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Companies Act

Kanchan M Mangaonkar (Student) (40 Points)

10 August 2010

Can any one explain me what is Red Herring Prospectus ?

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Yogesh Bhatt (Company Secretary) (475 Points)
Replied 10 August 2010

"Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares being offered or the amount of issue.

This means that in case the price is not disclosed, the number of shares and the upper and lower price bands are disclosed.

On the other hand, an issuer can state the issue size and the number of shares are determined later.

An RHP for and FPO can be filed with the RoC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue.

In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed.

Hence, such details are not shown in the Red Herring prospectus filed with the RoC in terms of the provisions of the Companies Act.

Thanks & Regards.

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vivek (CS) (751 Points)
Replied 10 August 2010

A red herring prospectus is a document submitted by a company (issuer) who intends on having a public offering of securities (either stocks or bonds) in the India. Most frequently associated with an Initial Public Offering (IPO), this registration statement must be filed with the Securities and Exchange Board of India (SEBI) .

"Red-herring prospectus" means a prospectus, which does not have complete particulars on the price of the securities offered and quantum of securities offered.

Why it is called so?

The term red herring originates from the tradition whereby young hunting dogs in Britain were trained to follow a scent with the use of a "red" (salted and smoked) herring (see kipper). This pungent fish would be dragged across a trail until the puppy learned to follow the scent.

The reason it is called a red herring is due to a disclosure statement printed in red ink on the cover which explicitly states that the issuing company is not attempting to sell its shares. e.g. "A Registration Statement relating to these securities has been filed with the SEBI but has not yet become effective. Information contained herein is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective."

Regards,

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