HOW TO FIND RISK FACTORS AND OUTSTANDING LITIGATIONS BY READING THE DRHP (DRAFT RED HERRING PROSPECTUS) FILED WITH SEBI IN AN IPO?

 

HOW TO FIND RISK FACTORS AND OUTSTANDING LITIGATIONS BY READING  THE DRHP (DRAFT RED HERRING PROSPECTUS) FILED WITH SEBI IN AN IPO?

WHAT IS DRHP (DRAFT RED HERRING PROSPECTUS)?

DRHP MEANING:

A Draft Red Herring Prospectus (DRHP) is the initial document filed with SEBI by companies planning an Initial Public Offering (IPO) to raise capital.

CONTENTS:

It includes details on company financials, promoters, and business operations, but typically excludes the exact price band and number of shares.

PROCESS:

After SEBI reviews the DRHP, the company files a Red Herring Prospectus (RHP) with the Registrar of Companies (ROC) before the final, full prospectus.

HOW TO FIND THESE DISCLOSURES?

·    If you are looking at a specific IPO, search the PDF of the DRHP for these keywords:

·    "Internal Risk Factors" (usually the first 20–50 pages).

·    "Outstanding Litigation" (near the end of the document).

·    "Objects of the Issue" (to see if the money is actually staying in the company).

RED FLAGS IN DRHP

DISCLOSURE AREA	WHAT TO LOOK FOR
PROMOTERS	Criminal cases, PMLA investigations, or SEBI debarment.
Financials	Sustained losses, negative cash flow, or auditor "Qualifications."
Use of Funds	Paying off old debt or buying assets from "unknown" vendors
Litigation	Tax , criminal cases or contingent liabilities that demands that exceed the total IPO size

STARTLING RISK FACTORS

Companies often list "boilerplate" risks, but some are specific and "horrible":

CUSTOMER CONCENTRATION:

Disclosing that 80–90% of revenue comes from just one client. If that client leaves, the company collapses.

RELATED PARTY TRANSACTIONS:

Disclosing that the company rents its offices from the promoter’s wife or buys raw materials from the promoter’s own side-business at non-market rates.

CRIMINAL PROCEEDINGS & PROMOTER LITIGATION

WEWORK INDIA (2025/2026)

In this case, petitioners challenged the DRHP for allegedly downplaying serious criminal charges under the PMLA and IPC (Sections 409 and 477A) against promoters.

BANNING FROM MARKETS:

If any promoter or group company was previously banned by SEBI from the capital markets (e.g., the historic DLF case where subsidiary transactions were concealed.

TRAFIKSOL ITS TECHNOLOGIES (2025)

SHAM VENDORS:

In the case of Trafiksol ITS Technologies (2025), SEBI found the company intended to use IPO proceeds to buy software from a third-party vendor that turned out to be a shell entity with no technical expertise.

BRIDGE LOAN SECRETS:

Some companies fail to disclose that they took high-interest "bridge loans" just weeks before the IPO, intended to be paid off immediately with investor money.

FINANCIAL RED FLAGS & "GOING CONCERN" RISKS

NEGATIVE NET WORTH:

Disclosure that the company has lost more money than its total capital.

NEGATIVE CASH FLOWS:

Admitting that the business "burns" cash and has never actually made a profit from operations (common in tech startups like Paytm or Zomato at the time of their IPOs).

AUDITOR QUALIFICATIONS:

If an auditor adds a "Going Concern" note, it means they doubt the company will survive the next 12 months without the IPO funds.

RED FLAGS IN CURRENT 2026 DRHP FILINGS WITH SEBI

COMPANY	RISK FACTORS
Shadowfax Technologies	High "Offer for Sale" (OFS) component vs. Fresh Issue; high operational burn.
KRM Ayurveda	Look for regulatory approvals for Ayurveda formulations and any pending consumer court cases.
Rodec Pharma	Look for pending USFDA observations or drug quality litigation (common in the pharma sector).

KEY TAKEOVERS

It requires a deep dive into the specific sections of their DRHP before investing your hard earned money  in IPOs.

LITIGATION INVOLVING THE PROMOTERS:

This is where you find criminal cases, tax evasion charges, or money laundering (PMLA) investigations against the founders.

LITIGATION INVOLVING THE COMPANY:

Look for "Environmental violations," "Intellectual Property (IP) disputes," or "Material Tax demands" that could exceed the company's net worth.

REGULATORY ACTIONS:

 Any past penalties imposed by SEBI, RBI, or the Enforcement Directorate (ED) on the company has to searched for.

 

R V SECKAR, FCS, LLB ,79047 19295