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# How to Read a DRHP as a Retail Investor — The 8 Sections That Actually Matter
Every company listing on Indian exchanges must file a DRHP (Draft Red Herring Prospectus) with SEBI before its IPO. A typical DRHP runs 300–500 pages. No retail investor reads the whole thing — and no one expects you to.
But certain sections contain information that fundamentally changes whether you should apply to an IPO. Skipping these is how investors end up buying into overpriced or promoter-exit IPOs.
Here are the 8 sections worth reading, in order of priority.
Tip: DRHP PDFs are searchable. Use Ctrl+F for the section headers below.
Section 1: Objects of the Issue / Use of Proceeds
What it contains: How the company plans to spend IPO proceeds.
Why it matters: This is the single most important section for understanding whether the IPO is beneficial for the company or primarily an exit for existing shareholders.
Green flags:
- Capex for new facilities, equipment, or technology
- Debt repayment (reducing leverage is generally positive)
- Working capital for growth
- R&D or product development
Red flags:
- Large OFS (Offer for Sale) component — proceeds going to selling shareholders, not the company
- "General corporate purposes" as a major use (vague and unaccountable)
- Inorganic acquisitions without a named target
Quick math: For any IPO, calculate: Fresh Issue proceeds ÷ Total issue size = % going to the company. Below 40% and it's primarily an exit IPO.
Section 2: Risk Factors
What it contains: A legally required list of risks the company faces.
Why it matters: Risk factors are written by lawyers to cover all possible disclosures — some are boilerplate, some are genuine and critical.
How to read it: Skip the generic industry risks. Focus on company-specific risks:
- "We have had negative cash flows in the past and may continue to" — a real risk
- "Our promoter is involved in certain legal proceedings" — check if material
- "We are dependent on a single customer / supplier" — concentration risk
- "We have not paid dividends in the past" — less relevant for growth companies but note it
A company with 30+ pages of risk factors isn't necessarily riskier than one with 15 pages — but reading what's specific to this company is worth 30 minutes.
Section 3: Financial Statements (Restated)
What it contains: 3 years of audited P&L, balance sheet, and cash flow statements.
Key numbers to check:
| Metric | What to Look For | |---|---| | Revenue growth | Consistent 20%+ for growth companies | | EBITDA margin | Trending up or stable — not shrinking | | PAT (net profit) | Profitable, or clear path to profitability | | Operating cash flow | Should be positive (or at least improving) | | Debt/Equity ratio | Higher debt = higher risk; watch interest coverage | | Working capital days | Rising debtors/inventory days = collections problem |
One year of high profit can be engineered; three years tell the real story.
Section 4: Capital Structure
What it contains: Pre-IPO and post-IPO shareholding structure.
What to check:
- How much is the company raising in fresh shares vs. OFS?
- What percentage will promoters hold after the IPO?
- Who are the pre-IPO shareholders? (VC/PE names indicate diligenced investment)
- Is there a large ESOP pool being diluted?
Section 5: Promoter and Promoter Group
What it contains: Background on founders, their qualifications, compensation, and related entities.
Red flags:
- Criminal cases (especially fraud, cheating, financial crimes)
- Multiple companies under the same promoter with losses
- Excessive promoter salaries relative to company size
- Related-party transactions (more on this in Section 6)
SEBI requires disclosure of all legal proceedings against promoters and the company. Take 10 minutes to read this section.
Section 6: Related-Party Transactions
What it contains: All transactions between the company and its promoters, directors, or their relatives/companies.
Why it matters: This is where value leakage from minority shareholders happens — the company pays excessive rent to a promoter-owned property, buys from a promoter-owned vendor at above-market prices, or routes contracts through relatives.
Red flags:
- Sales to related parties exceeding 20% of revenue
- Purchase of assets from promoters at undisclosed valuations
- Loans given to related parties
- Rental payments to promoter-owned entities
Section 7: Litigation
What it contains: All material pending lawsuits, tax disputes, regulatory proceedings.
What to look for:
- Outstanding SEBI orders or show-cause notices
- Income tax demands above a material threshold (check what % of net worth)
- Customer / supplier disputes suggesting operational problems
- Environmental or regulatory compliance failures
One large tax dispute is not necessarily alarming; a pattern of regulatory non-compliance is.
Section 8: Management Discussion and Analysis (MD&A)
What it contains: Management's own explanation of financial performance, industry trends, and business strategy.
How to use it: Read the MD&A for how management explains performance — particularly any decline in margins or revenue. Do they blame external factors? Do they take accountability? Is their analysis consistent with the financials?
The quality of management's self-analysis is often a proxy for management quality itself.
A 30-Minute DRHP Review Checklist
- 1☐ Use of proceeds: what % goes to the company vs. sellers?
- 2☐ Revenue: 3-year CAGR and is it profitable?
- 3☐ Cash flow: is operating cash flow positive?
- 4☐ Promoter background: any criminal proceedings?
- 5☐ OFS percentage: is it primarily an exit IPO?
- 6☐ Related-party transactions: any obvious value leakage?
- 7☐ Risk factors: any company-specific risks that are material?
- 8☐ QIB subscription: what did institutional investors decide?
*Published by the Polemarch editorial team. Not investment advice.*