The longest document most investors never open

This module has so far been about what a listed company publishes. This post goes back to the document that made it a listed company in the first place.

A DRHP — draft red herring prospectus — is what a company files with SEBI (the Securities and Exchange Board of India) when it wants to sell shares to the public and list on the main board of the NSE (National Stock Exchange) and BSE. “Draft” because it’s filed for review; “red herring” because the final price and quantity are left blank until close to the issue. Once approved and priced it becomes the RHP, and then the prospectus. It is typically 300 to 500 pages, it’s free, and it’s the most complete, most legally accountable description of a business you will ever get — because every statement in it exposes the company and its bankers to liability if it’s wrong.

Desi Bites Foods filed its DRHP with SEBI in December 2024, filed the final RHP in June 2025 once its FY25 accounts were audited, and listed on the NSE and BSE main boards on 15 June 2025 at ₹640 a share. Fictional company, fictional filing, real structure. Here’s how to read one in an evening rather than a week.

1. Fresh issue or offer for sale?

Page one of the summary tells you the most important thing about any IPO: where the money goes.

Fresh issue      → company sells NEW shares → money goes INTO the company
Offer for sale   → existing holders sell    → money goes to THEM, not the company

Desi Bites’ issue was 100% fresh issue; no offer for sale: 2.5 lakh new shares raising ₹1,600 lakh, all of it going into the business. That’s the cleaner story — the company needs capital and is asking for it.

An offer for sale (OFS) is the other kind. The company gets nothing; early investors or the promoter are cashing out, and you are buying from people who know the business far better than you do. Plenty of legitimate IPOs are mostly OFS — venture funds need exits — but an IPO that’s 90% OFS with a promoter selling down is a different proposition from one that’s 90% fresh issue, and the cover page tells you which.

2. Objects of the issue: what the money is for

For a fresh issue, this section is a promise, and one the company will be held to — listed companies must report deviations from stated objects to the exchange every quarter until the funds are spent.

Desi Bites, stated objects ₹ lakh Share
Capital expenditure: second production line 700 43.8%
Inorganic growth / acquisitions (target not yet identified) 400 25.0%
Working capital 350 21.9%
General corporate purposes 150 9.4%
Total 1,600 100%

Read the labels carefully. Capex for a named project is specific and checkable. Working capital is vaguer but legitimate. General corporate purposes (GCP) is the catch-all — money with no stated use. Inorganic growth means acquisitions not yet identified, which is a request to trust management’s judgement on deals it hasn’t found. Both are capped, precisely because companies would otherwise put everything there: SEBI’s ICDR (Issue of Capital and Disclosure Requirements) Regulations cap general corporate purposes at 25% of the amount raised, and since January 2022 cap general corporate purposes plus acquisitions whose target isn’t yet identified at 35% combined, with the unidentified acquisitions alone at no more than 25% (regulation 7(2) and (3), in the text amended up to 21 March 2026) (the combined cap came in with the SEBI ICDR (Amendment) Regulations, 2022, notified 14 January 2022). Desi Bites sits just inside the combined limit: GCP plus unidentified acquisitions come to 34.4% of the issue.

Now the reckoning. By 31 March 2026, Desi Bites had spent ₹600 lakh on an acquisition (against ₹400 lakh stated) and ₹245 lakh on capex (against ₹700 lakh), with ₹755 lakh unspent. Acquisitions ran ₹200 lakh over the stated object; capex ran ₹455 lakh under. Neither deviation is scandalous; both are exactly the kind of thing the capital allocation post said to watch, and the prospectus is the yardstick that makes watching possible.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Your friend wants ₹1,000 from you and your classmates to grow her lemonade stand. Before you chip in, you’d want a note that says: what will you buy with it (a bigger table? a second stand?), what could go wrong (rain? a rival stand?), how much lemonade did you sell last year, and — very important — is the ₹1,000 going to the stand, or into her pocket because she’s selling you her share?

A prospectus is that note, written by lawyers, 400 pages long. The questions are the same.

3. Risk factors: the section written by the lawyers

Every DRHP has 30 to 60 pages of risk factors, and most readers skip them because they’re written to protect the company from being sued (“we may be adversely affected by…”). Skim anyway, because the specific ones are buried among the boilerplate. Desi Bites’ first six:

  1. Dependence on a single manufacturing unit in one state
  2. Edible oil and flour make up roughly 55% of raw material cost; no hedging
  3. Nine per cent of revenue flows through a promoter-group distributor
  4. The brand is registered but a similar mark is under dispute in one state
  5. No prior experience as a listed company; the CFO (chief financial officer) joined eight months before filing
  6. GST (goods and services tax) classification dispute for FY23-FY24 (see contingent liabilities)

Ignore the ones that could apply to any company on earth (competition, economic conditions, regulation). Read the ones that could only apply to this one. Items 1, 3, 4 and 6 above are that kind: one plant, a promoter-family distributor handling 9% of revenue, a trademark dispute, and a tax demand. The tax demand came back in the contingent liabilities post, and promoter-group dealings in the forensic post. The prospectus told you first.

Two sections, read together. Our Promoters tells you who controls the company and what else they do: Founder and spouse; founder ran the family’s wholesale namkeen trade before setting up the plant in 2015. Holding 100% before the issue and 80% after. Look here for other companies the promoter runs (competing? supplying?), for litigation against them personally, and for how long they’ve actually run this business.

Related party transactions lists every dealing between the company and the promoter’s circle — usually three to five years of them. Desi Bites’: Sharma Distributors (owned by the promoter’s brother) bought ₹233 lakh of product in FY25 — 9% of revenue — on 45 days vs 30 for other distributors. That’s not necessarily wrong; family distributors are how many Indian consumer businesses started. It is a channel through which revenue can be pulled forward or margins shifted, and the longer credit terms are a small example of the favour flowing one way. This is the same note you’ll read in every annual report afterwards, and the prospectus is where you first see how large it is.

5. The financials: restated, and three years of them

A DRHP carries three years of restated financial statements — audited numbers re-presented on a consistent basis — and they’re brought up to date as the process runs, which is why Desi Bites’ June 2025 RHP carried FY25. For Desi Bites that’s the FY23–FY25 model this blog has used all along, at /case-study/. Three things to do with them that the summary page won’t:

  • Check the trend, not the last year. Companies list after their best year. FY25 was Desi Bites’ best by every measure. That’s not a coincidence; it’s when bankers advise listing.
  • Run the cash conversion. OCF/PAT over three years. Desi Bites’ was 1.90, 1.54, 1.56 — profit turning into cash every year. A company listing on rising profit and falling cash conversion is the pattern the forensic post described.
  • Look at the pre-IPO round. If investors bought shares six months before the issue at a third of the IPO price, the prospectus must say so, in a table of “weighted average cost of acquisition.” It’s the most quietly informative table in the document.

6. Basis for the issue price: what you’re paying

The Basis for Offer Price section is where the company justifies ₹640. It gives the multiples at the issue price and a peer comparison:

At ₹640, FY25 numbers  
P/E, on post-issue EPS of ₹16.72 38.3x
P/E, on pre-issue EPS of ₹20.9 30.6x
P/B, on post-issue book value 3.51x
EV/EBITDA 14.8x
Market cap at issue ₹8,000 lakh

Two traps here, both covered earlier in this blog. The prospectus will often quote P/E on the pre-issue share count — 30.6x looks better than 38.3x, and the EPS post explained why the post-issue figure is the honest one for a buyer at listing. And the peer table is chosen by the company: large, richly valued peers make the issue look cheap. The comparables post is about choosing that table yourself.

One thing the section will not say is whether ₹640 is a good price. Nor will this blog. The terminal value post showed a DCF of the same numbers landing well below the issue price, and its reverse DCF showed what growth ₹640 implied. The prospectus gives you every input for that exercise. It leaves the conclusion to you, which is the correct division of labour.

Common mistakes

  • Not checking fresh issue versus OFS. The single most important line in the document, on the cover.
  • Skipping risk factors because they’re boilerplate. Two-thirds are. The specific third is the company telling you, under legal duress, what it’s worried about.
  • Reading the P/E the company chose. Recompute it on post-issue EPS and on your own peer set.
  • Anchoring on the last year. Companies list after a strong year. Read three, and read cash conversion.
  • Ignoring the related-party section because it’s dull. It’s the map of every channel through which value can leave the company.
  • Forgetting the prospectus after listing. It’s the promise. The quarterly deviation reports and the annual report are where you check whether it was kept — which is what this whole module has been doing.

Sources

Takeaway: A prospectus is the most complete and most legally accountable description of a business you’ll ever be handed, and most investors read only the price. Read six things: fresh issue or offer for sale, what the money is for, the specific risk factors, who the promoter is and what flows to their relatives, three years of restated cash conversion, and the multiples on post-issue earnings. Then keep the document — every annual report afterwards is a report on whether its promises were kept.