When a company plans to raise money from the public, it needs to provide the offer document (prospectus) containing detailed information about the business and financials of the company including details about its promoters, reason for raising money, how the money will be used, risks involved with investing in the company and so on.
The Section 32 of the company’s act 2013 deals with Red Herring Prospectus (RHP). As per this section a company proposing to make an offer of securities may issue RHP prior to the issue of a prospectus. Thus, it is a preliminary prospectus (red herring) which does not have details of either price or size of the offering or the amount of issue. The name “Red Herring” links to the red lettered disclaimer displayed on the front page of each preliminary prospectus that the final prospectus may slightly vary. The Red Herring prospectus (RHP) can be filed with the ROC without the price band and the issuer, the company in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring prospectus filed with the ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed with ROC containing the details of the final price is called ‘Prospectus’.
Initially, the company which is going for public issue shall file a mandatory ‘Draft Red Herring Prospectus’ (DRHP) to the Securities and Exchange Board of India (SEBI) for approval. SEBI verifies the DRHP submitted to it through the merchant banker and checks that the company has made adequate disclosures. SEBI then forwards its observations to the merchant banker and call for necessary changes in the prospectus for the final approval. The merchant banker to the issue later makes the changes according to SEBI’s comments and files the final offer document with SEBI, the Registrar of Companies (ROC) and stock exchanges. Another time the offer document is reviewed by SEBI and observations to be fulfilled, if any, are communicated to the merchant banker. Once that is done, final approval is provided and such approved final offer document is called as Red Herring Prospectus (RHP).
An “Abridged Prospectus” is a prospectus that contains the salient features of a prospectus. It accompanies the application form of public issues.