Draft Red Herring Prospectus In Company Law (Section 32)
Updated: Jun 21
Meaning of a Prospectus –
The prospectus is an official document issued by a public company to invite general offers for subscribing to its shares. It contains all of the vital information about the shares that a company sells to the public. Furthermore, it is frequently used to assist investors in making financial selections.
What is Draft Red Herring Prospectus? –
Everyone can see all of the information about companies that are listed on stock exchanges because it is in the public domain. But what about corporations that aren't publicly traded? So before any company goes for an IPO to raise money and hits the primary market, it comes out with a draft red herring prospectus (DRHP).
DRHP is an important communication connection between the company and its investors and stakeholders. Companies that have previously gone public wish to give a quick summary of their business to potential investors. A company may also choose to give more extensive information about its operations to investors without incurring the cost of publishing a formal prospectus.
A complete prospectus gives investors detailed information about the company, including financial statements and risk factors. Full prospectuses must be evaluated by accountants to ensure that they meet all regulatory criteria before being accepted by securities regulators.
Red Herring Prospectus in Company Law –
Before the issuance of a prospectus, a firm planning to make a securities offering may issue a red herring prospectus.
A firm that wishes to produce a red herring prospectus according to subsection (1) must file it with the Registrar at least three days before the subscription list and offer open.
A red herring prospectus is subject to the same obligations as a prospectus, and any differences between the red herring prospectus and the prospectus must be noted as differences in the prospectus.
The prospectus stating the total capital raised, whether by debt or share capital, and the closing price of the securities, as well as any other details not included in the red herring prospectus, must be filed with the Registrar, and the Securities and Exchange Board after the offer of securities under this section has been closed.
The term "red herring prospectus" in company law refers to a prospectus that does not contain complete details about the quantity or price of its securities.
When a firm wants to raise money from the public by selling shares of the company to investors, it files a Red Herring Prospectus, or offer document, with SEBI (Securities and Exchange Board of India). The paper is beneficial to investors since it includes thorough information on the company's commercial operations, financials, promoters, and goal to obtain cash through an initial public offering. It also explains how the firm plans to use the funds raised and the dangers that investors may face.
Regulations & Policies in Section 32, Companies Act 2013
The laws and regulations that apply to the issuing corporation are summarized in this section. It provides the names of the Acts that mandate the rules, such as environmental regulations, tax laws, and labor laws. This enables you to comprehend the level at which the industry is regulated. Under-regulated industries are more likely to attract the wrong companies, and investment in them can backfire.
Application of Section 32, Companies Act 2013 –
This part is used when a corporation wants to raise money by selling shares to the general public. This section outlines a possible approach for a firm to communicate vital and relevant information to investors and a mechanism for merchant bankers to determine whether an initial public offering will be successful in the market and gauge the price of the offering.
A red herring prospectus is a document used in the case of a book-built public offering that contains all pertinent information except the price and quantity of shares being offered. The RHP has a wealth of information about the business. Assessing the basic strength of a company might be simple if an investor attentively reads the entire RHP. Before investing in an IPO, it is necessary to take some time to study the data.