Guide 10 minutes
How to read a DRHP without drowning: a section-by-section guide
A DRHP can run to hundreds of pages, but SEBI fixes what goes in it. Know the six sections that matter, and the one question to ask each, and the brick becomes a book.
Three years after listing, a younger chai brand has filed its own draft with SEBI, and Sameer wants to know what the fuss is about. Riya hands him something closer to home: Sameer Chai's own draft from September 2022.
SameerI signed this. I never read it.
RiyaFounders rarely do. Let's read it now, the way an outsider should. Not front to back. Six sections, one question each.
First, what you're holding
The DRHP, or draft red herring prospectus, is filed with SEBI and the stock exchanges. It's put up on their websites and the lead managers' for at least 21 days so anyone can comment. Since 21 March 2026 a draft abridged prospectus, a short summary in a fixed format, goes up with it. Start with that if you're short of time. It lists the top ten internal risk factors.
What the draft leaves blank is the price. You'll see [●] wherever a number depends on it.
SameerWhy does SEBI care what goes in?
RiyaBecause Schedule VI of its issue rules lists the contents, almost heading by heading. That's good news for you. Every DRHP has the same skeleton, so you can jump straight to the bones.
Risk Factors
The question: which risks are about this company, not the world?
SameerForty pages of risks. Are we really that dangerous?
RiyaLawyers write half of it. "The economy may slow down" is true of everyone. SEBI makes companies split risks into internal ones, specific to the business, and external ones beyond its control. Read the internal ones.
The rules also say risks go in descending order of how much they matter. Where the money impact can be measured, it must be given. Where it can't, the document must say so. Any plan to deal with a risk can't promise a happy outcome to a pending court case.
For us the internal risks were milk prices, losing a stall spot, and a business that leaned on one founder. Those are the pages worth your time.
What slows a careful reader down: a risk the company plainly faces that isn't listed at all, or a vague one ("we depend on key people") with no detail on who.
Objects of the Issue
The question: where does each rupee go, and how much is left vague?
SameerThis is the bit where we say what the money's for.
RiyaOnly some of the money. Our issue had two parts. The fresh issue, 1.5 crore new shares, brought ₹60 crore to the company. The offer for sale, the early investor's 50 lakh shares, brought ₹20 crore to him. The objects section is about the ₹60 crore only.
Look for two caps. Money for "general corporate purposes", meaning no named use, can't be more than 25% of what the company raises. That plus money for acquisitions without a named target can't be more than 35% together.
Then check who watches the spending. If the fresh issue is more than ₹100 crore, a credit rating agency must be appointed as a monitoring agency and report every quarter until the money is used. At ₹60 crore, ours didn't need one. We still file a quarterly statement with the exchanges on any change from the plan, after the audit committee reviews it.
SameerSo a big OFS and a small fresh issue means...
RiyaMost of the money leaves with the sellers. Nothing wrong with that, but you should know it before you bid.
Basis for Issue Price
The question: what is the price built on?
SameerThis page is all blanks.
RiyaIn the draft, yes. It fills in once there's a price band. Then it must show earnings per share for the last three years, the P/E at the issue price next to the industry's highest, lowest and average P/E, return on net worth, and net asset value per share before and after the issue. It also shows the key performance indicators the company itself chose, and the prices at which shares changed hands before the IPO.
Start with face value. The rules require it next to the issue price, in the same font size. Ours was ₹10 against a price of ₹40, so ₹30 a share was premium. On 1.5 crore new shares, that's ₹45 crore of securities premium.
Then the P/E. The draft measured it against pre-IPO profits. Our ledger doesn't hold those years, so here's a hindsight sum instead: against FY26 profit, ₹1.80 a share, a ₹40 buyer paid 40 ÷ 1.80, about 22 times earnings. Today's ₹54 price is 30 times.
What slows a careful reader down: a P/E well above the industry average with no reason given, or shares sold to insiders shortly before the IPO at a price far below the issue price.
Our Promoters and Promoter Group
The question: who controls this, and are they staying?
RiyaHere's you. Before the IPO you held 3 crore of 3.5 crore shares, about 86%. After it, 3 crore of 5 crore, 60%.
SameerAnd they wouldn't let me sell.
RiyaPromoters must hold at least 20% of the post-issue capital, and that 20% is locked in for 18 months, or three years if most of the fresh money goes on capital spending. The rest of a promoter's holding is locked for six months, or a year in that case.
The promoter group goes wider than the promoter: spouse, parents, brothers, sisters and children, the spouse's family too, and companies in which any of them hold 20% or more. If your sister's dairy is a company she owns, it's in the group.
What slows a careful reader down: the promoters' average cost of buying their shares, which the draft must show. If it's a few rupees and the issue price is a few hundred, ask why they're selling now.
Financial Information
The question: what changed when the accounts were restated?
These are restated consolidated accounts, usually for three full years, plus a part-year if the latest accounts are too old. Restated means past years are recast on today's accounting policies, with corrections pushed back to the year they belong to, so the years compare fairly.
Read three things here:
- Auditor qualifications that weren't fixed in the restatement. The draft must list them.
- Contingent liabilities, the claims not yet in the accounts. A summary table sits near the front.
- Related party transactions for the last three years. Also summarised near the front.
Then put revenue and profit for the three years side by side. A business that grows sales but not cash is a question for the risk factors you've already read.
Outstanding Litigation and Material Developments
The question: what's in court, and how big is it?
SameerEvery lawsuit we've ever had?
RiyaNot every one. All criminal cases and all regulatory actions involving the company, its directors, promoters and subsidiaries. Any SEBI or exchange penalty on promoters in the last five years. Tax claims, given as a count and a total. Then anything else above a threshold.
Since 8 March 2025 that threshold has a floor. The board can't set its own materiality policy too loosely: any case worth more than the lowest of these must be disclosed.
- 2% of turnover
- 2% of net worth
- 5% of the average profit or loss after tax over three years
Our draft, filed in 2022, used the older rule: the board's own policy.
SameerOur GST notice?
RiyaThe ₹1.2 crore one is from FY26, so it wasn't in the 2022 draft. In a draft filed today it would sit in the tax table whatever its size, because tax claims are always counted.
When the draft becomes an offer
After the comments, SEBI sends its observations, and the company has 12 months from them to open the issue. Ours took about 13 months from draft to IPO.
What the draft can't tell you
Whether the price is right. A DRHP tells you what the company is, what it owes, who runs it and what could go wrong. Whether that's worth ₹40 a share is a judgement it leaves to you.
SameerSo the brick isn't telling me to buy.
RiyaIt's not telling you anything. It's answering what you ask it. Bring your six questions.