Disclosure in Draft Red Herring Prospectus

The Draft Red Herring Prospectus (DRHP) is the first complete public account a company gives of itself before it asks strangers for money. Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the DRHP is the document on which the entire book-built initial public offer is built: it must carry every material disclosure prescribed in Schedule VI, it is filed with the Board and the stock exchanges, and it is then thrown open to the public for at least twenty-one days so the market itself can test the issuer's claims before SEBI issues its observations. This chapter explains what must be disclosed, why the standard is "true and adequate", how the comment-and-observation mechanism works, and how courts have policed the line between an honest prospectus and a misleading one.

What a Draft Red Herring Prospectus Is

A red herring prospectus, in the language of company law, is a prospectus that does not contain complete particulars of the price or quantum of the securities offered. The Companies Act, 2013 defines it in Section 32 as a prospectus which does not include complete particulars of the quantum or price of the securities included therein. In a book-built public issue the issuer cannot state a fixed price up front because the price is to be discovered through bidding; it therefore files a prospectus with a price band rather than a fixed figure. That document is the red herring prospectus (RHP). The draft red herring prospectus is the version filed with the Securities and Exchange Board of India and the stock exchanges before the issue is cleared — it is the working draft on which SEBI's scrutiny and the public's comments operate.

Under the SEBI ICDR Regulations, 2018, the expression "draft offer document" means the draft offer document filed with the Board in relation to a public issue or rights issue; in an IPO conducted through the book-building route that draft offer document is the DRHP. The DRHP must contain all the disclosures specified in Schedule VI of the Regulations. It is, in substance, a near-final document: the only material particular left blank is the price (and, in a fresh issue, the precise number of shares), which is filled in later in the RHP and finally in the prospectus registered with the Registrar of Companies. Because the rest of the disclosure is complete, the DRHP is the central document on which an investor — and the regulator — forms a view. For the conceptual difference between the draft and the final priced document, see Disclosure in the Red Herring Prospectus.

The Statutory Architecture: Regulations 24 to 28

The disclosure regime for public issues lives in Chapter II of the ICDR Regulations. Four provisions form its spine. Regulation 24 fixes the disclosure standard: "The draft offer document and offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision." Regulation 25 deals with filing — the issuer files the draft offer document with the Board and with the stock exchanges through a lead manager, along with the prescribed fee, and the lead manager certifies that the document is in conformity with the documents, materials and papers relevant to the issue. Regulation 26 requires the draft offer document to be made public, for comments, for a period of not less than twenty-one days from the date of filing, and the issuer to make a public announcement inviting comments. Regulation 28 governs pricing, which is why the price is absent from the draft and is supplied only later.

The architecture is deliberately sequenced: a complete disclosure document is filed (Reg 25), the market scrutinises it (Reg 26), SEBI issues observations, the issuer incorporates them, and only then is the priced RHP filed with the Registrar of Companies. The integrity of the whole offer therefore depends on the quality of the DRHP. As the discussion in Introduction and Object of the ICDR Regulations explains, this disclosure-based model replaced the old merit-based "controller of capital issues" regime: SEBI no longer judges whether an issue is a good investment, it ensures the investor has every material fact needed to judge for himself. The DRHP is the instrument through which that philosophy is delivered.

The "True and Adequate" Standard

The phrase in Regulation 24 is doubled for a reason: a disclosure must be both true and adequate. Truth alone is not enough. A statement may be literally accurate and yet, by what it omits, leave the investor with a materially false picture. Adequacy demands that everything material be disclosed and that nothing material be suppressed by selective truth-telling. This twin requirement is the modern statutory expression of a much older common-law principle.

That older principle was crystallised in New Brunswick & Canada Railway & Land Co. v. Muggeridge (1860) 1 Dr & Sm 363, where Kindersley V-C laid down what came to be called the "golden rule" for prospectuses: those who issue a prospectus, holding out to the public the great advantages which will accrue to persons who take shares, are bound to state everything with strict and scrupulous accuracy, and not to omit any fact within their knowledge the existence of which might in any degree affect the nature or quality of the privileges and advantages which the prospectus holds out as inducements to take shares. The golden rule treats a prospectus as a document of uberrima fides — not in the strict insurance sense, but in the sense that the promoter, who alone knows the facts, must volunteer them rather than wait to be asked. Regulation 24's insistence on disclosures that are "adequate" is the statutory descendant of Kindersley V-C's command not to omit material facts.

What counts as "material" is judged from the standpoint of the reasonable investor: a fact is material if its disclosure would be likely to influence the decision of a prudent investor whether to subscribe. The DRHP must therefore be drafted not to persuade but to inform — a distinction that issuers and their merchant bankers frequently blur, and which SEBI's enforcement actions repeatedly correct.

Schedule VI: The Anatomy of Disclosure

Schedule VI of the ICDR Regulations is the detailed checklist of what a DRHP must contain. It is organised into parts, but for the student the substance falls into recognisable heads. The cover page and general information identify the issuer, the lead managers, the registrar, the stock exchanges where listing is sought, and the nature of the instrument. The risk factors section — arguably the most read part of any DRHP — must set out, in order of materiality, the internal and external risks specific to the issuer and the issue, written in plain language and not buried in boilerplate.

The capital structure discloses the share capital before and after the issue, the history of capital build-up, the shareholding of the promoter and promoter group, and any shares issued at a price lower than the issue price in the preceding year. The objects of the issue must state with precision how the money raised will be deployed, the means of finance, the deployment schedule, and any interim use of funds — a head on which SEBI is exacting, because vague objects are a classic vehicle for diversion. The financial statements, restated and audited, give the historical picture; management's discussion and analysis interprets it. Disclosures on litigation and defaults, on related-party transactions, on the basis for the issue price, and on promoters and management complete the document.

Two heads connect directly to other chapters. The lock-in and minimum contribution of the promoter, disclosed in the capital-structure section, are governed by the rules discussed in Promoters' Contribution and Lock-in; and the eligibility on which the company relies to make the offer at all is governed by the conditions in Eligibility for an IPO. The DRHP is where compliance with both is demonstrated to the public.

Filing the Draft: Regulation 25 in Practice

The DRHP is not filed by the issuer directly across the counter. Under Regulation 25 it is filed through a lead manager (merchant banker registered with SEBI), who lodges it with the Board and simultaneously with the stock exchanges on which listing is proposed, accompanied by the fee specified in the Regulations. The lead manager files a due-diligence certificate confirming that the disclosures in the draft are true, fair and adequate and in conformity with the documents and materials relevant to the issue. This certification is not a formality: it fixes the merchant banker with primary responsibility for the accuracy of the document, and SEBI has repeatedly proceeded against lead managers who certified DRHPs that turned out to be misleading.

The role of the lead manager flows from the definitions and obligations discussed in Definitions and Scope under the ICDR Regulations. Once the draft is filed, SEBI examines it and may issue observations — in effect, a list of deficiencies and additional disclosures required — which the issuer must address before the offer can proceed. SEBI's observations are not an approval of the issue or an endorsement of its merits; every offer document carries a mandatory disclaimer to that effect. The Board's function is confined to ensuring disclosure compliance, consistent with the disclosure-based philosophy of the regime.

The Twenty-One Day Public Comment Window

Regulation 26 introduces a feature that distinguishes Indian practice: the DRHP, once filed, is hosted on the websites of SEBI, the stock exchanges and the lead managers, and is made available to the public for comments for a period of not less than twenty-one days from the date of filing. The issuer must make a public announcement, in the prescribed manner, inviting the public to comment on the disclosures made in the draft. Comments received are forwarded to the issuer and the lead managers and must be considered; where a comment exposes a deficiency, the disclosure is corrected before the RHP is finalised.

The rationale is structural. SEBI's examining team, however diligent, cannot know the issuer's affairs as well as its competitors, suppliers, former employees, litigants and aggrieved investors. The public comment window crowdsources scrutiny: it allows those with first-hand knowledge to surface facts that the issuer might prefer left unsaid — undisclosed litigation, related-party dealings, or overstated claims. The twenty-one-day floor ensures a meaningful window rather than a token one. This mechanism is a practical answer to the problem identified in the Sahara litigation, where concealment in the offering document was found to "go to the root of the controversy".

Sahara: When Disclosure Goes to the Root

The leading Indian authority on disclosure in an offering document is Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India (2013) 1 SCC 1, decided by the Supreme Court on 31 August 2012. Two Sahara group companies issued Optionally Fully Convertible Debentures (OFCDs) and raised tens of thousands of crores from millions of subscribers, claiming the issue was a private placement outside SEBI's reach. A central plank of the controversy was the offering document: the companies had filed a red herring prospectus with the Registrar of Companies but had concealed the true character and scale of the offer.

The Securities Appellate Tribunal, whose findings the Supreme Court upheld, observed that the red herring prospectus did not disclose that the information memorandum was being issued to more than three crore persons inviting them to subscribe, and held that "this concealment is, indeed, very significant and goes to the root of the controversy". The Supreme Court (Radhakrishnan and Khehar JJ.) held that an offer to more than forty-nine persons is deemed a public offer attracting the first proviso to Section 67(3) of the Companies Act, 1956, and that the Sahara companies were therefore bound to comply with the public-issue and listing regime and to refund the monies collected, with interest. Sahara is the clearest judicial statement that disclosure is not a box-ticking exercise: an offering document that camouflages the very nature and scale of what is being offered fails the truth-and-adequacy standard at its core, whatever else it discloses.

Liability for Misstatement and Omission

A DRHP that misstates or omits a material fact exposes the issuer, its directors, the promoters and the lead managers to liability on several fronts. Under the Companies Act, 2013, Section 34 imposes criminal liability for mis-statement in a prospectus (attracting the fraud provisions of Section 447), and Section 35 imposes civil liability to compensate subscribers who sustain loss by reason of any untrue or misleading statement, or the inclusion or omission of any matter calculated to mislead. The common law that underlies these provisions is instructive for the standard of fault.

In Derry v. Peek (1889) 14 App Cas 337, the House of Lords held that an action in the tort of deceit requires proof of fraud — a false statement made knowingly, without belief in its truth, or recklessly without caring whether it be true or false — and that a merely negligent misstatement, however careless, did not found an action in deceit. Derry v. Peek exposed how high the bar was for defrauded investors and was the immediate spur for statutory liability for untrue prospectus statements. In Rex v. Kylsant [1932] 1 KB 442, the Royal Mail Steam Packet case, the prospectus stated truthfully that dividends had been regularly paid over a period of years, but omitted that those dividends had been paid out of accumulated reserves while the company was in fact trading at a loss; the literal truth of the statement was held to be no defence because the omission rendered the document as a whole misleading. Kylsant is the classic illustration of why Regulation 24 requires disclosure to be adequate as well as true: a half-truth in a prospectus can be as actionable as a lie.

Due Diligence and the Lead Manager's Exposure

Because the lead manager certifies the DRHP, SEBI's enforcement frequently targets merchant bankers and not merely issuers. The point is illustrated by SEBI's GDR cases. In Securities and Exchange Board of India v. Pan Asia Advisors Ltd., decided by the Supreme Court on 6 July 2015, the Court held that SEBI's jurisdiction extends to lead managers to the issuance of Global Depository Receipts by Indian companies where their conduct has an adverse impact on the integrity of the Indian securities market, even though the GDRs were issued abroad. The lead manager, Pan Asia Advisors, had been involved in structuring GDR issues in which the subscription was funded by loans secured against the very proceeds, and the disclosures to Indian exchanges were found to be misleading.

The principle that emerges is that the merchant banker's due-diligence certificate is a substantive undertaking. The lead manager cannot shelter behind the issuer; it must independently verify the disclosures it certifies and is answerable if a DRHP it files is found to contain material misstatements or omissions. This is the reason DRHP preparation is an exhaustive, months-long exercise of verification against source documents, board minutes, financial records and litigation files — the certificate is only as good as the diligence behind it.

From Draft to Final: DRHP, RHP and Prospectus

It helps to keep the three documents distinct. The DRHP is the draft filed with SEBI and the exchanges and opened to public comment; it carries every Schedule VI disclosure except the price and, in a fresh issue, the exact number of shares. The RHP is the document filed with the Registrar of Companies after SEBI's observations are incorporated; it adds the price band and is the document on the basis of which bids are invited during the issue period. The final prospectus is filed with the Registrar after the issue closes and the price is discovered through book-building; it states the actual issue price and the number of shares allotted.

The continuity matters: a material fact that surfaces between the DRHP and the RHP, or between the RHP and the prospectus, must be carried into the later document — the disclosure obligation is continuous, not discharged once and for all at the draft stage. The relationship between the priced and the unpriced documents is examined in detail in Disclosure in the Red Herring Prospectus. For a fresh public offer by a listed company, the parallel disclosure regime is discussed in Eligibility for an FPO.

The Abridged Prospectus and the Application Form

No retail investor reads a four-hundred-page DRHP, and the law does not pretend otherwise. Every application form for a public issue must be accompanied by an abridged prospectus — a condensed version containing the salient features of the offer in a prescribed format, drawn from the DRHP. The abridged prospectus is the document the ordinary subscriber actually reads, and SEBI has periodically simplified and standardised its format precisely so that the most material disclosures — risk factors, objects of the issue, basis of the price, promoter background, financial summary and outstanding litigation — are presented intelligibly on a few pages.

The abridged prospectus does not dilute liability. Because it is a faithful condensation of the DRHP, any misstatement or omission in it traces back to the parent document and attracts the same liability under Sections 34 and 35 of the Companies Act, 2013. The abridged prospectus and the front cover of the offer document are therefore drafted with care: they are the disclosures most investors will rely on, and their accuracy is tested against the full DRHP from which they are derived.

The Confidential Pre-Filing Route

In 2022 SEBI introduced an optional pre-filing mechanism that alters the sequence described above. Under this route an issuer may file the draft offer document with SEBI and the stock exchanges on a confidential basis; the document is not made public for comment at the draft stage. SEBI examines the confidential draft and issues its observations privately, the issuer incorporates them, and an updated DRHP is then made public for a limited period before the issue. The pre-filing route was modelled on the confidential-filing practice in mature markets and is intended to let issuers test the waters and engage with the regulator without prematurely exposing sensitive commercial information to competitors.

The pre-filing route does not relax the substantive disclosure standard of Regulation 24 — the document that ultimately reaches the public must still be true and adequate, and Schedule VI still governs its contents. What changes is the timing and visibility of the public-comment step. For most issuers the conventional DRHP-with-comment route under Regulation 26 remains the default; pre-filing is an alternative, not a replacement, and its take-up has been gradual.

Common Disclosure Deficiencies SEBI Flags

SEBI's observations on DRHPs, and its occasional returns of draft documents, reveal recurring failures. Vague objects of the issue — "general corporate purposes" stretched well beyond the permitted ceiling, or deployment schedules that are illusory — are a frequent ground of objection, because indeterminate objects defeat the investor's ability to assess how his money will be used. Inadequate risk-factor disclosure — risks understated, buried, or written so generically as to be meaningless — is another. Undisclosed or understated litigation against the issuer, its promoters or its directors is a serious deficiency, as is incomplete disclosure of related-party transactions, which can mask diversion of funds.

SEBI also scrutinises the basis for the issue price: where an issuer justifies a high price by reference to peer multiples, those comparators must be genuine and the metrics consistently computed. Discrepancies between the restated financials and the narrative in the management discussion, gaps in promoter-group disclosure, and failure to disclose price-sensitive developments occurring after the DRHP are all flagged. The consistent theme is that a defect of adequacy — material facts present but presented in a way that obscures rather than informs — is treated as seriously as an outright falsehood, exactly as Regulation 24 and the Kylsant principle require.

The DRHP in Examination Perspective

For the judiciary and CLAT-PG aspirant, the disclosure regime for the DRHP rewards a structured answer. Begin with the statutory anchor: a DRHP is a red herring prospectus (Section 32, Companies Act, 2013) filed at the draft stage with SEBI and the exchanges, which must contain all Schedule VI disclosures and meet the Regulation 24 standard of being "true and adequate so as to enable the applicants to take an informed investment decision". Then map the mechanics: filing through a lead manager with a due-diligence certificate (Reg 25), the not-less-than-twenty-one-day public comment window (Reg 26), SEBI's observations, and the progression from DRHP to RHP to prospectus.

Anchor the principles in authority. Use New Brunswick v. Muggeridge for the golden rule, Derry v. Peek for why fraud-based liability proved inadequate and prompted statutory liability, Rex v. Kylsant for the rule that a literal truth which omits a material qualification is misleading, and Sahara (2013) 1 SCC 1 for the Indian Supreme Court's holding that concealment going to the root of the offer vitiates the document and attracts SEBI's jurisdiction. Close by linking disclosure to the regulatory philosophy traced in Introduction and Object of the ICDR Regulations: SEBI does not vouch for the investment, it guarantees the investor's right to the full material facts. The DRHP is the instrument that delivers that right.