What is Red Herring Prospectus?
A red herring prospectus is the preliminary document submitted by a company to SEBI (Securities and Exchange Board of India) when it plans to raise funds from the public by selling its shares. It is usually filed when the company decides to launch its IPO (initial public offer). This document is also called ‘Offer Document’ and it is very useful for investors as it contains the detailed information about the company, its business, financials, future plans and the company’s objective of raising funds through the IPO. The red herring prospectus also informs the investors about how the company is planning to use the money, it will raise through IPO. It includes all the planning details and the financials of the company but due to security reasons, it does not include the price and the number of shares to be issued.
Where the Investors Can Find the Red Herring Prospectus?
The red herring prospectus of a company can be obtained from the official website of SEBI. You can find it in the ‘offer document’ section of the website. This document can also be find at the websites of stock exchanges and select merchant banks.
The issuing company also has to make a public announcement through at least one newspaper after submitting the red herring prospectus to SEBI.
Important Things to Look in a Red Herring Prospectus
Business Description
This section tells about the business of the company. The core operations of the company and the way by which the company operates the business is mentioned in this section. This section is crucial for the investor as it provides the insight to the investors about how their money will be utilized by the company.
Financial Information
This is one of the most important section of the red herring prospectus as it gives the information of the financials of the company such as, turnover, sales, profits, financial statements, etc. If the finances of the company are good, then the chances of receiving future dividends are also bright. The investors can also analyze the risk factor and predict future growth of the company by using the financial data of the company.
Risk Factors
The potential risks and their impact on the business of the company is mentioned in this section. There are some routine risks which are common for all the companies working in the same business environment, some risks are crucial and need to be analyzed very carefully. The risks such as pending legal cases, debts, etc. should be well scrutinized by the investors before making any investment decision in the company.
Use of Proceeds
In this section, the company discloses how it will use the capital raised through IPO. There are different objectives of the companies for the use of capital raised. Some companies raise capital to reduce the debt, some plan to expand the existing business and other companies may use the capital in new projects. It is also crucial to look into the capital structure of the company to see whether any big private investors have invested money in the company!
Industry Overview
The information of the industry in which the company is operating, business environment, performance trends of the industry, etc. are provided in this section. As an investor, it is important for you to have idea of the overview of the industry in which you are investing, the market forces, competitors and the growth prospects of the industry.
Management
In this section the information about the management of the company is provided. If the management of the company is good, then the future prospects of the company will be good. The management is responsible for planning strategies on varied fronts like driving growth, pushing expansions, renovation, marketing etc.
Promotors and Promoter Group
The details of promotors and promotor group can be find in this section.
Capital Structure
The details about the equity share capital of the company as on the date of filing red herring prospectus is given in this section. This incorporates the authorized share capital and issued, subscribed, and paid-up capital before the offer. The information about the equity share capital held by the company is also provided in this section.
Strategy
The details about the business strategies adopted by the company is mentioned in this section. It includes product-level strategies, geographic strategies, market-level strategies, etc. This section is crucial for the investors as the investors must have an idea about how the company is going to make profit in the future.
Benefits of the Red Herring Prospectus
The red herring prospectus is very beneficial for the investors as it is a source of crucial information about the company like financial statements, business strategy, management, capital structure, industry overview, etc. By using the data given in this document, investors can analyze and predict future growth of the company. The details of offer made by the company is also available in this prospectus. The investors may also have an idea about potential risk factors like pending litigations, market risks, excessive debt, etc. by looking into the ‘risk factors’ section of the red herring prospectus.
Conclusion
A red herring prospectus is the preliminary document submitted by a company to SEBI (Securities and Exchange Board of India) when it plans to raise funds from the public by selling its shares. It is usually filed when the company decides to launch its IPO (initial public offer). This document is very useful for investors as it contains the detailed information about the company, its business, financials, future plans and the company’s objective of raising funds through the IPO. The red herring prospectus also informs the investors about how the company is planning to use the money, it will raise through IPO. There are some important sections to be looked in the red herring prospectus like, business description, financial information, management information, promotors, risk factor, industry overview, capital structure, etc. The red herring prospectus is very beneficial for the investors as it is a source of crucial information about the company. The investors may also have an idea about potential risk factors like pending litigations, market risks, excessive debt, etc. by looking into the ‘risk factors’ section of the red herring prospectus.
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