How to Read an IPO Prospectus (DRHP) Before Investing

The Draft Red Herring Prospectus (DRHP) is the most comprehensive document available for any IPO. Filed with SEBI before the IPO opens, it contains everything — financials, business model, risks, promoter background, and how the company plans to use your money. Most retail investors never read it. That's a mistake you can easily fix.

Where to Find the DRHP

DRHPs are publicly available on:

• SEBI's website (sebi.gov.in → DRHP filings)
• NSE and BSE IPO pages
• The lead manager's (investment bank's) website
• The company's official website

Section 1: Objects of the Issue

This tells you why the company is raising money and how it will be used. Watch for:

• Offer for Sale (OFS): Promoters selling their existing shares — no money goes to the company. This is often a red flag.
• Fresh Issue: New shares are issued and proceeds go to the company for growth, debt repayment, etc.

Section 2: Risk Factors

Companies are legally required to disclose all material risks. Read every point. Look especially for:

• Ongoing litigation or regulatory action
• Dependence on a single client (customer concentration risk)
• Heavy debt levels
• Promoter pledging of shares
• History of losses or declining revenues

Section 3: Financial Statements

Three years of audited financials are mandatory. Key metrics to check:

• Revenue growth: Is it consistent? Or a sudden spike pre-IPO?
• PAT (Profit After Tax): Is the company profitable? Trending up?
• Debt-to-Equity ratio: High debt is risky, especially in rate environments
• EBITDA margins: Are margins improving or compressing?
• Cash flow from operations: Profit on paper but negative cash flow is a warning sign

Section 4: Promoter Background

Research the promoters — the people who built and are running the company. Check for any SEBI actions against them, criminal cases, or history of running companies that failed. This information is in the "Promoters and Promoter Group" section.

Section 5: Peer Comparison

The DRHP always includes a peer comparison table showing the company's valuation versus listed competitors. Check whether the IPO price implies a reasonable PE multiple compared to peers. A company listing at 60x PE when peers trade at 20x needs a strong justification.