2.1 DRHP Preparation and Filing
The Draft Red Herring Prospectus (DRHP) is the foundational document for any IPO. It contains comprehensive disclosures about the company, its business, financials, and risk factors, and is the primary document reviewed by SEBI.
IPO Process Overview
1
Pre-IPO Planning
Appointment of intermediaries, structuring, due diligence
2
DRHP Filing
File with SEBI and stock exchanges
3
SEBI Review
Observations, clarifications, final approval
4
RHP Filing
ROC filing, marketing, roadshows
5
Issue & Listing
Bidding, allotment, listing
Key Intermediaries in IPO
| Intermediary | Role | Regulatory Requirement |
|---|---|---|
| Book Running Lead Manager (BRLM) | Overall management, due diligence, marketing | SEBI registered Category I MB |
| Registrar to Issue (RTI) | Bid processing, allotment, refunds | SEBI registered RTI |
| Legal Counsel | Legal due diligence, documentation | Not SEBI registered but essential |
| Statutory Auditor | Restated financials, comfort letters | ICAI member, peer reviewed |
| Bankers to Issue | Bid collection, ASBA processing | SEBI empaneled |
| Credit Rating Agency | IPO grading (optional now) | SEBI registered CRA |
DRHP Contents (Schedule VIII)
The DRHP must contain the following mandatory sections:
- Cover Page: Issue details, price band (to be filled in RHP), BRLMs, risk factors summary
- Risk Factors: Internal and external risks, ranked by materiality
- Introduction: Summary of industry, business, strengths, strategies, issue details
- About the Company: History, main objects, subsidiaries, key agreements
- Financial Information: Restated financials for 5 years, auditor's report
- Legal and Other Information: Outstanding litigation, material developments
- Offer Information: Terms, procedure, eligibility requirements
- Other Regulatory Disclosures: DRHPs of group companies, expert opinions
DRHP Filing Checklist
- Form: Filed electronically through SEBI Intermediary Portal
- Fees: Filing fees based on issue size
- Copies: Simultaneously filed with stock exchanges
- Documents: Due diligence certificate, tripartite agreements, in-principle approval applications
- Timeline: Must be filed at least 30 days before opening of issue
2.2 SEBI Observations Process
SEBI reviews the DRHP and issues observations within 30 days (extendable). Understanding this process is crucial for managing IPO timelines and ensuring smooth approvals.
SEBI Review Timeline
| Stage | Timeline | Action Required |
|---|---|---|
| DRHP Filing | Day 0 | Filing on SEBI portal with all documents |
| First Round Observations | Day 15-20 | SEBI issues first set of observations |
| Response Submission | Day 25-30 | Issuer/BRLM submits detailed responses |
| Second Round (if any) | Day 35-40 | Additional clarifications |
| Final Observations | Day 45-60 | SEBI issues final observations letter |
| Validity | 12 months | Observations valid for 12 months from issuance |
Common SEBI Observations
Frequently Raised Observations
- Inadequate Risk Disclosure: Risk factors not comprehensive or properly ranked
- Financial Discrepancies: Inconsistencies between restated and audited financials
- Litigation Disclosure: Incomplete disclosure of pending cases
- Related Party Transactions: Inadequate disclosure of RPT terms
- Business Description: Unclear business model or revenue sources
- Object of Issue: Vague or unsupported fund utilization plans
Response Strategy
Best Practices for SEBI Response
- Respond to each observation point-by-point with clear references
- Provide supporting documents as annexures
- Mark-up changes in the DRHP clearly
- Maintain a tracker for all observations and responses
- Escalate complex issues early to legal counsel
2.3 Red Herring Prospectus (RHP)
The Red Herring Prospectus is the DRHP with SEBI observations incorporated and price band disclosed. It is filed with ROC and used for marketing the issue.
DRHP to RHP Transition
Key differences between DRHP and RHP:
| Element | DRHP | RHP |
|---|---|---|
| Price Information | Price band not disclosed | Price band/fixed price disclosed |
| SEBI Observations | Not incorporated | All observations incorporated |
| Filing Authority | SEBI and Stock Exchanges | ROC (Registrar of Companies) |
| Public Availability | Available on SEBI website | Available for public marketing |
| Updates | Subject to SEBI review | Final version for issue |
RHP Filing Process
- SEBI Clearance: Receive final observations letter from SEBI
- Price Band Determination: BRLM and issuer finalize price band based on valuations
- Board/Committee Approval: Approve RHP and price band
- ROC Filing: File RHP with Registrar of Companies
- Stock Exchange Filing: File RHP with stock exchanges for listing approval
- Public Announcement: Issue pre-issue advertisement
Red Herring Prospectus - Why "Red Herring"?
The term comes from US securities practice where preliminary prospectuses were printed with a red legend on the cover stating the document was not complete. In India, the RHP contains all information except final issue price, which is determined through book building.
2.4 Final Prospectus Requirements
The Final Prospectus is filed after price discovery and contains the final issue price and other details that were not available in the RHP.
Final Prospectus Contents
The prospectus must include:
- Final Issue Price: Determined through book building process
- Basis of Allotment: Category-wise allocation basis
- Anchor Investor Details: Names and allocation amounts
- Total Subscription: Category-wise subscription numbers
- Underwriters Details: If any underwriting arrangements
Filing Timeline
Post-Issue Timeline
- T (Issue Closes): Last day of bidding
- T+1: Anchor lock-in begins (30 days from allotment)
- T+3: Basis of allotment finalized
- T+4: Refunds initiated, shares credited
- T+6: Listing and trading commences
Note: T+6 listing timeline is mandatory under current SEBI guidelines (reduced from T+12).
2.5 Material Disclosures
Material disclosures form the heart of investor protection in securities law. Understanding what constitutes "material" information is critical for compliance.
Categories of Material Disclosures
| Category | Specific Disclosures Required |
|---|---|
| Financial | Revenue concentration, related party transactions, contingent liabilities, off-balance sheet arrangements |
| Legal | Pending litigation above threshold, regulatory actions, tax disputes |
| Business | Key customer/supplier dependence, technology risks, competition |
| Management | Key managerial personnel changes, conflicts of interest, compensation |
| Promoter | Promoter background, other business interests, shareholding pattern |
| Group Companies | Common controls, related party nature, past defaults |
Materiality Threshold
Determining Materiality
While SEBI does not prescribe a specific percentage threshold, general practice considers information material if:
- It could influence investment decisions of a reasonable investor
- Financial impact exceeds 1% of revenue/net worth
- It relates to regulatory compliance or legal risks
- It involves key management or promoter changes
"In case of doubt about materiality, the benefit should go to disclosure rather than non-disclosure. The principle of caveat emptor does not apply to securities markets." SEBI Guidance Note on Offer Documents
Consequences of Inadequate Disclosure
Regulatory Consequences
- SEBI Action: Show cause notices, penalties up to Rs. 25 crore
- Criminal Liability: Prosecution under SEBI Act Section 24
- Civil Liability: Investor claims for misrepresentation
- Reputational: Market credibility loss, future fundraising impact
- Personal Liability: Directors and KMPs personally liable
Key Takeaways
- DRHP is the foundational document filed with SEBI containing all disclosures except price
- SEBI review typically takes 30-60 days with multiple rounds of observations
- RHP is filed with ROC after incorporating SEBI observations and includes price band
- Final prospectus contains issue price and basis of allotment post book building
- Material disclosure is key - when in doubt, disclose
- T+6 listing timeline is now mandatory