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Red Herring Prospectus – The Price-less Wonder! 🔴🐟

Funny name, right? Why "Red Herring"?

Story time: In old England, hunters trained dogs using red herring fish (smells STRONG!) to distract dogs from fox's scent!

In IPOs: Red Herring Prospectus distracts you with ALL info... EXCEPT PRICE! 😄

What is Red Herring Prospectus?

Simple Definition: Prospectus that contains EVERYTHING except:

  • ❌ Final share price
  • ❌ Total number of shares
  • ❌ Total money to be raised

Why "Red"? Cover page has RED HERRING stamp/text in red ink! 🔴

Also called: RHP or Draft Prospectus

Why Would Company NOT Mention Price?! 🤔

Real scenario - Zomato IPO (July 2021):

Company thinks: "Our shares worth ₹72-76 each (price band)"

Advertises RHP:

"We're offering shares between ₹72-76. Public, show interest!"

Public response:

  • Day 1: 40x oversubscribed! (40 people want 1 share!)
  • Day 2: 100x oversubscribed!
  • Investor frenzy: "We'll pay even ₹90!"

Final price fixed: ₹76 (upper end!)

Company raised: ₹9,375 crores (₹9,000 crore target exceeded!)

Why RHP helped:

  1. Gauge demand first
  2. Price shares based on interest
  3. Maximize money raised!

If they fixed ₹50 initially? Would've lost ₹26 per share × crores of shares = Thousands of crores! 💸

How Red Herring Prospectus Works (The Process)

Step 1: File RHP with SEBI 📄

Company files Draft Red Herring Prospectus with SEBI

Contains:

  • ✅ Business details
  • ✅ Financial statements
  • ✅ Risks
  • ✅ Management info
  • ✅ PRICE BAND (Range, e.g., ₹100-₹120)
  • ❌ Final price (TBD!)

Step 2: SEBI Reviews & Approves ✅

SEBI checks for:

  • Legal compliance
  • No misleading statements
  • Adequate risk disclosures

Takes 30-60 days

Step 3: Investor Roadshows 🎤

Management pitches to investors:

  • Institutional investors (mutual funds, FIIs)
  • HNIs (High Net-worth Individuals)
  • Retail investors

Gauges interest at different price points!

Example - Paytm Roadshow (2021):

  • Vijay Shekhar Sharma (CEO) personally met 200+ investors
  • Pitched in Mumbai, Singapore, London, New York!
  • Asked: "Would you buy at ₹2,000-₹2,150?"

Step 4: IPO Opens for Applications 📝

Public applies within price band

Example: Zomato's ₹72-76 band

  • Retail investors: Choose ₹72, ₹73, ₹74, ₹75, or ₹76
  • Most choose ₹76 (eager to get shares!)

Step 5: Book Building (Price Discovery) 📊

Book building = Auction-like process

How it works:

  • Collect all bids
  • See which price has MAXIMUM demand
  • Fix final price!

Zomato example:

  • At ₹72: 150x demand
  • At ₹74: 120x demand
  • At ₹76: 100x demand (still HUGE!)
  • Decision: Fix ₹76! ✅

Step 6: Issue Final Prospectus 📜

After price fixed:

  • File FINAL prospectus with price
  • Allocation of shares
  • Listing on stock exchange!

Red Herring vs Regular Prospectus

FeatureRed Herring ProspectusFinal Prospectus
PricePrice BAND (range)Fixed final price
SharesApprox numberExact number
Total fundsApproximateExact amount
When filedBefore IPO opensAfter price discovery
Color markingRED ink/stampNo red marking
PurposeGauge demandFinal legal document

Real Examples from Indian IPOs

1. Life Insurance Corporation (LIC) - 2022

RHP Details:

  • Price band: ₹902-949
  • Public interest: Massive! (National pride - LIC IPO!)
  • Final price: ₹949 (upper limit!)
  • Money raised: ₹21,000 crores (India's biggest IPO!)

Why RHP worked: Tested waters, maximized price!

2. Paytm - 2021

RHP Details:

  • Price band: ₹2,080-2,150
  • Investor roadshow: Covered 15 cities globally!
  • Final price: ₹2,150 (upper limit)
  • Result: Raised ₹18,300 crores!

Post-IPO drama: Shares fell to ₹1,400 within months! 📉 (But that's stock market risk - prospectus warned!)

3. Nykaa - 2021

RHP Details:

  • Price band: ₹1,085-1,125
  • Demand: 82x oversubscribed!
  • Final price: ₹1,125
  • Listing: Opened at ₹2,018 (80% premium!) 🚀

Investors who got allotment: JACKPOT on Day 1!

Book Building Explained (The Magic of RHP)

Fixed Price Issue (Old method, before 1995):

  • Company: "Shares are ₹100. Take it or leave it!"
  • Public: Either buys or doesn't
  • Problem: What if ₹100 is wrong? Too high = No buyers. Too low = Company loses money!

Book Building (Modern method with RHP):

  • Company: "We think ₹100-120. You tell us fair price!"
  • Public: Bids at various prices
  • Company: Sees demand, fixes optimal price!
  • Result: Win-win! ✅

Think of it as:

  • Fixed price = Fixed price shop (₹100, no bargaining!)
  • Book building = Auction (highest bidder wins, seller gets best price!)

Who Can File Red Herring Prospectus?

Answer: Public companies going for IPO!

NOT used by:

  • Private companies (not issuing to public)
  • Companies doing follow-on offerings (already listed, issuing more shares - they know market price!)

Fun Fact: The Name's Origin! 🐟

Early 1900s, USA: Securities filings had red ink warnings

1920s: Term "Red Herring" popularized

Meaning: "Distracts you from the missing piece (price), while showing everything else!"

Like: Movie trailer showing all actors, plot, action... but NOT the climax! 🎬

Quiz Time! 🎯

Test Your Knowledge

Question 1 of 5

1. Red Herring Prospectus does NOT contain:

Company name
Risk factors
Final price
Management details

💡 Final Wisdom: "Red Herring Prospectus = Dating app profile with EVERYTHING except... what you earn! You reveal salary (price) only AFTER seeing interest! Smart, right?" 😄💡

Final lesson: Statement in Lieu of Prospectus - When you DON'T want to go public but still need to follow rules! 📋

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