Last Updated on March 15, 2024 by ethinos
Initial Public Offering or IPO is the process by which a private company becomes public. Through the process, a private company raises funds from the public in exchange for their equity. IPO is not an easy process because there are various restrictions and rules set by regulatory bodies and exchanges to get permission for public issues. Therefore, it is a very complex process and may take months to complete.
In case you are thinking of investing in an IPO, it is advisable to check all information about a company by reading its IPO prospectus. This is a document that any company filing for an IPO application needs to draft. Here are the things you should know about this document.
Table of Content
What is an IPO prospectus?
IPO prospectus is one of the most important legal documents in which a company shares all the information about it. It helps you a lot to decide if you should invest in a company or not. It includes various details of a company going public, including its strengths, weaknesses, strategies and financial data.
When a company applies for a public offering, it has to file a Draft Red Herring Prospectus (DRHP) with SEBI and stock exchanges. A company has to prepare their offer document as per the guidelines set by SEBI.
Stock exchanges and SEBI review every IPO prospectus to make sure that the company is not hiding any information from investors. SEBI can return it to the company if any changes are required. However, they can reject a DRHP if they decide not to allow a company for public issues. After getting approval from the authorities, the issuing company files a Red Herring Prospectus (RHP) and a final prospectus.
What does an IPO prospectus contain?
Usually, an offer document is a document containing all the necessary information about a company. However, these are some most important chapters a company includes in their offer document:
- Historical financial performance and its current financial condition
- Business model, overview, and strategy of the company
- Strengths and risks of their business
- Number of shares put on offer, price range, selling shareholders, usage of funds, etc.
- About the regulatory environment in which the company runs
- Information about the board of directors and management team
- Any upcoming market opportunity for the company
- Description of the peer companies or competitors and comparisons
In an IPO prospectus, a company mentions all the intermediaries including their name, address, contact details, etc.
Why Is an IPO Prospectus Important?
The actual importance varies between the user of the document:
SEBI or Stock Exchanges:
SEBI has to check if a company maintains all regulatory requirements as prescribed. It also checks if all the information is transparent to the investors. Stock exchanges and SEBI use this document to check these things before giving approvals for public listing. Upon getting any discrepancy, they can reject an IPO application.
Investors:
IPO prospectus is the only way to know about a private company which is going public for the first time. You can use this document to do your research and it is easier for you to know every unknown fact about a company before investing in its IPO.
Issuer Company:
A company uses this document to market its issue among institutional investors, HNIs and retail investors to attract attention. After showing a well-structured offer document, a company can attract more investors to subscribe to their issue. This is very important to the issuer to get a better valuation of post-issue.
Additional Read: IPO Process
Tips to Read Prospectus Fine Print
These are some tips you must follow while reading an offer document of any public issue:
Checking the Industry:
It is very important to know the industry where a company mainly operates and assess its market share and competitive edge. You have to understand the sector and its future opportunities to make a good investment decision.
Company Strengths and Risks Involved:
Every company has its strengths and weaknesses. You have to compare the risks and strengths of a company before making a final decision.
For example– A company makes EV chargers, which is a notable strength due to the growing adoption of renewable energy across the world. However, you see its main risk is that it is dependent on global suppliers for raw materials and they do not have alternative arrangements. So, any mismatch between demand and supply of raw materials can badly affect this company’s business model.
Company Financials:
Company financials are one of the most important parts that you must analyse from an IPO prospectus to know if the business is profitable or not. A company shows its sales, profit, net assets, liabilities, expenses, EPS, revenue, etc., of the last three fiscal years.
If a loss-making company offers an IPO, it is better to avoid it and you may take an entry post-issue once it becomes profitable.
Purpose of the Issue:
As an investor, you need to know the purpose of an issue before investing your money. For a fresh issue, check how the company is going to invest its raised capital. You may not want to invest in a company if its IPO purpose is not clear to you.
Through IPO, private investors try to book their profits by selling their shares to public investors. You should compare the share price and valuation with other peer companies to check the fairness of an issue.
If a company is overpriced and there are better competitors present with a lower valuation, it is better to avoid the IPO. Overpriced stocks can fall anytime until and unless they reach a fair valuation. You should wait for the opportunity of price correction to avoid losses.
How to Access IPO Prospectus?
You can download or view an IPO prospectus from the website of lead manager, issuer, stock exchanges, SEBI, etc. For SME IPOs, you can find the prospectus from the websites of NSE, BSE, BSE SME and NSE SME.
An IPO prospectus is a very useful document for issuers, regulatory bodies, and investors. If you are an investor, you should not rely on any rumours or social media tips. Read the prospectus properly and do your research and analysis before placing your bids.
Frequently Asked Questions:
In short, DRHP is an offer document that a company needs to submit to SEBI when it plans to raise funds from public investors in exchange for equity shares.
The financial part of a prospectus includes all information about its previous years’ financial statements. You can find numbers of its profit and loss, assets and liabilities, cash flow, total revenue, EBITDA, profit after tax, inventories, borrowings, share capital, etc.
RHP contains every detail except the total number of shares offered and the final issue price. In a full prospectus, a company mentions all finalised details to share the information with investors.
