Red Herring Prospectus: What Changes Between the DRHP and the RHP

A red herring prospectus (RHP) is an offer document that opens a public issue, carrying the company, the offer and a price band but no price. The draft red herring prospectus (DRHP) is the earlier version, filed for review before anything opens. Between the two, an issuer fills in what could not be known and alters what the review or events have moved. Both versions are published at sebi.gov.in.

A household in a small town asks a contractor for a written estimate to repaint the house before a wedding. The estimate comes back on one sheet: the rooms, the surfaces, the grade of paint, the number of coats, the labour, the total at the bottom. Because one wall is shared with the building next door, the estimate has to go to the society committee before any work can start. The committee reads it and sends back questions. Three weeks later a second estimate arrives from the same contractor, headed the same way, laid out in the same order.

Read on its own, the second sheet states what will be done and what it costs. The second sheet does not state that the grade of paint named on the first sheet was a different grade. Nor does it state that a line about the terrace was on the first sheet and is missing from this one. Neither sheet is a record of changes, so neither one announces a change and neither is being sly about it. Each one states what the contractor says on the day it was written. The change exists in exactly one place: the two sheets held next to each other. A household that filed the first sheet away unread will never learn there was one.

The same arrangement runs inside a document many times larger. A company coming to the public files a draft version of its offer document, that draft gets looked at, and a later version is filed which opens the offer. The later version is the current one, so nearly everybody reads it, and that instinct is entirely reasonable. Reading only the later one also discards the most interesting fact available, and that fact sits in neither document.

Both documents, the order they are filed in and the review that sits between them belong to Indian securities regulation. The regulations and the bodies that issue them are listed below with the date each was read, and every requirement, period, portion and timeline attached to them lives in the regulation itself.

One raise carries the whole example. Vindhya Ceramics Private Limited, an invented manufacturer, raised Rs 40,00,00,000 in all, Rs 25,00,00,000 of it in equity and Rs 15,00,00,000 in debentures. Trilokpur Capital Markets Private Limited was its merchant banker, with a team led by Sulekha Bhandari, and Ratnakar Deshpande is the finance director who signed from the issuer side. Its draft ran to 480 printed sides, and 38 differences were later listed between that draft and the later version that opened the offer.

What is a red herring prospectus, and why does it carry that name?

A red herring prospectusThe version of an offer document that opens a public issue to applicants. It carries a price band and no final price. is the offer document that opens a public issue. An applicant applies against it, so anybody who has ever applied for shares in a company coming to the market had this document sitting behind that application whether or not they opened it. The document carries the description of the business, the risk factors, the accounts, the people, the plan for the money, and a price band. A price is the one thing it does not carry.

The name is older than the Indian market and it is not a comment on the truthfulness of anything. The phrase comes from an old printing habit of putting a warning on the cover in red ink to mark a document as not yet final, and it stuck to the offer document that goes out while something is still to come. The name is a status label, not a description of contents: it marks where the document sits in a sequence and says nothing whatever about what is inside it.

The other word worth pinning down early is filingSubmitting a document as the route requires, which is the act that puts it on the public record.. Filing is the act of submitting the document as the route requires, and filing is what puts a version on the public record. A version that has been filed does not stop existing when a newer one arrives. The permanence of a filed version is what makes a comparison possible.

Draft Red Herring Prospectus: what is the earlier version for?

The draft red herring prospectusThe earlier version of the same document, filed before the offer opens to anybody, so that it can be examined first. is the version filed before the offer opens to anybody at all. In shape it is the same document: the same sections in the same order, at close to the same length. The Vindhya Ceramics draft ran to 480 printed sides, and the later version that opened the offer was recognisably the same file to anybody who had read the first one.

The draft has one narrow purpose, and it is worth stating exactly. The draft exists so that the document can be examined before an offer opens rather than after. A reviewThe examination a draft goes through before an offer opens, in which questions can be asked of the issuer. after the money has arrived is not a review, it is a post mortem, and no arrangement of paperwork can undo an offer that has already been subscribed. So the examination goes at the front, and everything else about the order of these documents falls out of that one placement.

For a reader from outside, though, the draft does a second job that nobody designed it to do. The draft is a fixed public record of what the issuer said about itself before it had been asked a single question, and that is what turns it into a baseline rather than merely an old file. Ratnakar Deshpande's team wrote it with care, but they wrote it unprompted. Whatever appears differently in the later version appeared differently after somebody with standing to ask had gone through it.

The baseline has a consequence for the value of a difference. There is no public record of the earlier wording, so a sentence the company rewrote in its own office in March, before anything was filed, is invisible to an outside reader and always will be. A sentence that reads differently between the draft and the later version is a different animal entirely. There is a fixed public record on both sides of it, and something happened in between.

DRHP vs RHP: what is the same, and what is different?

Set the two Vindhya Ceramics documents side by side and the first honest reaction is that almost nothing differs. The reaction is correct, and it is also the good news. The two files are the same document at two moments, so the business reads the same, the risk factors read the same, the people are the same people and the answerability runs to the same parties. A reader who walked the two files row by row found the following.

The sameness is not a disappointment, it is the mechanism: because the overwhelming bulk of the two files is identical, the differences are few, locatable and worth something once found. A comparison of two unrelated documents would produce thousands of differences and mean nothing. A comparison of two versions of one document produced 38, and 38 is a number a person can work through in an afternoon.

Notice the second last row, the one that catches most people. The price is absent in both. A reader who assumed the later version exists in order to add the price has the purpose of the sequence upside down.

Why is the price still absent from the later version?

Two versions of the same document, weeks apart, and neither one prints a price. The absence looks like an omission repeated, and it is not an omission at all. One fact about the calendar is showing up twice.

A panchayat puts a piece of land out to sealed tender. The notice describes the plot completely: the survey number, the area, the access road, the encumbrances, the date the bids will be opened, and a floor below which no bid will be looked at. The price is the output of the tender rather than an input to it, so the notice cannot describe it, and no amount of care in drafting would fix that. Anybody who reads the notice and concludes the panchayat is being cagey about the number has misunderstood what kind of document they are holding.

The Vindhya Ceramics document that opened the offer carried a band of Rs 96 to Rs 101 per share. Inside that band, the price was still to be found. The price came out at Rs 100 per share, and it came out only after the offer had opened and closed. No document filed before that moment could carry it. How the number is arrived at is set out under book building. The absence itself is what has to be understood.

The price is missing from both versions for exactly the same reason, and the reason is a fact about the calendar rather than a decision about disclosure. Once that is held, the third document explains itself, and so does the whole order of the three.

What kinds of change actually happen between the two?

A reader expecting drama will misjudge every line on the list, so it helps to know what sorts of difference a comparison actually throws up before counting anything.

The first sort is a slot being filled. Something was written in the draft on the shared understanding that it would be completed later, and later arrived. The second sort is the calendar doing its work: a figure carried forward to a more recent period, a count of employees restated, a date advanced. The third sort is plain correction: a wording tidied, a cross reference repointed, a total in a table repaired. The fourth sort, and only the fourth, is a statement about the company that now says something else than it said before.

The first three are all one thing wearing three coats. Each is an updateA change that replaces something written on the understanding it would be replaced, such as a figure carried forward to a newer period., meaning a replacement of something that was always going to be replaced. Only the fourth is a substantive changeA change that alters what a document says about the business, its risks or its restrictions, rather than how something is dated, worded or completed..

Most readers have handled a document like this before. A school textbook goes into a second edition, and almost every printed side differs somewhere: the printing date, the price on the back cover, a spelling correction, a photograph replaced because the old one printed badly, a table of figures brought up to the newest year available. One chapter said something that was no longer right, and that chapter was genuinely rewritten. The book never says which chapter that was. A book states what it says now, and it has no reason to do more. Most of what differs between two versions of a document differs because time passed, and only a thin remainder differs because something about the thing being described actually changed.

How do the thirty eight changes reduce to six?

One test does it, and it can be applied by somebody who made none of the changes and knows nobody involved. Take each numbered difference and ask a single question: did this replace something that was always going to be replaced? If yes, it is an update, and it goes to one side. If no, and what moved is what the document says about the business, its risks or its restrictions, it is substantive and it stays. Work down the list once and do not go back.

The reason the test survives contact with an outsider is that it never asks about intention. Sulekha Bhandari's team knew which differences were which because they had made them. Both branches of the question are answerable from the two files alone, so an outside reader has no such knowledge and needs none. Either the difference was a slot waiting to be filled, or it was a statement that now reads differently.

Run it down the Vindhya Ceramics list and 32 of the 38 go to one side. Fourteen were figures brought forward to a later date. Eleven were sections that could not have been completed when the draft was filed and were completed afterwards, and the band of Rs 96 to Rs 101 per share sits in that eleven. Seven were corrections of wording and cross reference. Fourteen and eleven and seven is 32, and 32 with the remaining 6 is 38. The reduction takes under an hour once the numbered list exists.

A price band appearing where there was none feels like the biggest change in the document, so the band is the line most readers want to promote out of the updates. By the test it is an update: it was a slot everybody knew would be filled, and its arrival shows that the calendar advanced rather than that anything about the company moved. A list of thirty eight differences is a chore nobody finishes and a list of six is a set of questions somebody can actually ask, so the reduction is the whole exercise.

The six lines themselves matter less than the count, the test and the reduction, and all three work on any comparison a reader runs.

Why does the comparison hold information that neither document states?

Neither version says that a change was made. Not in a note, not in a margin, not in a summary at the front. Each document states what the issuer says at the moment it was filed. Stating that much is what a document of that kind is for, and the fact of revision is simply not part of what either one is doing.

So the information produced by the comparison is not held anywhere. The information is not held in the later version, it is not held in the draft, and it is not held in any commentary either. Commentary is written off the current version like everything else. The information comes into existence when somebody puts the two files next to each other, and it stops existing again if nobody does.

The revisions an issuer made after somebody with the standing to ask questions had read the document are a fact about the issuer, and they are available to anybody holding both files. A combination like that is rare enough to be worth naming. Most information that is genuinely useful is either expensive, restricted, or so widely distributed that knowing it puts the holder level with everybody rather than ahead. The comparison is free, unrestricted, and almost nobody performs it, for the least glamorous reason imaginable: it takes an afternoon and it is dull.

A version comparisonReading two filings of one document against each other, so that what moved between them becomes visible. is therefore worth understanding as a technique rather than as a fact about one issue. Any document filed more than once has the same property. Two versions, two moments, and a difference that neither version mentions.

What happens to the document after the issue closes?

A third version arrives, and it is simply called the prospectusThe final version, filed after an issue has closed, carrying the price that the issue produced.. The prospectus is filed after the issue has closed, and it carries the price. For Vindhya Ceramics that price was Rs 100 per share, and at Rs 25,00,00,000 of equity that comes to 25,00,000 shares. The arithmetic is the whole of it. Twelve thousand and sixty holders were on the register when the shares were allotted, processed by Suravali Registry Services Private Limited.

Nothing at all happens to the two earlier versions when that third one appears. The earlier versions do not lapse, they are not withdrawn, and they do not stop being public. Prerna Wadekar, who carries the continuing obligations at Vindhya Ceramics from listing day onward, inherited a company whose two earlier filings sit permanently on the record beside everything she will file afterwards.

The earlier versions do not stop existing when a later one is filed, and that single fact is the reason this comparison is still available to a reader who arrives years late. Both files are still there, so somebody studying the company four years after it listed can still run the same afternoon's work.

How are the changes found, without any special access?

Four steps, and not one of them needs anything out of the ordinary. Both filings are public and both are obtained. The two are opened side by side and walked in the same order, section by section, by section name. Pagination shifts between versions, and following the numbering printed on the sheets would make a whole chapter look as though it has moved when nothing has. Every difference found is listed, and the list is numbered. The one test is then applied to each numbered line.

Two things make this go wrong for people who try it, and both are avoidable. The first is deciding along the way. The moment the pass stops at line four to work out what line four means, it slows to a crawl and is abandoned at line nine with nothing to show. Listing comes first and judging second, and the two are best treated as separate sittings. The second is starting with the intention of reading both documents properly. The documents are not being read. Comparing is a different physical activity from reading, and a much faster one.

The exercise costs two public files, a numbered list and an afternoon, and it does not cost a relationship with anybody, a subscription, or permission from a single person. The Vindhya Ceramics comparison was done inside Trilokpur Capital Markets Private Limited by a junior, and there was nothing in the method that a careful outsider could not have repeated.

Where are both documents found, and why is one harder to reach?

Three public routes carry these documents. The regulator publishes them at sebi.gov.in, in the part of the site that holds filings and public documents. The exchanges publish the documents for issues coming to their own platforms, at nseindia.com and at bseindia.com. And the merchant banker typically publishes the documents for the issues it has handled, so Trilokpur Capital Markets Private Limited would carry the Vindhya Ceramics files on its own site.

The wrinkle is that two files are needed rather than one, and the two do not necessarily sit next to each other. A draft is filed at one stage and the later version at another, and sites tend to arrange things by stage. So a reader who finds one version where they expected both often concludes that the other is not available, when what has actually happened is that it is filed under a different heading. Finding one version and not the other is almost always a fact about how a site is arranged rather than a fact about what is public. Try the second route before concluding anything.

What does a reader actually do with the six lines?

Six lines is small enough that it is worth being concrete about what different people do with them. Concrete use is where the technique stops being a curiosity.

A credit officer at a bank, looking at a lending proposal from a company that has recently come to the market, reads the current document for the settled facts and then reads the six lines for something the current document cannot supply: whether the description of the business in front of her is the description the company started with. If a statement about who the customers are moved between versions, that is a question to put in the meeting, and it is a question nobody else in the room has thought to ask.

An equity analyst starting cold on a newly listed company gets a different use out of the same six lines. The six lines become six questions for the first call after listing. The current document is the sensible thing to work off, so everybody else on that call is working off it. The comparison does not make anybody smarter about the company, it just puts six specific questions in the hands of one person in the room and nobody else.

A trainee in a compliance or merchant banking team gets the cheapest education available anywhere in this work. Running one comparison on a completed issue teaches more about what an examination actually does to a document than any amount of reading about examinations. The output is not a description of the process, it is the process's fingerprints.

And a household deciding whether to apply is in the position everybody actually recognises. Nobody in that household is reading 480 printed sides. Six lines takes ten minutes, and they are the six the process itself put pressure on. Settling the question is what they will not do. The six lines are questions, not answers, and whether any issue is worth applying to is a separate matter entirely.

What does reading only the later version cost?

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