Red Herring Prospectus
Also written RHP · Draft red herring prospectus · DRHP
The offer document used in a book-built public issue, containing every disclosure a prospectus carries except the final price or number of shares, filed with the Registrar before the issue opens.
In plain language
In a book-built issue the price does not exist when the document is written — it is produced by the bidding. So the issuer files a document that is complete in every other respect and leaves that one hole. That is the red herring prospectus.
The Companies Act, 2013 defines it as a prospectus which does not include complete particulars of the quantum or price of the securities included therein. The workbook puts it plainly: it contains all the relevant details except that of price or number of shares being offered, and it is filed with the Registrar of Companies before the issue opens.
The name is old market slang — the cover once carried a warning in red ink that the document was not final.
How it works
Section 32 of the Companies Act, 2013 sets the mechanics:
- A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus, and shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.
- A red herring prospectus carries the same obligations as are applicable to a prospectus. It is not a draft in the sense of being less binding.
- Any variation between the red herring prospectus and the prospectus shall be highlighted as variations in the prospectus.
- Upon the closing of the offer, the prospectus is filed with the Registrar and SEBI, carrying all the details that were absent from the RHP — the total capital raised, whether by way of debt or share capital, and the closing price of the securities.
Where it sits among the documents. Under the ICDR Regulations, "offer document" means a red herring prospectus, prospectus or shelf prospectus, and the information memorandum under section 31 of the Companies Act in the case of a public issue — and a letter of offer in the case of a rights issue. The draft offer document is the version filed with SEBI for observations before it goes to the Registrar of Companies, and it is put in the public domain, including on SEBI's website, for public comment.
The price hole is not unbounded. The RHP carries a price band: a floor price, which is the minimum at which a bid can be made, and a cap. The cap shall be at 105% of the floor price, and cannot be more than 120% of the floor price.
And the application form is never bare. Under section 33, no form of application may be issued for the purchase of securities unless it is accompanied by an abridged prospectus — a memorandum of the salient features of the prospectus as specified by SEBI. The exceptions are narrow: a bona fide invitation to enter into an underwriting agreement, and securities not offered to the public.
A worked example
A consumer-goods company runs a mainboard IPO: fresh issue of Rs 1,100 crore, book-built, price band floor Rs 480, cap Rs 504.
Cap as a multiple of floor = 504 ÷ 480 = 105% ← the minimum band width
Maximum permissible cap = 480 × 120% = Rs 576
A band of Rs 480–504 is the tightest the regulations allow; Rs 480–576 would be the widest. Anything narrower than 105% is not a valid band at all.
| Event | Date | Document |
|---|---|---|
| DRHP filed with SEBI | 12 Jan | Draft offer document, hosted for public comment |
| SEBI observations | within 30 days | — |
| RHP filed with Registrar of Companies | 6 Aug | Price band, no final price |
| Anchor bidding | 10 Aug | One day before issue opening |
| Issue opens | 11 Aug | At least 3 days after RHP filing |
| Issue closes, price discovered at Rs 496 | 13 Aug | — |
| Prospectus filed with RoC and SEBI | after closing | Final price, shares, capital raised |
At the cap the issue would have been Rs 1,100 crore ÷ Rs 504 ≈ 2.18 crore shares. The book clears at Rs 496, so the company actually issues Rs 1,100 crore ÷ Rs 496 ≈ 2.22 crore shares — about 4 lakh more shares than the cap scenario, and that extra dilution is the real cost of the book clearing below the cap. Those final numbers appear for the first time in the prospectus, never in the RHP.
Why NISM asks about it
Chapter 4 (Issue Management – Important Terms) defines the RHP among the offer documents, and Chapter 2 carries the Companies Act section 32 treatment. The heavily tested facts are the 3 days before the opening of the subscription list, the fact that the RHP carries the same obligations as a prospectus, the 105% / 120% price band rule, and the order of filings — DRHP to SEBI, RHP to the Registrar, prospectus to the Registrar and SEBI after closing.
A favourite conceptual question is what the RHP omits: price or number of shares, and nothing else.
Common exam traps
- The RHP is filed with the Registrar of Companies; the draft RHP goes to SEBI. Reversing the two is the single most common error in this chapter.
- Three days before the subscription list opens — not three working days, and not three days before the price band is announced.
- The cap is at least 105% of the floor and at most 120%. 105% is a floor on the band width, not a ceiling.
- An RHP carries the same liability as a prospectus. "Red herring" describes the missing price, not a lower standard of truth.
- The prospectus goes to the Registrar and SEBI after closing, carrying the capital raised and the closing price. The RHP never does.
- Variations must be highlighted as variations in the prospectus — silently correcting an RHP statement is not permitted.
- A fixed-price issue has no RHP at all: the prospectus filed with the Registrar contains the issue price, and demand is known only while the issue is open.
Check yourself
1.Under Section 32 of the Companies Act, 2013, a company issuing a red herring prospectus must file it with the Registrar:
- a)On the day the issue opens
- b)At least 21 days prior to the opening of the issue
- c)Within 3 days after the closing of the offer
- d)At least 3 days prior to the opening of the subscription list and the offer
Show the answer
Answer: (d) At least 3 days prior to the opening of the subscription list and the offer
The workbook: "A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus and shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer."
A red herring prospectus is "a prospectus which does not include complete particulars of the quantum or price of the securities included therein." It "shall carry the same obligations as are applicable to a prospectus", and "any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus."
Why the other options are wrong:
- On the day the issue opens — too late; it must be at least 3 days before.
- 21 days — 21 days appears in the REIT rules (draft offer document made public "for a period of not less than 21 days"), not in Section 32.
- Within 3 days after closing — confuses the RHP with the final prospectus, which is filed "upon the closing of the offer of securities... with the Registrar and SEBI" with details such as the total capital raised.
2.What is a shelf prospectus, and for how long is it valid?
- a)A prospectus omitting the price, valid until the issue closes
- b)A prospectus under which securities may be issued in one or more offers over a period not exceeding one year, without a further prospectus
- c)An abridged memorandum of salient features, valid for three years
- d)A prospectus filed only with SEBI, valid indefinitely
Show the answer
Answer: (b) A prospectus under which securities may be issued in one or more offers over a period not exceeding one year, without a further prospectus
"Shelf Prospectus" means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.
Its validity: any class of companies, as prescribed by SEBI may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities.
And the saving: in respect of a second or subsequent offer issued during the period of validity of shelf prospectus, no further prospectus is required. The purpose is that it will save expenditure and time of the companies in issuing a new prospectus every time they wish to issue securities to the public within a period of one year.
But updates are required. A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company before each later offer, and where an information memorandum is filed... such memorandum together with the shelf prospectus shall be deemed to be a prospectus.
With a withdrawal right for early applicants: the company shall intimate the changes to such applicants. If the applicants express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within fifteen days.
Option A describes a red herring prospectus — a prospectus which does not include complete particulars of the quantum or price of the securities included therein, filed with the Registrar at least 3 days prior to the opening of the subscription list.
Option C describes an abridged prospectus — a memorandum containing such salient features of a prospectus as may be specified by SEBI, which under Section 33 must accompany any application form except in an underwriting invitation or a non-public offer.
And the Section 33 penalty: fifty thousand rupees for each default.
3.An issuer sets a floor price of Rs. 500 in a book built issue. What is the permissible range for the cap price?
- a)Rs. 525 to Rs. 600
- b)Rs. 500 to Rs. 600
- c)Rs. 525 to Rs. 750
- d)Any price the issuer chooses above the floor
Show the answer
Answer: (a) Rs. 525 to Rs. 600
The cap price shall be at 105% of the floor price, but cannot be more than 120% of the floor price.
105% of Rs. 500 = Rs. 525. 120% of Rs. 500 = Rs. 600.
So the band must be at least 5% wide and at most 20% wide.
The workbook footnotes the lower limit: in case of book-built issues, a minimum price band of at least 105% of the floor price shall be applicable for all issues opening on or after SEBI notification in the official gazette.
What the two edges mean: price band indicates the floor price, which is the minimum price at which the bid can be made, and the cap, which is the upper limit of the price at which the bid can be made.
Investors bid inside it: bids are collected from investors at various prices at which they are willing to subscribe to a certain number of shares, which is within the price band specified by the issuer.
And the outcome comes later: the issue price is determined after the bid closure based on the demand generated in the process.
Which is why the price is missing from the offer document at filing. The red herring prospectus... contains all the relevant details except that of price or number of shares being offered.
Option D would be right only for a market with no band rule — and note that the band is not the same thing as differential pricing, which is when one category of investors is offered shares at a price different from the other category, allowing a prescribed discount to retail and certain other categories.
In India the bidding is visible while it happens: Indian Book building process provides for an open book system.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Anchor investorA qualified institutional buyer allotted shares a day before a book-built issue opens — at least Rs 10 crore on the main board or Rs 2 crore on the SME exchange — under a discretionary, locked-in allocation.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Due diligence certificateThe formal certificate a lead manager signs and files with SEBI at prescribed stages of an issue, confirming that it has verified the issuer's disclosures and that the offer document is compliant.
- Offer documentThe document inviting subscription to an issue — a red herring prospectus, prospectus, shelf prospectus or information memorandum in a public issue, and a letter of offer in a rights issue.
- Shelf prospectusA prospectus under Section 31 of the Companies Act, 2013 that covers securities issued in one or more offers over a validity period of up to one year, without a fresh prospectus for each offer.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Designated Stock ExchangeThe one exchange, among those where an issuer seeks listing, that the issuer chooses to anchor the issue — holding the 1% security deposit and overseeing the basis of allotment with the lead manager and registrar.
- SR equity sharesSuperior voting right equity shares issued to promoter-founders of a technology-intensive company — same face value and economics as ordinary shares, but 2 to 10 votes per share.
- Misleading advertisementAn issue advertisement that states the issuer's performance without the necessary qualifying statements, or portrays past performance inaccurately or as if past gains will be repeated in future.
- Dissenting shareholdersShareholders who voted against the resolution for a change in objects, or a variation in the terms of a contract referred to in the prospectus — and who must therefore be offered an exit.
- Promoter lock-inThe rule that promoters' shares cannot be sold for a set time after an IPO — 18 months for the minimum 20 percent contribution, or 3 years if most proceeds fund capital expenditure; 6 months or 1 year for the excess.
- Stabilizing AgentUnder a green shoe option, the merchant banker who uses over-allotment money to buy the newly listed shares when they fall below the issue price — buying only, for 30 days, up to the over-allotment.
- Differential pricingPricing an issue differently for different investor categories — in particular, allotting to retail investors at a discount of not more than 10 percent to the price at which other categories are allotted.
- ProspectusThe offer document a company issues when it raises money from the public. It sets out the company, its promoters, finances, risks, purpose of the issue and terms, so investors can decide.
- Offer for SaleAn offer of securities by existing shareholders — promoters, institutions, the government — to the public through an offer document. The sellers get the money; the company issues no new shares.
- Fixed price issueA public issue in which the company, with its lead manager, sets the issue price in advance and discloses it, so investors know exactly what they will pay when they apply — the alternative to a book built issue.