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 Securities and Exchange Commission 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."
When a company decides to go public the company appoints underwriters and registrars of issue, it first involve one or more investment banks known as underwriters. The company and the investment bank first discuss some aspects like the amount of money a company will raise, the type of securities to be issued and all the details in the underwriting agreement. After the company secures an underwriter, it files a draft offer prospectus SEBI for review.
This document contains information about the offering and company’s information like financial statements, management background, legal issues (if any), use of proceeds and risk factors. Once the draft document cleared by SEBI, it becomes offer document. Offer document is then submitted to registrar of the issue and stock exchange. Once offer document gets clearance from stock exchange, Issuer company makes it available to the public. The issue prospectus is now called as ‘Red Herring Prospectus’.
It means a prospectus which does not have complete details as regards the price at which the securities are being offered and the quantity of securities. When the offer of securities gets closed, then the company has to file a final prospectus stating therein the total capital or quantity of securities raised and the price of the securities or any other details which were not given in the red-herring prospectus. This final prospectus, in case of a listed public company, is necessary to be filed with the Securities and Exchange Board of India (SEBI) and the Registrar of Companies but if the company is not a listed one then the company has to file the final prospectus only with the Registrar of companies.
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 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 ROC. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.
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 Securities and Exchange Commission 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."
When a company decides to go public the company appoints underwriters and registrars of issue, it first involve one or more investment banks known as underwriters. The company and the investment bank first discuss some aspects like the amount of money a company will raise, the type of securities to be issued and all the details in the underwriting agreement. After the company secures an underwriter, it files a draft offer prospectus SEBI for review.
This document contains information about the offering and company’s information like financial statements, management background, legal issues (if any), use of proceeds and risk factors. Once the draft document cleared by SEBI, it becomes offer document. Offer document is then submitted to registrar of the issue and stock exchange. Once offer document gets clearance from stock exchange, Issuer company makes it available to the public. The issue prospectus is now called as ‘Red Herring Prospectus’.
It means a prospectus which does not have complete details as regards the price at which the securities are being offered and the quantity of securities. When the offer of securities gets closed, then the company has to file a final prospectus stating therein the total capital or quantity of securities raised and the price of the securities or any other details which were not given in the red-herring prospectus. This final prospectus, in case of a listed public company, is necessary to be filed with the Securities and Exchange Board of India (SEBI) and the Registrar of Companies but if the company is not a listed one then the company has to file the final prospectus only with the Registrar of companies.
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 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 ROC. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus.
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