How to Read a Draft Offer Document, Step by Step

Reading a draft offer document is a procedure rather than an act of endurance. The reading starts with the sections that state what the money pays for and what could go wrong, extracts a fixed set of facts at each stop, compares the draft against any later version, and separates the changes that matter from the ones that do not. The procedure runs to nine steps, taken in the same order every time.

A draft offer documentThe version of an offer document that is filed before an offer opens. of several hundred printed sides does not defeat a reader because it is hard. The document defeats a reader because it has no obvious entry point. Every step below exists to take away one decision, and it is always the same decision: where to look next. Choosing where to look next is the decision people get tired of making, and tiredness in the middle of a long document is what produces the half read impression that everybody in this trade has formed at least once. Follow a fixed order and a document of several hundred sides stops being an ordeal and becomes a list of questions with answers in known places.

The nine steps below are a set of instructions and nothing else, taken in order. How an issue works is set out under public issue types, how a price gets set under book building and the price band, and what each document in a raise is for under the offer document. Every step here either extracts something or compares two things, and no step evaluates anything. Judging what the reading has found is separate work that begins after this procedure has finished.

Vindhya Ceramics Private Limited, an invented unlisted manufacturer, is raising Rs 40,00,00,000 in total: Rs 25,00,00,000 of equity and Rs 15,00,00,000 of debentures. Its draft ran to 480 printed sides. Trilokpur Capital Markets Private Limited is the merchant banker on the raise and Sulekha Bhandari leads its team.

Step one: which version of the document is in hand?

Before the document is opened properly, the reader takes a blank sheet and writes three things at the top of it: the name the filing gives the document, the date it was filed, and where it was obtained. The next stop is the source, to confirm which questions a version of that kind answers and which it leaves for a later filing, and that goes on the same line. Neither fact is taken from memory, and neither is taken from a colleague across the desk. Establishing the version is step one because the version decides which questions the document in front of the reader can answer at all, and finding that out afterwards costs the hours already spent looking for something that was never in there.

Most readers have done this without calling it a step. Somebody hands over a printed syllabus and the first thing checked is the edition. Revising hard from the wrong edition is worse than not revising at all. The Vindhya Ceramics draft ran to 480 sides and carried no price anywhere in it. Sulekha Bhandari's team at Trilokpur Capital Markets Private Limited knew that on the day they filed it. A reader who did not establish the version first can spend a genuinely long afternoon hunting through 480 sides for a number that is not in the building.

Step two: what does the document state the money is for?

Go straight to the objects of the issueThe section setting out what the money raised in an offer is to be applied to. section. Not the front sections, not the letter at the start, not the summary. Down goes every stated use, the amount the document puts against each one, and the total. The wording is copied rather than paraphrased. A paraphrase will be tidier than the original, and the untidiness is often the information. Then that section closes and the reading moves on. The uses are not compared to anything, no decision is taken on whether they add up to a sensible plan, and no view is formed. The second thing read is what the money pays for, and it comes before a single word about the business.

In the Vindhya Ceramics draft, that section sat at sides 90 to 98, nine sides of a 480 side document, and it broke the Rs 25,00,00,000 equity portion into three stated uses: Rs 14,00,00,000 for a second kiln line at the existing works, Rs 7,00,00,000 to repay borrowings, and Rs 4,00,00,000 for general corporate purposes. Nine sides, three lines in the note, and the three add back to Rs 25,00,00,000. The three lines are the whole of step two. A reader starting at side one would have to travel a long way to reach those nine sides, and the nine sides were sitting there the entire time.

The everyday version is the quote from a contractor for work on a house. Nobody reads the covering letter first. The line items come first, then how much of the total is materials and how much is labour, and the three numbers go on the back of an envelope. The rest is read afterwards. Doing it the other way round means reading four sides of terms while the one question in the reader's head stays unanswered.

Step three: which risk factors are marked?

Read every one of the risk factorsThe section of an offer document setting out what the issuer states could go wrong., start to finish, without skipping. Only those that could not have been written about any other company in the country are marked. Everything else is left unmarked. The marked ones are not ranked, not weighed one against another, and not sorted by seriousness. Each marked item goes into the note in the document's own words. Marking is the entire instruction at this step: it separates what could only have been written about this issuer from everything written around it, and nothing else is done with either group.

In the Vindhya Ceramics draft, the risk factors ran from side 31 to side 84, fifty four sides, and carried 61 numbered items. Of those 61, nine could not have been written about any other company, and 52 could have been. Fifty two plus nine is 61, and the nine are what went into the note. The other 52 were read, and read carefully, and then left where they were.

Step four: who is selling, and who is only issuing?

Find the part of the document that sets out the components of the offer, and write one line: which part of it is new shares issued by the company, and which part is existing holders selling shares they already have. If there is an offer for saleA component of an offer in which existing holders sell shares they already have, rather than the company issuing new ones. component, write down whose shares are in it and how many. If there is none, write that there is none. Do not draw any conclusion from either answer. Write the line even when the answer takes one sentence. A note read later by somebody else cannot tell a short answer apart from a step that got skipped.

For Vindhya Ceramics Private Limited the answer was short. The draft showed the whole Rs 25,00,00,000 equity portion as new shares issued by the company, with no existing holder selling anything, so the line in the note read: whole equity portion fresh issue, no offer for sale component, nobody selling down. One sentence, written down after fifteen minutes of looking, and it is now a fact somebody can rely on rather than an assumption somebody made.

Step five: what is recorded from the outstanding proceedings?

Go to the section on outstanding proceedingsLegal and regulatory matters set out in an offer document as unresolved at the time of filing. and record four things: how many matters are set out, who each one is against, what the document states about the status of each, and what the document states about amounts where it states any. Write them down. Then stop. Do not decide whether a matter is serious, do not group them into big and small, and do not form an impression of the company from the pile. Step five extracts and does not evaluate, and holding that line is the single reason the procedure stays usable rather than turning into an argument with oneself in the middle of side 380.

In the Vindhya Ceramics draft, this section ran from side 357 to side 418, sixty two sides, and set out 23 matters: 14 against the company, six against directors, and three against a subsidiary. Fourteen plus six plus three is 23. Ratnakar Deshpande, the finance director, could have said what he thought each one was worth in about four minutes. None of that goes in the note, and what he thinks is not what the document states. Judging those 23 matters is a different exercise altogether, and it begins after this procedure has produced its note.

Step six: what is taken from the financial information?

The financial information is the longest section in most documents, and it is the one where the procedure is easiest to abandon. The instruction is narrow. Down goes which periods are presented, on what basis the document states they are presented, who the document names as having examined them, and where the document states the figures came from. Then the section closes. Not a single ratio is computed, no period is compared against another, nothing is annualised, and no number enters the note that was worked out rather than read. Step six records what is presented, not what it shows, and the difference between those two is the difference between a note anybody can check and a note nobody can.

In the Vindhya Ceramics draft, the financial information ran from side 208 to side 352. The 145 sides between them are the largest single stretch of the 480, and a reader working through the document front to back would still be inside them when their attention gave out. Working the procedure instead, a reader is in and out of those 145 sides with four lines in the note, and those four lines exist by early afternoon rather than not at all.

The household version is the electricity meter. When the bill looks wrong, the first move is to go outside and copy the reading off the meter. Nobody stands in front of it working out what the reading implies about the air conditioner. Copy first, argue later, and the copying takes two minutes precisely because the two were not attempted at once.

Step seven: which restrictions on selling does the document set out?

Every restriction on selling that the document sets out goes into three columns: the person restricted, the holding the restriction attaches to, and the period exactly as the document states it. Each period is copied character for character out of the document. No period is written from memory, none is carried across from another document read last month, and none is rounded to something tidier. Where a restriction is described in words rather than as a period, the words are copied. Every period is copied out of the document in front of the reader. A period written from memory is the one line in the note that will be wrong without looking wrong.

In the Vindhya Ceramics draft, the restrictions on selling ran from side 425 to side 442, eighteen sides near the back, and produced a table of a few rows in the note. Every such period lives inside an instrument somebody can amend, so the periods themselves are read at the source rather than carried across from anywhere else. A note may still carry those periods. Each one was copied out of a document that was open at the time.

Step eight: how are two versions of the same document compared?

If a later version of the document exists, the two go side by side and are walked section by section in the same order as the first reading. Every difference, however small, goes on a numbered list. Nothing is decided about any of them while the listing runs. Stopping to think about what a change means slows the listing to a crawl, and the list then never gets finished. A version comparisonReading two filings of the same document against each other to establish what changed between them. is a mechanical pass with one output, a numbered list. Neither version states what changed, so the comparison is the only way to find out, and it produces information that exists in neither document on its own.

For Vindhya Ceramics Private Limited, comparing the 480 side draft against the later version produced 38 differences. Thirty eight numbered lines, produced by two people with two documents open and no opinions between them. The listing took Sulekha Bhandari's junior most of a day. The numbered list has a property neither document has: it is the only place in the whole exercise where the issuer's own hand can be seen moving.

Step nine: which of the thirty eight changes actually matter?

Take the numbered list and apply one test to each line, and only this test. Ask whether the change replaced something that was always going to be replaced. If it did, mark it an updateA replacement of something written on the understanding that it would be replaced later, such as a figure carried forward to a newer date. and set it aside. If it did not, and the change altered what the document says about the business, its risks or its restrictions, mark it a substantive changeA change to what a document says about the thing it describes, rather than to how something is worded, dated or completed. and keep it. Work down the list once and do not revisit. One test, applied mechanically, is what turns a list of thirty eight lines that nobody will read into a list of six that somebody will.

The reason this test can be applied by a reader from outside is that it does not ask what anybody intended. Sulekha Bhandari's team at Trilokpur Capital Markets Private Limited knew which changes were which because they made them. An outside reader has none of that and needs none of it. The test is answerable from the two documents alone: either the change filled a slot that was waiting to be filled, or it left a statement about the company saying something else.

Run the test down the Vindhya Ceramics list and 32 of the 38 go left. Fourteen were figures brought forward to a later date. Eleven were sections that could not be completed when the draft was filed and were completed afterwards, among them the price band of Rs 96 to Rs 101. Seven were corrections of wording and cross references. Fourteen plus eleven plus seven is 32. Six go right, and those six are the output of the entire procedure. Thirty two plus six is 38, and the reduction took under an hour once the list existed.

The price band is the line worth pausing on, and it is the one most readers want to promote. A band appearing in the later version and not in the draft feels enormous, and by the test it is an update: it was a slot waiting to be filled, and everybody involved knew it would be filled. Six items on a sheet is an output somebody will act on, and thirty eight is a list that gets attached to an email and never opened.

What does the note look like?

The note has five headings and it has the same five every time. What the money is for. The issuer specific risks. Who is selling and who is issuing. What is set out as outstanding. Every restriction on selling. The five headings are filled in as the reading proceeds rather than written up afterwards. A note written up afterwards is written from memory, and memory is what this whole procedure exists to avoid. The shape of the note is fixed so that two documents read months apart produce notes that can be laid beside each other, and that is the only reason a reading done once is worth anything later.

The six substantive changes get filed under those same five headings, and that is when the shape earns itself. For Vindhya Ceramics Private Limited the six landed as one under what the money pays for, two under the issuer specific risks, none under who is selling, two under what is set out as outstanding, and one under the restrictions on selling. One plus two plus none plus two plus one is six. The heading that took nothing is as informative as the ones that took something. Nothing about who was selling moved between the two filings, and that is a fact the reader now holds rather than a gap left to wonder about.

When does the reading stop?

The reading stops when two conditions are both true and not before, and neither of them has anything to do with how much of the document is left. The first is that all five headings in the note are filled in, including any that are filled in with the word none. The second is that every substantive change from step nine is written under one of those five headings. When both are true, the reading is finished, even if a third of the document is still unread. When either is false, it is not finished, even if every side has been turned. The stopping rule is a condition rather than a count of sides, and that is what stops the reading turning into an endurance test with no defined end.

The stopping rule is worth stating plainly because the alternative rule is so tempting. Reading until the document ends feels like the thorough choice, and it is the reason the exercise gets abandoned halfway by people who are perfectly capable of finishing it. A rule that ends when the output is complete gives a finish line visible from the start.

What happens to what the reading found?

The note is handed over as it is. Whoever asked for the reading gets it with the five headings intact, the six substantive changes filed under them, and no covering opinion attached. One line at the top records which version was read, the date it was read, and where it was obtained. The next person can then tell which document the note is a note of. The output of this procedure is a note, not a view, and keeping the two apart is what lets somebody else disagree with the view without having to redo the reading.

The work that comes after the note is different. Somebody takes the note and forms a judgement, and that judgement draws on things the note does not contain. Whether any issue is worth applying to is not a question this procedure answers. Prerna Wadekar, the company secretary at Vindhya Ceramics Private Limited, keeps a note of exactly this shape for the same reason: a note in that shape survives being handed to somebody who was not there.

Who uses this procedure outside a merchant bank?

A lender's credit team uses it and calls it something else. When a borrower is raising and the loan turns on that raise, somebody in the credit team has to read the document, and they have one afternoon rather than one week. The five headings are what they come back with, and the useful part is that the note is checkable: another person can open the same document at the same numbered sides and see the same lines. A note built by a fixed procedure can be checked by somebody who did not do the reading, and a note built by wandering through a document cannot.

A research analyst runs the version comparison and little else. The comparison is the part that produces information nobody has published. Two versions, one numbered list, one test, six lines. An analyst who does that on the day a later version appears has something by lunchtime that nobody who read only the newest filing has at all.

A person with a small holding uses the same five headings too, and there the procedure stops being a specialist skill. If somebody has been sent an offer document and has an evening rather than a week, the evening is better spent on the objects of the issue, the marked risk factors and the restrictions on selling than on the front hundred sides. The note that evening produces is not a decision and it is not meant to be. The note is the set of facts a decision would have to be made from, written in a form that can be shown to somebody else. Deciding what to do with those facts afterwards belongs to whoever holds them.

Vindhya Ceramics Private Limited, Trilokpur Capital Markets Private Limited, Ratnakar Deshpande, Sulekha Bhandari and Prerna Wadekar are invented.
Educational material. Not advice on any investment, tax, budget or market position.