Introduction
In the blueprint of aspirations in Indian capital markets, there is a document—a trilogy of disclosure, design, and destiny. The Draft Red Herring Prospectus (“DRHP”), the Red Herring Prospectus (“RHP”), and the Final Prospectus are not mere regulatory filings; they are the pillars on which an investment is made.
It has become imperative for investors to be aware of what they are stepping into while investing. These documents are very vital for Initial Public Offerings (“IPO”) of a Company as these documents eventually educate investors on the actual features of a company, once the DRHP is filed then comes the RHP and finally the final prospectus gets issued once the IPO price is determined and the RHP is approved by Securities and exchange board of India (“SEBI”) generally at the end of the book building process.
This article explores the significance of this prospectus, how it functions, and the changes incorporated into these documents during the IPO process, leading to the “Final prospectus,” which is the last legal document issued by a company once the price allocations are finalized.
To understand what is an IPO, we may refer to Section 23 of the Companies Act, 2013 (“the Act”), which allows a public or private company to issue securities for a public company, it is done through a “Prospectus” which is referred to as a “Public offer”. For a private company, it can be done by way of rights issues or a bonus issue under the Act. This public offer also includes “Initial Public Offer” or further offer of securities by the company to the public.[1]
What is a “Prospectus”? A document that includes the sale of shares to the public by a company allotting or agreeing to allot any securities is deemed to be a prospectus as defined under Section 25 of the Act. A Prospectus is the backbone of an IPO as it consists of all the data that is to be released to the investors for increasing transparency and accountability, and to know the functioning of the company. This article also figures out the importance of this prospectus and all the technical aspects as well.
DRHP – Draft Red Herring Prospectus
Firstly the main question is what is a DRHP and what law governs it, a DRHP stands for Draft red herring prospectus which is a preliminary document filed by the company which is to go for an IPO to raise capital through issue of a prospectus, it includes all the main essentials of a company, Such as an overview, it’s business, finances and even management for that matter, although one of the most essential feature it lacks is the final pricing and the shares which are to be offered.
SEBI (Securities Exchange Board of India) plays a crucial role in validating this prospectus, as it is a regulator that ensures that all the mandatory disclosures are in place, and it assesses the completeness and compliance of the filing. It can later be reviewed and sent back for rectification if the standards are not met. It is mainly done to ensure that it meets all the guidelines laid down in the ICDR Regulations, 2018 (“ICDR Regulations”), and the Company Law.
RHP- Red Herring prospectus
The term “Red herring” originated from the idea that it is not a final prospectus and it comes from the prominent red disclaimer on the cover, highlighting that the information is incomplete and subject to change until the registration statement becomes effective.
It is a vital document for a company going public through an IPO. It is a refined version of the DRHP which is usually filed in the preliminary stages before IPO, but the RHP is filed after it has been reviewed by the concerned authority and approved by them (SEBI) for public release, it includes price band and more comprehensive information about the company but it still doesn’t include the final allotment which is to be released in the final prospectus.
A Red Herring Prospectus may be issued before the issue of a final prospectus under Section 32 of the Act; it is to be filed before 3 days before the opening of a subscription list and the offer as per Section 32(2) of the Act. Whatever variations that are to be there between the RHP and the final prospectus need to be highlighted as variations in the final prospectus.
Final Prospectus
The final prospectus is the last legal document issued by a company once the IPO price and allocations are done and finalized. It consists of all the necessary information required by the law, which was mentioned in Section 26(a) of the Act, but was later omitted.[2]
Regulations under ICDR (Issue capital and disclosure requirements), 2018
Part VI of the ICDR Regulation, specifically “Regulation 24,” provides for the disclosures to be made in the draft offer document and the offer document. It states that both documents shall contain all the material disclosures for investor decision making, and the RHP and the prospectus shall contain:
a) Disclosure specified in the “Companies Act, 2013”
b) Disclosure specified in PART A of Schedule VI.
ICDR Regulations 25 provide for the filing of the draft offer document and the offer document, which is the prospectus. Regulation 26 authorises the release of these documents in public. PART A of the Schedule VI specifically has all the contents which are to be laid out in the prospectus, which were omitted with the omission of 26(a) of the Act, for less confusion and to avoid overlapping of law.
Contents to be mentioned in the prospectus as per Part A of Schedule VI of the ICDR Regulation are very informative, such as cover pages, table of contents, definitions, risk factors, capital structure, particulars of the issue, about the issuer, financial statements, legal information, and legal and statutory disclosures and other essentials mentioned in the Schedule VI of the Regulation.
Moreover there is an application process as well, ICDR Regulations 7(1)(a) specifies that an issuer making an IPO shall ensure that “it has made an application to one or more stock exchanges to see an in-principle-approval for listing of its specified securities on such stock exchanges and has chosen one of them as the designated stock exchange, in terms of Schedule XIX”[3] This provides for a comprehensive list that the company must make in the DRHP document, including financial statements, business operations, factors of risk, and management. ICDR Regulations 6[4] On the other hand provides for the procedure for filing DRHP with SEBI, ensuring the document is complete and meets regulatory standards.
Punishment of Non-Compliance
There are both civil and criminal liabilities for distributing mis-statements which are untrue or misleading to investors, Criminal liability is under Section 34 of the Act. It is clarified that one may be charged with fraud, and they shall be liable under Section 447 of the Act.
If a person incurs loss who had subscribed for the securities of a company, acting upon anything misleading in the Prospectus is liable to get compensation from individuals mentioned under Section 35(1)(a) to (e) of the Act, these persons may be the director of the company at the time of issuance of the prospectus, is the promoter of the company, has authorised issue of the prospectus and an expert under section 26(5) of the Act. Section 35(2) of the Act has exceptions to escape civil liability even after being in the management of the company.
In Kimsuk Krishna Sinha vs. Securities and Exchange Board of India & Ors[5] Delhi High Court directed SEBI to investigate the matter concerning the misrepresentation of certain information, mainly about the sale of shares to a new associate company. This information was not reflected in the DRHP or RHP, leading to a sham to avoid criminal proceedings. Later, a restraining order was issued against the directors of DLF and its chief financial officer, preventing them from accessing the securities market for three months. This highlights the vital importance of making accurate disclosures in the prospectus.
Concluding Remarks
In concluding remarks, the three stages of going into IPO for a company are imperative to be as true and accurate as it can be. DRHP is already a document that gives a window to the actors to be as clear, and then only one can file for an RHP three days before the final Prospectus. SEBI is the regulatory body for verifying all the information to maintain transparency at its peak. The ICDR Regulations, 2018, and the Companies Act, 2013, along with the SEBI, act as a protector for the investor as they impose civil and criminal liabilities on misinformation and fraud, leading to a more accountable market, encouraging investment in the contemporary world.
Refrenace
[1] Companies Act, 2013, § 23 Explanation (India).
[2] Act 1 of 2018, sec.
[3] Securities and Exchange Board of India. ICDR Regulations, 2018. Regulation 7, 6. (2018).
[4] Securities and Exchange Board of India. ICDR Regulations, 2018. Regulation 7, 6. (2018).
[5] AIRONLINE 2010 DEL 1
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[Saksham Shivam is a 3rd-year student at Chanakya National Law University, Patna]
