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Almost nobody reads the DRHP. People check GMP, subscription numbers, listing day predictions from Twitter threads, but the document that actually contains everything you need to know about the company sits unread. This is a mistake that costs investors real money, and it does not have to.
The good news: you do not need to read all 600 pages. There are four sections that matter most, and together they take maybe an hour to read for a typical IPO. Here is what they are and what to look for in each.
What is a DRHP?
DRHP stands for Draft Red Herring Prospectus. It is the document a company files with SEBI before an IPO. SEBI reviews it, may ask for clarifications or additional disclosures, and eventually issues its observations. After that, the company files the final version, called the Red Herring Prospectus or RHP, which is what is actually in effect when you apply.
The DRHP is a legal disclosure document. It contains the company’s full financials for the past three years, the business description, risk factors, promoter details, litigation history, related party transactions, and, critically, how the IPO proceeds will be used. It is, in theory, everything a reasonable investor should need to make an informed decision.
The DRHP is filed publicly on SEBI’s website and the stock exchanges. Anyone can read it. The fact that most people don’t is not a technology problem, it is a habit problem.
Section 1: Objects of the Issue / Use of Proceeds
This section tells you what the company plans to do with the money it raises from the fresh issue portion. It is one of the most important sections and also one that reveals a lot about the quality of management thinking.
A well-written use-of-proceeds section is specific. It names the projects, the locations, the cost estimates, the timelines, and the expected outcomes. It might say: acquire land at Location X for ₹Y crore, construct manufacturing facility for ₹Z crore, repay specific borrowings of ₹W crore from Bank A. These are checkable claims. After listing, SEBI requires the company to report on actual utilisation versus stated plans in every annual report for several years. If management deviated significantly from what they said, you can see it.
A poorly written use-of-proceeds section uses language like “general corporate purposes” and “organic growth initiatives” without specifics. Sometimes this is because the business genuinely doesn’t have a specific capital deployment plan yet, which raises the question of why they are raising money now. Sometimes it is deliberate vagueness. Either way, treat it as a yellow flag.
Also note the OFS versus fresh issue split here. If most of the issue is OFS, the Objects of the Issue section covers only the fresh issue portion. The bulk of your application money may be going to selling shareholders, not into the business. I have written separately about OFS versus fresh issue and why this distinction matters.
Section 2: Risk Factors
Risk factors in a DRHP are written by lawyers, which means they are comprehensive, repetitive, and deliberately broad. They cover everything from regulatory risks to the company’s dependence on a few customers to the possibility that management could be wrong about future projections. Most of it is boilerplate.
But within the boilerplate, there are often specific, material disclosures that are genuinely important. Here is what I look for.
Customer concentration: if 60-70% of revenue comes from one or two customers, the business is fragile in ways the headline financials may not show. A risk factor like “our top three customers account for 68% of our revenues” is worth sitting with.
Regulatory or legal issues: specific ongoing litigation, regulatory notices, or sector-level risks that are material. These are disclosed in the risk factors. Do not skim past them.
Dependence on key personnel: if the business is essentially one person and that person leaves, what happens? This is especially relevant for service businesses or founder-led companies where the founder is selling a large stake through OFS.
The risk factors section often buries the genuinely concerning items among dozens of standard disclaimers. Reading it once, slowly, for the specific and non-generic disclosures, takes about twenty minutes and can surface things that no IPO review will mention.
Section 3: Related Party Transactions
Related party transactions (RPTs) are transactions between the company and its promoters, directors, their families, or entities they control. These transactions can be entirely benign, paying rent to a promoter-owned property company, buying inputs from a family-owned supplier. Or they can be a systematic mechanism for extracting value from the listed company to private entities.
What I look for in the RPT section: scale and proportion. If RPTs as a percentage of revenue are very high, or if the company is buying critical inputs exclusively from promoter-controlled entities at undisclosed pricing, that is a concern. Look for whether the transactions are at arm’s length and whether the pricing rationale is disclosed.
Loans to promoters or promoter entities from the company are a serious red flag. This means the company’s capital is being used by promoters for personal or other business purposes. It is legal with proper disclosure and board approval, but it should make you uncomfortable as a minority investor.
The pattern of RPTs also tells you something about governance culture. A company that has kept RPTs minimal and transparent through its pre-IPO life is showing you something about how management thinks. A company that has an extensive network of related-party transactions involving multiple family entities is showing you something different.
Section 4: Promoter Background and Shareholding
The promoter section covers who the founders and major shareholders are, their background and qualifications, their other business interests, and any legal proceedings against them personally. It also shows their pre-IPO shareholding and what it will be after the IPO.
I look at post-IPO promoter shareholding carefully. A promoter who retains 60-70% after the IPO has strong alignment with minority shareholders, they will do well if the stock does well and suffer if it doesn’t. A promoter who drops from 70% to 25% through a large OFS has substantially reduced their stake. They have already captured significant value through the IPO. Their incentive going forward is not the same as yours.
Also read the background of key promoters honestly. Do they have domain expertise in the business they are running? Have previous ventures succeeded or failed? Any criminal proceedings or regulatory penalties against them? The DRHP discloses all of this, it is just not discussed in most IPO commentary.
What You Can Skip
You do not need to read the full financial statements in detail unless you are comfortable with accounting. The key ratios, revenue growth, EBITDA margins, PAT margins, debt levels, return on equity, are usually summarized in the financial summary section and in every decent IPO review. Read those.
You can skim the business description section if you already understand the industry. You can skip the legal definitions section entirely. The underwriting and expert opinions sections are largely procedural.
The four sections above, use of proceeds, risk factors, RPTs, and promoter background, are where the highest signal-to-page ratio lives. An hour spent there will tell you more about whether an IPO is worth applying for than any amount of GMP tracking or subscription number monitoring.
Frequently Asked Questions
Where can I read a company’s DRHP?
DRHPs are filed publicly on SEBI’s website (sebi.gov.in) under Offer Documents. They are also on NSE and BSE under IPO filings. The final RHP is available from the same sources once filed.
What is the difference between a DRHP and an RHP?
The DRHP is the draft filed with SEBI for review. The RHP is the final version filed after SEBI’s observations are incorporated. The price band usually appears in the RHP, not the DRHP. Both are public documents.
How long does it take to read a DRHP?
A full DRHP can be 500-800 pages. Focussing only on the four key sections described above takes about an hour. That is time well spent before committing money to an investment.
Practical takeaway: Before applying to any IPO, spend one hour reading four sections of the DRHP, Use of Proceeds, Risk Factors, Related Party Transactions, and Promoter Background. These four sections will tell you almost everything that actually matters about the investment.
This post is for educational purposes only. It is not financial advice. Mohit Mehra is not a SEBI registered investment advisor. Please consult a qualified financial advisor before making investment decisions.