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Red Herring Prospectus

Red Herring prospectus refers to the preliminary prospectus which is filled by the company with SEC generally with respect to the initial public offering by the company that contains the information of the operation of the company but does not include details of the prices at which securities are issued and their numbers. A disclosure is made in red letters that the company will not attempt to sell the securities prior to the approval of the SEC and hence the name Red Herring’.

By: Priyanka Ray, a 3rd year law student pursuing BBA LLB (Hons.) from Jindal Global Law School, Sonipat.

Red Herring Prospectus is a prospectus, which does not have details of either price or number of shares being offered, or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed.

On the other hand, an issuer can state the issue size and the number of shares is determined later. An RHP for and FPO can be filed with the RoC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.

A draft red herring prospectus (DRHP), or offer document, is the preliminary registration document prepared by merchant bankers for prospective IPO-making companies in the case of book building issues. The document includes information about the company’s business operations, promoters, financials, its standing in the industry it deals in and listed or unlisted peers.

The document clarifies the reason why the company wants to raise money from the public, how the money will be used and risks involved in investing in the company. It does not contain details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares is determined later.

The price cannot be determined until the bidding process is completed. In case of book-built issues, such details are not shown in the red herring prospectus filed with ROC in terms of the provisions of the Companies Act.

The role of the merchant banker, in this case, is to take care of the legal compliance issues and ensure that prospective investors are aware and kept in the loop of public issue.

SEBI reviews the draft document and checks if adequate disclosures are made. It gives its observations to the merchant bankers, who make the required changes and file the final offer document with SEBI, the ROC and stock exchanges. The final document is reviewed, and observations if made, are to be implemented.

References:

[1]  Red Herring Prospectus (RHP) Meaning, Definition, Abbreviation, Chittorgarh.com (2018), https://www.chittorgarh.com/glossary/red-herring-prospectus-(rhp)/58/ (last visited Aug 23, 2020).

[2] What is a Red Herring Prospectus?, Moneycontrol.com, https://www.moneycontrol.com/glossary/ipo/what-is-a-red-herring-prospectus_756.html#:~:text=Red%20Herring%20Prospectus%20is%20a,lower%20price%20bands%20are%20disclosed. (last visited Aug 23, 2020).

[3]  What is draft red herring prospectus?, The Economic Times (2020), https://economictimes.indiatimes.com/markets/ipos/fpos/what-is-draft-red-herring-prospectus/articleshow/75005637.cms?from=mdr (last visited Aug 23, 2020).

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