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Finance GlossaryRed Herring Prospectus
Red Herring Prospectus
Definition of Red Herring Prospectus
A Red Herring Prospectus (RHP) is a preliminary offer document filed with SEBI when a company plans to go public through an IPO, outlining the company’s business, financials, risks, management, and most issue details. It does not include the final offer price or the exact number of shares being issued. It is marked with a bold red disclaimer indicating that certain key information like price and share count is incomplete or subject to change, and it helps investors assess the company before subscription. Once the offer price and share details are finalised (usually after book-building), the final prospectus with complete priced details is issued for public use.
Related Terms
Passive Investing
Passive Investing is an investment strategy where the goal is to mimic the performance of an index representing a broad market, as opposed to attempting to beat the market through active stock picking or market timing. The purpose is to have market returns with minimum costs. This strategy is implemented mostly in Index Funds and exchange-traded funds (ETFs). Passive investing is characterised by low expense ratios and steady performance in the long term, thus avoiding potential human error or poor fund manager decisions.
Market Maker
A market maker is an individual or a firm that continuously quotes bid (buy) and ask (sell) prices in order to provide liquidity and ensure smooth trading. They act as intermediaries, buying from sellers and selling to buyers from their own inventory, which facilitates smooth, efficient trading and reduces price volatility for other investors. This role is generally played by financial institutions like brokerage firms or investment banks.
Government Bonds
Government bonds are debt instruments that allow the central banks to raise capital to finance operations. The types of government bonds are:
- Treasury Bills
- Fixed Rate Bonds
- Floating Rate Bonds
- State Development Loans
- Sovereign Gold Bonds
- Zero Coupon Bonds
Every government bond has a credit rating that’s based on the financial health of the country. The government is the apex institution of any country, which is why their credit rating is the high.
In India, you’ll notice government bonds with the credit rating SOV. This is known as a sovereign rating.
In India, you’ll notice government bonds with the credit rating SOV. This is known as a sovereign rating.
Book Building
Book building is the process of determining the potential issue price of a financial instrument based on investor demand, generally during an IPO.
Book building is typically done by an underwriter (like an investment bank) who will invite institutional investors like hedge funds, mutual funds, and others to submit bids for the financial instrument.
These bids act as a range that the underwriter can use to fix a price that satisfies the company issuing the security and market participants.
Book building is typically done by an underwriter (like an investment bank) who will invite institutional investors like hedge funds, mutual funds, and others to submit bids for the financial instrument.
These bids act as a range that the underwriter can use to fix a price that satisfies the company issuing the security and market participants.
Premium
In finance, a premium is the excess amount that the price of a security or asset is over its nominal value, intrinsic value, or its price in another market or context. For options, the premium is the price that a buyer pays for an option contract. In insurance, a premium is the sum of money that an individual or business is required to pay for an insurance policy. A stock may trade at a premium if the market price is higher than its book value, which often reflects strong growth potential or market optimism.
Debentures
A debenture is a legal certificate that a company issues in exchange for a long-term unsecured loan. A debt instrument like a debenture is issued by companies who want to fund their business without diluting existing shares.
The components of a debenture are as follows:
The components of a debenture are as follows:
- Principal: The loan amount or the money lent by an investor
- Tenure: The duration of the loan
- Interest rate: The rate of interest
-
Repayment: Terms and conditions of the amount to be repaid
Debenetures can also be issued by small-size companies who may not be creditworthy enough to secure a loan from traditional lenders. Hence, the unsecured aspect of the loan may help achieve their objective.
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