an investor, you might be wondering why you should care about these documents. Here’s why:

• Transparency: Both RHP and DRHP provide detailed insights into the company’s operations, financials, and risks. This helps you make informed decisions.
• Risk Assessment: The risk factors section in both documents highlights potential challenges, such as market competition or regulatory hurdles.
• Investment Decisions: The RHP’s price band and issue size help you decide how much to invest and whether the IPO aligns with your financial goals.

For example, imagine you’re considering investing in a company’s IPO worth Rs. 500 crore. By reading the DRHP, you learn about the company’s business model and risks. Later, the RHP reveals the price band (say, Rs. 200–Rs. 250 per share), helping you calculate how many shares you can afford. These documents empower you to invest wisely.

Frequently asked questions

1. Can the public access both RHP and DRHP?
   Yes, both documents are publicly available on SEBI’s website, the company’s website, or stock exchange platforms like BSE and NSE.

2. Why is the final share price missing in the RHP?
   The RHP includes a price band, but the final price is determined after the IPO subscription period, based on investor demand.

3. How long does it take to move from DRHP to RHP?
   It depends on SEBI’s review process, but it typically takes a few weeks to a couple of months.

4. Are RHP and DRHP only for IPOs?
   Yes, these documents are specific to IPOs and follow-on public offerings (FPOs) in India.
5. Can the information in the DRHP change significantly by the time the RHP is filed?

Yes, the information in the DRHP can change based on SEBI’s feedback, market conditions, or updates in the company’s plans. For example, the company might revise its financial projections, add more risk factors, or adjust the IPO size. The RHP reflects these updates, making it a more refined and accurate document for investors.

Real-World Example: A Recent IPO

To make things clearer, let’s look at a hypothetical example. Suppose a tech company, TechTrend Ltd., plans to raise Rs. 1,000 crore through an IPO. It files its DRHP with SEBI, outlining its business of developing AI software, financials showing Rs. 200 crore in revenue, and risks like dependency on key clients. SEBI reviews the DRHP and suggests adding more details about the risks. TechTrend revises the document and files the RHP, which includes a price band of Rs. 300–Rs. 350 per share and an issue size of 2 crore shares. Investors use the RHP to decide whether to bid, and the IPO is a success.

This example shows how the DRHP and RHP work together to guide a company from planning to launching an IPO while keeping investors informed.

Conclusion: 

The difference between RHP and DRHP may seem technical, but it’s a crucial part of India’s IPO ecosystem. The DRHP is the starting point, giving SEBI and investors an early look at the company’s plans. The RHP takes it a step further, providing refined details to help investors make smart choices. Together, these documents ensure transparency, protect investors, and make the IPO process smooth and fair.

Whether you’re an investor eyeing the next big IPO or just curious about how companies go public in India, understanding RHP and DRHP gives you a front-row seat to the action. Want to dive deeper into IPOs or explore recent offerings? Check out SEBI’s website or stock exchange platforms for the latest DRHPs and RHPs. What’s the next IPO you’re excited about? Let us know in the comments!