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How to read a DRHP: five things to check first

5 min read · By Manoj Pareek

A Draft Red Herring Prospectus (DRHP) is the document a company files with SEBI before it lists on the stock exchanges. It is long and technical, so most investors never open it. You don’t need to read every page. Reading these five parts, in this order, tells you most of what matters.

1. Why is the company raising money?

Look at the “Objects of the Issue”. Is the money going into the business (new factories, debt repayment, expansion), or is most of it an Offer for Sale, where existing shareholders sell and the company receives nothing? Neither is automatically good or bad, but you should know which it is.

2. Do the restated financials show a steady story?

Check revenue, profit and cash flow over several years. Profit that grows while cash from operations stays weak deserves a closer look.

3. Who are the promoters, and what are they doing?

Read about promoter holding before and after the issue, and any shares pledged. Look at how much of the company they plan to sell.

4. Related-party transactions

If the company does large business with firms owned by its promoters or their relatives, ask whether the terms look fair and whether the amounts are growing.

5. Risk factors and litigation

Companies must list what could go wrong. Skim for repeating themes such as customer concentration, pending cases and regulatory issues, and ask whether the price you are being asked to pay leaves room for these risks.

A simple habit

Write one line for each of the five points. If you cannot explain the business, where the money goes and what the main risks are in five lines, it may be wiser to wait.