A Draft Red Herring Prospectus (DRHP) can run to 500 pages or more. Most investors skip it entirely and rely on summary articles instead — which is understandable but costly. The DRHP contains information that cannot be found anywhere else: the real use of proceeds, the promoter's track record, related-party transactions, and the risk factors the company itself has flagged. You do not need to read all 500 pages. You need to know which 10 sections matter.
What Is a DRHP?
The Draft Red Herring Prospectus is the primary document a company files with SEBI before launching an IPO. It discloses everything about the company: business, financials, management, risk factors, use of proceeds, and issue details. SEBI reviews it, issues observations (which may require changes), and the company then files the final Red Herring Prospectus (RHP) before the issue opens.
'Draft' because it may change after SEBI's review. 'Red Herring' is a historical term indicating that the price has not yet been finalised (the price band is added in the RHP). The final RHP is the document in effect during the subscription window.
You can find DRHPs and RHPs on SEBI's website (sebi.gov.in → SEBI EDGAR → Draft Offer Documents) and on BSE/NSE filing pages. Most IPO aggregator sites also link to the DRHP for each IPO.
10 Things to Check in Every DRHP
1. Objects of the Issue — Use of Proceeds
This section explains what the company will do with the money raised. Look for two things: how much is a fresh issue (new money for the company) versus how much is an offer for sale (existing shareholders cashing out). In a pure OFS, the company receives zero fresh capital.
- Green flag: Fresh issue funds going to capacity expansion, technology, debt repayment for productive assets, or working capital
- Red flag: Majority OFS with promoters or PE funds selling large stakes — they are exiting, not building
- Red flag: Proceeds going to 'general corporate purposes' without specifics — vague use of funds signals poor planning or opacity
2. Promoter Stake and Post-IPO Dilution
Check the promoter holding before and after the IPO. High promoter holding post-IPO (60%+) indicates skin in the game. A dramatic drop in promoter holding through the OFS suggests promoters are taking money off the table while they still can.
- Green flag: Promoters retaining 50%+ post-IPO, no promoter selling in the issue
- Yellow flag: Promoters reducing from 70% to 30% in a single IPO — significant exit
- Red flag: PE investors with 3–5 year old stakes selling 100% of their holding at IPO
3. Revenue Growth — 3-Year CAGR
The financials section contains restated financial statements for 3 years. Calculate revenue CAGR: (Year 3 Revenue / Year 1 Revenue)^(1/2) - 1. For a growth company, expect 15–30%+ CAGR. Below 10% CAGR for a company claiming 'high growth' in its pitch is a warning sign.
- Also check: revenue quality (recurring vs one-off), whether growth is organic or acquisition-driven, and seasonality
4. Debt-to-Equity Ratio and Interest Coverage
High debt relative to equity is manageable in capital-intensive industries (infrastructure, real estate) but dangerous in consumer or tech companies. Check the debt-to-equity ratio and the interest coverage ratio (EBITDA / interest expense). Interest coverage below 2x means the company struggles to pay interest from operating income.
5. Peer Comparison Table
The DRHP is required to include a peer comparison table showing the company's key metrics (P/E, EV/EBITDA, ROE, margins) alongside listed peers. This is often the most direct valuation anchor available. Check:
- Is the company priced at a premium to all peers? It needs a credible reason (faster growth, higher margins, stronger brand).
- Are the peers chosen comparable, or cherry-picked to make the valuation look reasonable?
6. Risk Factors Section
Risk factors is one of the most-skipped sections in the DRHP — and one of the most valuable. Companies are legally required to disclose material risks. Read the first 10–15 risk factors carefully. Pay special attention to:
- Regulatory risk: 'We are subject to regulatory approvals that may not be granted' — if the business depends on a single licence or government approval, the risk is concentration.
- Customer concentration: 'Our top 5 customers account for X% of revenue' — concentration above 40% in a small number of clients is a business continuity risk.
- Litigation: Pending tax demands, legal cases, or regulatory inquiries are disclosed here. A large undisclosed tax demand can materialise after listing.
- Related-party transactions: Unusually large transactions with promoter-linked entities can indicate fund diversion.
7. Related-Party Transactions (RPTs)
RPTs are disclosed in the financial statements and notes. Look at transactions between the company and promoter-controlled entities. Legitimate RPTs exist (shared services, rent). Suspicious RPTs include: large unsecured loans to promoter entities, purchases at above-market prices from promoter-owned suppliers, or revenues that flow disproportionately through promoter-linked entities.
8. Restated Financial Statements
The 'restated' financials are adjusted to remove the impact of accounting policy changes, making 3 years comparable. Do not rely on the non-restated numbers. Key ratios to compute from restated financials: gross margin trend (expanding or contracting?), net profit margin, ROE (return on equity), and free cash flow (operating cash flow minus capex). A company with rising revenue but falling free cash flow is burning cash at scale.
9. Industry and Market Size Claims
IPO documents often cite third-party industry reports commissioned for the DRHP (sometimes written by the same investment banks managing the IPO). Treat market size projections with scepticism. The important question is not 'is this a large market?' but 'what market share does the company need to justify this valuation, and is that realistic?'
10. DRHP vs Final RHP — Check for Changes
After SEBI's review, the company files the final RHP. Sometimes significant disclosures change between DRHP and RHP: price band revealed, additional risk factors added, use of proceeds modified. If you read the DRHP weeks before the issue, re-check the final RHP for material changes before applying.
How Long Does It Take to Read a DRHP?
A focused read of the 10 sections above — skipping the boilerplate legal text — takes 45–60 minutes for a typical 400-page DRHP. A full read takes 4–6 hours. The 45-minute focused version is sufficient for most retail investment decisions.
Related Reading
- IPO GMP Today: What Is Grey Market Premium and How to Use It — check GMP alongside the DRHP for a complete pre-application picture
- Mainboard vs SME IPO: Key Differences Every Investor Must Know — DRHP requirements and depth differ between mainboard and SME IPOs
- IPO vs Mutual Fund vs FD: Which Is Better? — after reading the DRHP, compare whether this IPO is better than your alternatives
Disclaimer
This article is for informational purposes only and does not constitute financial advice. IPOLyst is not a SEBI-registered investment advisor. The checklist above is a general framework — different companies and sectors require different analytical approaches. Please conduct your own research and consult a financial advisor before investing.