The draft red herring prospectus is the long document the company files before an IPO. The red herring prospectus is the later version, with SEBI’s process behind it and, when the issue is about to open, a price band. Readers skip both because they are hundreds of pages and the grey-market number is one cell. The document is still the only place that has to describe the business, the risks, the accounts, and where the money goes. You do not need to read it like a lawyer. You need a route that hits the pages that change a decision.
Start at the cover, then the summary
The cover states whether the offer is a fresh issue, an offer for sale, or both, and the number of shares in each. Write those two share counts down. Everything else you read is about one of those piles. The summary that follows is the company’s own highlight reel: what it does, a few financial years, a few claims about market position. Treat it as a table of contents in prose. Every flattering adjective should have a later chapter that either supports it or qualifies it.
Check the timetable if you are reading the RHP rather than the draft. Open, close, allotment, and listing dates belong there. A tracker can lag a revision. The filed document and the exchange notice are the pair that should agree.
Objects of the issue, in rupees
This chapter says what the company will do with fresh-issue money. Repaying identified loans is specific. Building a named plant is specific. “General corporate purposes” is a residual bucket and it is capped. If a large share of the fresh issue is general purposes, you have less information, not more flexibility to admire.
If the offer is mostly an offer for sale, this chapter is short because the company is not receiving most of the money. That is the finding. You are buying from a selling shareholder. Ask why they are selling part of their holding now, and what lock-in still applies to what they keep. The answer is sometimes “a fund’s life is ending”, which is ordinary. It is sometimes “the promoters are cutting hard at the same time the company is raising almost nothing”, which deserves a slower evening.
Risk factors are written by lawyers, and still useful
The first risks are usually the material ones, written in a way that sounds like every other prospectus. Read them anyway, slowly, and mark risks that are specific: one customer above a quarter of revenue, a licence that expires, a promoter guarantee on a loan, a plant that is not yet commissioned, a regulatory enquiry, raw-material prices the company cannot pass on. Skip nothing that names a number. Generic sentences about “competition” and “economic conditions” are the background radiation of the genre. Specific sentences are the company.
Related-party transactions sit nearby in spirit even when they have their own chapter. Private companies often buy, sell, and rent inside the family group. Once listed, those deals need to be on terms you can live with as a minority shareholder. If the prospectus shows large related-party balances and a thin explanation, you do not have a small housekeeping issue. You have a governance issue.
Financials: three questions, not thirty ratios
Take the restated financials and answer three questions.
First, is revenue growing because the company sold more of its actual product, or because it bought another business, changed an accounting policy, or enjoyed one commodity cycle? The management discussion chapter is where the company has to talk about this. Cross-check it against the profit and loss account rather than against the summary.
Second, does profit turn into cash? A company can show profit while receivables and inventory eat the money. Cash flow from operations, next to profit after tax for the same years, is the comparison. A widening gap is a question, not a verdict. It is a question you want before you bid at the top of the band.
Third, what is the debt, and does the fresh issue repay it? A cleaner balance sheet after a genuine repayment is a real use of IPO money. A cleaner balance sheet that is mostly an accounting snapshot before a selling shareholder exits is a different picture. Look at borrowings in the latest year and at the objects chapter together.
Basis for issue price
This section compares the company’s price/earnings ratio and other metrics with listed peers. Companies choose peers that make the band look reasonable. You are allowed to notice a peer that is larger, more profitable, and more liquid. You are also allowed to notice when the comparison uses a single good year. The basis section is the company’s argument that the band is justified. It is not an independent valuation. Read it as a brief, then decide whether the brief survives the risk factors and the cash-flow comparison.
What you can skip on a first pass
Industry essays that run for dozens of pages of market-size tables are context. They are rarely the page that should change your bid. Procedure chapters about ASBA are important when you are applying, and they are the same process described in how to apply. Litigation tables matter when a case is large relative to net worth. Otherwise they can wait for a second pass.
A reading order that fits one evening
Cover and fresh-issue split, objects of the issue, the first twenty risk factors, three years of revenue and profit and operating cash flow, related-party note, basis for issue price. Then, and only then, look at GMP and subscription as mood. If the document fails the evening test — you cannot explain where the money goes or what the one big risk is — you are not ready to approve a UPI mandate, regardless of the premium. The disclaimer is the formal version. The practical version is: the mandate button is patient, and the prospectus is the job.