RED HERRING PROSPECTUS AND BOOK BUILDING PROCESS

As per Section 32, a company proposing to make an offer of securities may issue a red herring prospectus before the issue of a prospectus. It contains all other information except 

• Quantum of Securities
• Price of Securities

Why? Since the Price has not been discovered.

Red herring prospectus is issued during the book-building process. To understand the book-building process we should first understand the journey of the company to reach this stage:

• When a company needs to start, they always start small but it needs capital.
• Capital needs to grow, expand, diversity.

So say initially friends and family members give you. Then you can have “Angel Investors”. They are private individuals who invest in company’s that show a lot of promise. There can be Private Equity investing.

• Finally, if you want to grow, you go for IPO i.e. listing our stock.
• The company offers to the Public – stock, equity, and shares.

Red Herring Prospectus is a preliminary prospectus that does not contain complete particulars of the price of securities. It is called red herring because the front page of the prospectus displays a bold red disclaimer stating that the information in the prospectus is not complete and may be changed. A company making a public issue of securities has to file a draft red herring prospectus with SEBI through a SEBI registered merchant banker - Before the filing of the prospectus to ROC. SEBI reviews the draft document and may give observations and modifications to the same. After incorporating the observations of SEBI by the company, the document becomes a red herring prospectus. The company shall file the red herring prospectus with ROC at least three days before the opening of the subscription offer. 

According to SEBI guidelines, Book Building is a process undertaken by the companies by which demand for the securities proposed to be issued by a corporate body is discovered and the price for such security is accessed for the determination of quantum of securities to be issued employing offer document or through the red herring prospectus. It is a method or a way or marketing the shares or securities of a company where the quantum and price of securities to be issued to the public during an initial public offering IPO is divided based on bids received from prospective shareholders by lead merchant bankers or investment banker appointed by the company. 

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.