Disclosure in Red Herring Prospectus

In a book-built initial public offer the issuer goes to the market with a document that deliberately leaves one box empty: the price. That document is the red herring prospectus (RHP), and precisely because it omits the final price and the exact number of securities, the law demands that everything else in it be disclosed with scrupulous, verifiable accuracy. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR Regulations") build their entire disclosure architecture on a single command in Regulation 24(1): the offer document must contain all material disclosures which are true and adequate so as to enable applicants to take an informed investment decision. This chapter unpacks what the RHP must disclose, how it differs from the draft red herring prospectus and the final prospectus, how the price band is handled, who certifies the disclosures, and the civil and criminal consequences of getting it wrong.

What a Red Herring Prospectus Is

The term "red herring prospectus" is defined in Section 32 of the Companies Act, 2013. The Explanation to that section states that a red herring prospectus "means a prospectus which does not include complete particulars of the quantum or price of the securities included therein." Under Section 32(1) a company proposing to make an offer of securities may issue an RHP prior to the issue of a prospectus; under Section 32(2) it must be filed with the Registrar of Companies at least three days before the subscription list opens. Crucially, Section 32(3) provides that an RHP "shall carry the same obligations as are applicable to a prospectus," and any variation between the RHP and the final prospectus must be highlighted in the prospectus. On closing of the offer, Section 32(4) requires the company to file the closing prospectus, stating the total capital raised and the closing price, with both the Registrar and SEBI.

The ICDR Regulations dovetail with this scheme. Regulation 2(1) defines "offer document" as "a red herring prospectus, prospectus or shelf prospectus, as applicable, referred to under the Companies Act, 2013, in case of a public issue, and a letter of offer in case of a rights issue." The RHP is therefore the operative offer document for a book-built public issue. It is the principal selling document an investor reads before bidding, and the entire disclosure-based regime of Indian securities law rests on the proposition that the market polices price while the regulator polices disclosure. For the conceptual foundations of this disclosure philosophy, see our chapter on the introduction and object of the ICDR Regulations, and for the meaning of terms used throughout this article, the chapter on definitions and scope.

The Master Disclosure Standard: Regulation 24

Regulation 24(1) is the keystone provision. It declares that "the offer document shall contain all material disclosures which are true and adequate to enable the applicants to take an informed investment decision." Three words carry the weight: material, true and adequate. Materiality is judged from the standpoint of a reasonable investor; truth excludes misstatement; adequacy excludes misleading omission. This single sentence converts the old common-law "golden rule" of prospectus framing into a statutory command.

Regulation 24(2) then particularises: without prejudice to the generality of sub-regulation (1), the red herring prospectus and prospectus shall contain (a) disclosures specified in the Companies Act, 2013 and the Companies (Prospectus and Allotment of Securities) Rules, 2014, as applicable; and (b) disclosures specified in Part A of Schedule VII of the Regulations. Schedule VII Part A is the detailed line-item checklist covering the issuer's business, industry, management, financial statements, objects of the issue, risk factors, capital structure, basis of issue price and litigation. Regulation 24(5) adds a freshness rule: the lead manager must ensure that the information in the offer document, and the particulars as per audited financial statements, are not more than six months old from the issue opening date.

DRHP, RHP and the Final Prospectus Distinguished

A book-built IPO passes through three successive disclosure documents. First comes the draft red herring prospectus (DRHP), filed with SEBI for examination. Under Regulation 25(1) the issuer files three copies of the draft offer document with the concerned regional office of SEBI through the lead managers, and under Regulation 26(1) the DRHP is hosted for public comment for at least twenty-one days. SEBI may issue observations within the period stipulated in Regulation 25(4). The DRHP is the subject of its own chapter, disclosure in the draft red herring prospectus, which should be read alongside this one.

Second comes the red herring prospectus itself, filed with the Registrar of Companies after SEBI's observations are incorporated. It contains everything the prospectus will contain except the final price and final number of securities. Third comes the final prospectus, registered with the Registrar after price discovery, which fills in the price and the issue size and highlights any variation from the RHP as required by Section 32(3). The legal significance of the distinction is that liability for misstatement attaches to the RHP exactly as it attaches to the prospectus, because Section 32(3) places them on the same footing.

The practical workflow links the three documents tightly. SEBI's observations on the DRHP under Regulation 25(4) are not an approval of the issue or a guarantee of its merits; they are confined to the adequacy of disclosure, and the regulator expressly disclaims any responsibility for the financial soundness of the issuer. Once observations are incorporated, the issuer is free to determine the timing of the issue, file the RHP and open the book. The RHP, not the DRHP, is the document on the faith of which investors actually bid, which is why Section 32 fixes the RHP, and not the draft, as the prospectus-equivalent for liability purposes. A candidate should be able to state, in one line, that the DRHP is a SEBI-facing examination document while the RHP is a Registrar-filed, investor-facing offer document.

Handling the Price: Price Band and Floor Price

The defining feature of the RHP is that it carries a price band rather than a fixed price. Regulation 29(1) provides that the issuer may mention a price or a price band in the offer document in case of a fixed price issue, and a floor price or a price band in the red herring prospectus in case of a book built issue, determining the final price at a later date before registering the prospectus with the Registrar of Companies. The proviso is firm: the prospectus registered with the Registrar shall contain only one price.

The band is constrained. Regulation 29(2) caps the spread: the cap on the price band shall be less than or equal to one hundred and twenty per cent of the floor price. Regulation 29(3) sets a floor on the floor: the floor price or final price shall not be less than the face value of the securities. Where the issuer chooses not to disclose the floor price or band in the RHP itself, Regulation 29(4) requires it to announce the floor price or band at least two working days before the issue opens, in the same newspapers carrying the pre-issue advertisement, and Regulation 29(5) requires that announcement to carry the relevant financial ratios for both ends of the band and to direct investors to the "basis of issue price" section. Regulation 27 reinforces transparency by requiring that the face value disclosure appear in identical font size to the price band or issue price, a deliberately anti-deceptive rule that prevents an issuer from visually downplaying a low face value next to a high band. Pricing itself, including the book-building mechanism, is governed by Regulation 28 read with Schedule XIV; Regulation 28(1) permits the issuer to determine the price, and in the case of convertible securities the coupon rate and conversion price, in consultation with the lead manager or through the book-building process.

The disclosure logic of the price band is subtle. By stating a floor and a cap, the RHP tells investors the boundaries within which demand will set the price, while the "basis of issue price" section in Schedule VII Part A justifies that band by reference to earnings multiples, net asset value, comparable listed peers and qualitative business factors. An investor is thus given the analytical scaffolding to judge whether the eventual cut-off price is reasonable. Regulation 29(5) and 29(6) reinforce this by requiring that the floor-price or band announcement, where made separately, carry the relevant financial ratios for both ends of the band, be hosted on the stock exchange websites, and be pre-filled in the application forms. The omission of a precise number is therefore not a gap in disclosure; it is a disclosed, bounded uncertainty.

Risk Factors, Objects of the Issue and Capital Structure

Within Schedule VII Part A, three blocks of disclosure attract the closest scrutiny. The risk factors section must set out, in order of materiality, the internal and external risks to the issuer's business, including dependence on key customers, regulatory and litigation exposure, and any qualified or adverse audit opinions. The objects of the issue must state, with deployment schedules, exactly how the net proceeds will be applied; vague "general corporate purposes" cannot swallow the issue, and Regulation 2(1)(q) circumscribes what may be labelled as general corporate purposes. The capital structure and promoter disclosures must reveal the build-up of promoters' holdings, the price at which shares were acquired, and the lock-in to which they are subject, dovetailing with our chapter on promoters' contribution and lock-in.

The rationale for the rigour is old. In New Brunswick & Canada Railway & Land Co. v. Muggeridge (1860), Vice-Chancellor Kindersley framed the "golden rule" for prospectus drafting: those who issue a prospectus hold out great advantages to induce the public to take shares, and "the public is at the mercy of company promoters," so everything must be stated with strict and scrupulous accuracy and no fact omitted whose existence might in any degree affect the nature or quality of the advantages held out. Indian disclosure law is the statutory descendant of this rule, and Regulation 24(1)'s "true and adequate" standard is its modern codification.

Omission as Misstatement: The Half-Truth Problem

The hardest disclosure failures are not lies but half-truths. The leading authority is Rex v. Kylsant (the Royal Mail case, 1932), where the prospectus issued by Lord Kylsant's shipping company disclosed that dividends had been paid for a number of years at healthy rates. Every figure stated was literally true. What was omitted was that the dividends had been paid not out of trading profits but out of undisclosed realised capital reserves accumulated in earlier prosperous years, while the company was in fact trading at a loss. Lord Kylsant was convicted because the prospectus, though literally accurate in each sentence, was misleading as a whole by reason of what it left out.

This is exactly the mischief Regulation 24(1) targets through the word "adequate" and the Companies Act addresses through its definition of an untrue statement. Section 34 of the Companies Act, 2013 expressly provides that a statement is deemed untrue or misleading not only where it is itself false but "where the inclusion or omission of any matter is likely to mislead." The RHP draftsman therefore cannot defend a misleading document by pointing to the literal truth of each isolated sentence; the document is judged by the overall impression it conveys to a reasonable investor.

Due Diligence and the Lead Manager's Certification

Disclosure is not self-certifying. Regulation 24(3) imposes on the lead manager a duty to "exercise due diligence and satisfy themselves about all aspects of the issue including the veracity and adequacy of disclosure in the draft offer document and the offer document." Regulation 24(4) requires the lead manager to call upon the issuer, its promoters, directors and any selling shareholders to fulfil their disclosure obligations. The mechanism is the due diligence certificate: Regulation 25(2)(b) requires a due diligence certificate in Form A of Schedule VI to be filed with the DRHP, and Regulation 25(9)(b) requires a fresh due diligence certificate in Form C of Schedule VI at the time of registering the offer document.

The lead manager is thus, in SEBI's own conception, the eye and ear of the regulator and the investor. The Securities Appellate Tribunal has repeatedly emphasised that general investors are carried away by the contents of the offer document and that the merchant banker is bound to verify content and exercise genuine due diligence rather than mechanically certifying it. A merchant banker who artfully arranges or suppresses facts in the offer document is liable in his own right, independently of the issuer. The role of intermediaries in the broader issue process is developed in our chapter on eligibility for an IPO.

Two features of this duty deserve emphasis. First, due diligence is a continuing obligation, not a one-time act: a fresh certificate is required at registration of the offer document precisely because facts may change between the DRHP and the RHP, and the lead manager must re-verify. Second, the duty is non-delegable in substance. A lead manager cannot discharge it by relying blindly on management representations or on experts' reports without applying an independent professional mind to red flags. Where the lead manager certifies disclosures it knew or ought to have known were inadequate, SEBI can proceed against it under the fraudulent and unfair trade practices regime, and the certification itself becomes the evidentiary fulcrum of the case. The disclosure regime thus enlists the merchant banker as a gatekeeper whose own liability is the price of the trust the market places in the offer document.

Civil Liability for Misstatement

Where an RHP contains a misstatement, the persons who authorised its issue face civil liability under Section 35 of the Companies Act, 2013. A subscriber who suffers loss may claim compensation from the company, every director, every promoter, every person who authorised the issue of the prospectus, and every expert whose statement is included with consent. The liability is to compensate the person who has subscribed for securities on the faith of the prospectus for any loss or damage sustained by reason of the untrue or misleading statement or the omission.

The defences in Section 35(2) are narrow. A person escapes liability essentially by showing he withdrew his consent before issue, or that he had reasonable ground to believe and did believe up to the time of allotment that the statement was true, or that the statement was a correct copy of an expert's statement he reasonably believed competent. The structure mirrors the common-law distinction in Derry v. Peek (1889), where the House of Lords held that the tort of deceit requires a false statement made knowingly, or without belief in its truth, or recklessly careless whether it be true or false; an honest if mistaken belief defeats deceit. The statutory "reasonable ground to believe" defence under Section 35 absorbs that honest-belief principle while raising the bar to require reasonableness, not mere honesty.

Criminal Liability and Fraudulent Inducement

Beyond compensation, Section 34 of the Companies Act, 2013 imposes criminal liability for mis-statements in prospectus: where a prospectus (including an RHP, by virtue of Section 32(3)) includes any statement which is untrue or misleading in form or context, or where any inclusion or omission of matter is likely to mislead, every person who authorises its issue is liable under Section 447 for fraud, unless he proves the statement or omission was immaterial or that he had reasonable grounds to believe it was true. Section 36 separately penalises any person who, knowingly or recklessly, makes a false, deceptive or misleading statement, promise or forecast, or conceals material facts, to induce another to subscribe for or deal in securities, again attracting Section 447.

Section 447, the anchor fraud provision, prescribes imprisonment and fine, with enhanced punishment where the fraud involves public interest. The combined effect of Sections 34, 35 and 36 is that the RHP is one of the most heavily policed commercial documents in Indian law: a single material misstatement or misleading omission can trigger simultaneous civil compensation, criminal prosecution and SEBI enforcement.

SEBI Enforcement and the Reach of Disclosure Law

SEBI's enforcement reach over disclosure failures is wide. In Sahara India Real Estate Corporation Ltd. v. SEBI, (2012) 10 SCC 603, the Supreme Court held that two Sahara group companies which had raised over Rs 17,000 crore from millions of investors through optionally fully convertible debentures had in substance made a public issue, triggering the listing, disclosure and refund obligations of the securities laws regardless of the label placed on the instrument. The Court held that the form of the instrument does not diminish SEBI's regulatory reach where public funds are solicited, and that investor protection through full disclosure is paramount over corporate structuring. The companies were directed to refund the collections with interest. Sahara is the clearest modern statement that the disclosure obligations underpinning documents like the RHP cannot be evaded by re-characterising a public issue as a private placement.

On the liability of intermediaries, the Supreme Court in SEBI v. Pan Asia Advisors Ltd., (2015) 10 SCC 597 (decided 6 July 2015) held that SEBI's jurisdiction extends to lead managers to a global depository receipts issue by an Indian company, where the GDRs were converted into equity shares traded on Indian exchanges and the fraudulent scheme adversely affected investors in the Indian securities market. The decision confirms that those responsible for offer-document disclosures answer to SEBI even where part of the transaction occurs offshore, so long as the Indian securities market is impacted.

Variation, the Closing Prospectus and Post-Issue Disclosure

Because the RHP is, by design, incomplete on price and quantum, the law requires the gap to be closed transparently. Section 32(4) of the Companies Act mandates that, upon closing of the offer, the company file the prospectus stating the total capital raised, the closing price of the securities, and any other details not included in the RHP, with both the Registrar and SEBI. Section 32(3) requires any variation between the RHP and the prospectus to be highlighted as variations in the prospectus, so that an investor who bid on the faith of the RHP can see precisely what changed.

If, between filing the DRHP and the issue, there is a material change in the matters specified in Schedule XVII, Regulation 25(6) requires an updated offer document or a fresh draft offer document to be filed. Regulation 26(4) requires the issuer and lead manager to ensure that the hosted offer documents are identical in content to the printed versions filed with the Registrar, SEBI and the stock exchanges. The disclosure obligation, in short, is continuous: it begins with the DRHP, crystallises in the RHP, and is reconciled in the closing prospectus.

RHP Disclosure Compared with FPO and Fixed-Price Issues

The RHP regime is specific to book-built issues. In a fixed-price issue there is no price band and no book; the prospectus states a single price upfront, and there is consequently no "red herring" stage in the strict sense, though the same Regulation 24 disclosure standard applies. In a further public offer by an already-listed issuer, the disclosure burden is calibrated differently because the market already has information about the issuer through continuous-disclosure obligations; the comparative eligibility and disclosure requirements are dealt with in our chapter on eligibility for an FPO.

What unites all these documents is the Regulation 24(1) command of "true and adequate" disclosure and the Companies Act liability scaffolding. The RHP is simply the form that command takes where the price is to be discovered through book building rather than fixed in advance. For the full map of the disclosure framework and how the RHP fits among the other chapters, see the SEBI ICDR Regulations hub.

Exam Pointers and Common Traps

For judiciary and CLAT-PG candidates, the high-yield points are: (1) the RHP is defined in Section 32 of the Companies Act, 2013, not in the ICDR Regulations, which instead fold it into "offer document" in Regulation 2(1); (2) the master disclosure standard is Regulation 24(1) "all material disclosures which are true and adequate"; (3) the price band cap is governed by Regulation 29(2) at 120 per cent of the floor price, and the floor price cannot fall below face value under Regulation 29(3); (4) Section 32(3) places the RHP on the same liability footing as a prospectus, so Sections 34, 35 and 36 apply to it.

Common traps: do not confuse the DRHP (filed with SEBI, twenty-one-day public comment under Regulation 26(1)) with the RHP (filed with the Registrar, three days before subscription opens under Section 32(2)). Do not say the RHP carries no price; it carries a price band or floor price, only the final single price is absent. Do not attribute the "golden rule" to Derry v. Peek; the golden rule of strict accuracy comes from New Brunswick & Canada Railway & Land Co. v. Muggeridge (1860), while Derry v. Peek supplies the deceit/honest-belief test and Rex v. Kylsant the half-truth-by-omission principle.