How to Read an IPO Prospectus (DRHP) Like a Pro

The Draft Red Herring Prospectus (DRHP) is often a 500-page document that scares away most retail investors. However, it is the most important tool you have for making an informed decision. The first section you should always check is the "Objects of the Offer." This tells you if the money is going into the company for growth or just into the pockets of early investors via an OFS.\n\nNext, skip to the "Risk Factors." Every company is required to list everything that could go wrong. Look for specific risks like ongoing litigations or high dependency on a single customer. If a company gets 80% of its revenue from one client, that is a major red flag that you won’t find in a flashy news headline.\n\nThe financial tables are your third stop. Don’t just look at the revenue; look at the cash flow from operations. A company can show profits on paper while still running out of cash. Consistent positive operational cash flow is a sign of a healthy, sustainable business model.\n\nPay close attention to the "Promoter Holding" post-issue. If the founders are selling a large portion of their stake, it might signal that they believe the company has peaked. On the other hand, if institutional investors are staying in and the promoter holding remains high, it shows long-term confidence.\n\nFinally, compare the P/E ratio with listed peers. If the IPO is priced at a 50 P/E while the industry leader is at 30, you are likely overpaying for the hype. Mastering these five sections of the DRHP will significantly increase your success rate in the IPO market.