Investors tend to make a decision of whether to invest at the time of public issue, or IPO, purely based on the market grapevine. The better alternative, however, is to go through the draft red herring prospectus (DRHP) of the IPO-bound organisation.
Since the DRHP is a bulky document running into hundreds of pages riddled with a vast amount of data, information and description packed into one file, investors must apprise themselves of what to glance through, and what to examine carefully.
Reading between the lines is a skill that needs to be perfected over a period of time, but after following certain tips and tricks, one can train himself to do it as well.
One must follow these tips to ensure that no key information is skipped at the time of scanning a draft red herring prospectus (DRHP) of a company that is set to make its debut on the stock markets:
Summary: It is advisable, at the outset, to go through the summary of the offer document since it gives a synopsis of what the entire offer is all about. Later, one can dig deeper and explore more information on some of the topics.
It talks about the objects of the offer, risk factors, names of related parties and transactions carried out with them.
Past performance: Try to get a sense of the quality of the company in terms of its past performance and its present set up. The IPO-bound companies share a vast amount of information about the company’s past performance to woo the potential investors. This is a good opportunity for investors to make an informed choice.
Risk factors: This is one section which you cannot not go through. It gives the lowdown on different risk factors relating to the company's business such as impact of inflation, impact of contingent liabilities, cyber security breaches, impact of competition on revenues and profits and so on and so forth.
About promoters and dividend policy: Section about the company is very important. It shares details on promoters and their group. A potential investor must study this section carefully to see which companies and strategic investments the group has made and how those businesses are doing.
Besides, one can also go through the dividend policy of the company to get an idea of how much can the investors stand to receive once profits have been declared.
Offer-related information: Another section that one is not supposed to skip is the information related to the offer. It contains terms of the offer, offer structure and procedure given of the offer.
Outstanding litigation: Although almost every company has a number of routine litigations to deal with, but some of the legal challenges are of significant proportions and it is advisable to examine the severity of these litigations and find out whether the court verdicts can adversely impact the organisation's profitability or its very survival in the immediate and medium term.