Reading an IPO offer document (DRHP and RHP)

Before an Indian company lists, it publishes an offer document that often runs to several hundred pages. Most investors read the price band, the lot size and a few headlines, and stop there. Yet the document contains almost everything needed to judge the offer: who is selling, what the money is for, how the business has actually performed, what the risks are, and how the price compares with what earlier investors paid.

The habit worth building is to read it in a fixed order, starting with the sections that answer the most important questions, rather than from page one.

Three versions of the same document

Read the RHP once it is out; it updates the DRHP.

The sections to read first

1. The offer. Check how much is a fresh issue (new shares, so the money goes to the company) and how much is an offer for sale (existing shareholders sell, so the money goes to them, not the company). A large offer for sale is not bad in itself, but it means the IPO is mainly an exit.
2. Objects of the offer. What the fresh money will be used for: repaying debt, capital expenditure, acquisitions or general corporate purposes. Vague uses deserve questions.
3. Basis for offer price. The company must justify the price band with key performance indicators (KPIs) and compare itself with listed peers. It must also disclose the weighted average cost of acquisition of shares bought by investors before the IPO, and how the price band compares with it. If pre-IPO investors bought at a fraction of the IPO price shortly before listing, ask why.
4. Restated financial information. Three full financial years, plus any later part-year period. Read the cash flow statement, not only profit, and compare growth in receivables and inventory with growth in revenue.
5. Risk factors. Long, and much of it standard wording. Look for the risks specific to this company: customer concentration, pending approvals, losses in subsidiaries, dependence on related parties.
6. Outstanding litigation. Cases involving the company, its promoters and directors, with the amounts involved.
7. Promoters, group companies and related party transactions. Who controls the company after the IPO, and how much business it does with entities the promoters own.
8. Capital structure. Shareholding before and after the issue, recent share allotments and what the promoters paid for their shares.

Who gets the shares

A company that meets SEBI's profitability track record lists under regulation 6(1): at least 35% of the net offer is reserved for retail individual investors, at least 15% for non-institutional investors and not more than 50% for qualified institutional buyers (QIBs). A company that does not meet it lists under regulation 6(2): at least 75% must go to QIBs, and retail is capped at 10%. Up to 60% of the QIB portion can go to anchor investors, who bid one working day before the issue opens. The "Offer structure" section of each document gives the split for that issue.