What is a DRHP?
The Draft Red Herring Prospectus (DRHP) is a document filed by a company with SEBI before launching an IPO. It contains detailed financial and business information about the company. The word "draft" indicates that the final IPO price and number of shares are not yet fixed — hence "red herring." After SEBI reviews and issues observations, the company files the final RHP (Red Herring Prospectus) with actual price band details.
Where Can You Find the DRHP?
DRHPs are publicly available on:
- SEBI's website at sebi.gov.in under the Offer Documents section
- BSE website under IPO filings
- The company's own IPO microsite (usually linked from news articles)
- IPOpulse's DRHP AI Search at /ipo/drhp — where you can ask questions directly about any uploaded DRHP
Key Sections to Read
A DRHP can run 400–700 pages. You don't need to read all of it. Focus on these sections:
- Objects of the Issue: What will the company do with IPO proceeds? Look for specific uses like debt repayment, capex, or working capital. Be cautious if a large portion goes to Offer for Sale (OFS) — that's existing investors cashing out, not growth capital.
- Risk Factors: Usually the longest section. Look for concentration risk (one customer = 50% revenue), regulatory risks, litigation, and related-party transactions.
- Financial Statements: Revenue growth over 3 years, EBITDA margins, PAT trend, debt-to-equity ratio, and return on equity (ROE). Negative cash flow from operations despite profits is a red flag.
- Promoter Background: Who are the promoters? Do they have past SEBI violations, criminal cases, or bankruptcy history?
- Offer Details: Fresh issue vs OFS split. Fresh issue = money goes to company; OFS = money goes to selling shareholders.
Understanding the Offer for Sale (OFS)
An OFS is when existing shareholders (promoters, PE investors, or early employees) sell their shares through the IPO. A large OFS component means the company itself is not raising fresh capital — only existing investors are exiting. While this is not inherently bad (PE funds routinely exit via IPOs), an IPO that is 100% OFS with no fresh issue raises questions about why the company needs to list at all.
Financial Red Flags in a DRHP
- Revenue restated in multiple years (possible accounting adjustment)
- High related-party transactions — loans to promoter entities, purchases from promoter companies at above-market rates
- Contingent liabilities that could crystallize post-listing
- Net cash flow negative despite reported profits (sign of working capital strain)
- Very high accounts receivable relative to revenue (aggressive revenue recognition)
DRHP vs RHP
The RHP is the final document filed after SEBI observations. It includes the price band, lot size, and actual subscription dates. Always read the RHP before applying — DRHPs sometimes have changes incorporated based on SEBI feedback or updated financials.