How to Read an IPO Offer Document (DRHP/Prospectus) — Key Sections Explained

How to Read an IPO Offer Document

SEBI mandates every IPO to file a detailed offer document. Most investors never read it — which is a mistake. Here's what to look for in under 30 minutes.

Document Types

Section 1: Risk Factors — Read This First

Located at the beginning of every offer document, risk factors are written by the company's lawyers. They cover:

• Business-specific risks (customer concentration, regulatory risks)
• Financial risks (high debt, working capital issues)
• Industry risks (competition, cyclicality)

What to look for: If a company lists more than 50 risk factors or has several "material" risks, dig deeper. Boilerplate risks are fine; unusual or prominent risks are flags.

Section 2: Objects of the Issue

*"Where will the IPO money go?"*

Common uses:

• Capital expenditure: Expanding manufacturing, new facilities — positive
• Working capital: Funding day-to-day operations — neutral
• Debt repayment: Reducing existing debt — positive
• General corporate purposes: Vague — be cautious, SEBI caps this at 25%
• Offer for Sale proceeds: Goes to selling shareholders, not the company — neutral/negative

Section 3: Financial Statements (Restated)

The offer document includes 3–5 years of restated financial statements. Key metrics to calculate:

• Revenue CAGR: Is it growing fast enough?
• EBITDA margin trend: Expanding or contracting?
• PAT (Net profit) trend: Consistent or lumpy?
• Cash from operations: Is profit translating to cash?
• Debt-to-equity: How leveraged is the balance sheet?

Red flag: Revenue growing but margins declining sharply in the most recent year — may indicate fundamental business problems.

Section 4: Management & Promoters

• Promoter background: Years of experience, other ventures, legal record
• Key management team: Qualifications and tenure
• Related party transactions: Unusually high transactions with promoter entities — red flag
• Promoter pledging: Check if promoter shares are pledged (debt against their equity)

Section 5: Legal Proceedings

Lists all pending litigation involving the company, subsidiaries, and promoters. Look for:

• Tax disputes (very common, usually manageable)
• Criminal proceedings against promoters — major red flag
• Large financial claims that could impact the business

Section 6: Basis for Issue Price

This section shows the P/E comparison with peers. Read critically — companies sometimes cherry-pick favorable peers or use unusual metrics to justify premium pricing.

30-Minute Offer Document Checklist

1. [ ] Read first 10 risk factors
2. [ ] Check Objects of the Issue — where does money go?
3. [ ] Calculate 3-year revenue and profit CAGR
4. [ ] Check debt levels and interest coverage
5. [ ] Verify fresh issue vs OFS split
6. [ ] Check related party transactions
7. [ ] Scan legal proceedings for criminal cases
8. [ ] Compare P/E with peers in basis for issue price section

Where to Find Offer Documents

• SEBI website: sebi.gov.in → DRHP filings
• Company website: Investor relations section
• BSE/NSE: Listed under the IPO
• CheckIPO: Direct links from each IPO's detail page

Key Takeaway

You don't need to read 400 pages — focus on risk factors, objects of the issue, financial statements (3-year trend), and legal proceedings. These four sections will tell you 90% of what you need to know.