What is an IPO?
IPO (Initial Public Offering), is a process by which a private company can go public by sale of its stocks to the general public. This can be to raise capital from public investors or to give exit to existing investors. It becomes a public listed company with shares that are traded on a stock exchange.
To bring an IPO, companies hire investment banks to handle the complete process of IPO. Investment bankers set everything in place from making the offer document, doing roadshows to gauge demand, set the IPO price and date, and more.
Now study on IPO 2020, understand the important documents of the IPO by yourself and take an informed decision.
What is a DRHP?
The offer document also called as the Draft red herring prospectus (DRHP) is the most important document which provides all important information about the company and the offer. Company has to note down everything in detail in this document for an investor.
In order to study IPO, one should read the DRHP reports thoroughly. Yes it is huge and has lots of pages and looks extremely dull, but we will break it up for you so you don’t need to read it all. Lets understand how to read the offer document.
Studying the DRHP
When you open a DRHP, with the help of the index you can figure out which parts of the document will be important to read and which can give you maximum information.
You can start by understanding the company business which is in SECTION IV: ABOUT THE COMPANY. It starts with giving points about the position of the industry the company caters in and its competitors to explain the competitive scenario. Then it goes to the details of the company like the products or services it provides, the current order book position, the markets and geographies it caters to and their important clients list. This section also includes the business strategies of the company, which will give you an idea about what the company plans to do in the future. This helps you to understand how well the company is prepared for the future plans.
Post this study, one can check the details about the companies management and promoters in the same section. This helps to understand the experience and knowledge the management has to run a company.
After understanding the company one can move to its financials which tells us how well the company is earning. For this you can check SECTION V: FINANCIAL INFORMATION. This includes the company’s balance sheet and profit and loss statement for approx 3 or more years. One should check whether the company is profitable and that the revenue and Profit is growing over the years or not. If not, then what is the reason behind it, which usually is noted in disclosures. Also one should check on the liabilities or debt on the company which can turn to be a hangover in future.
It’s time to move to the important part of reading about the risks a company is facing or may face in future. This information is provided in SECTION II: RISK FACTORS. This section should be read in detail to check for any red flags.
SECTION VI: LEGAL AND OTHER INFORMATION provides you with the litigations the company is facing.
Finally after the read if you are positive about the company, you can read the details of the issue which is in SECTION III: INTRODUCTION. How many shares are going to be sold? Who is selling it? Which investor is exiting? Or How much will the promoter shareholding go down to? How will the money raised be used? What is the basis for deciding the issue price? All the information is provided here.
Post reading these main topics in the DRHP you will be able to make a call on the IPO. To Subscribe or Avoid? Because it is important to make an informed decision.
Where to find the DRHP or the offer document?
You can access a company’s DRHP on many platforms which includes the company’s website, stock exchange websites like NSE or BSE, the merchant banker website, or the Sebi website.