Q.What is a red-herring prospectus? How does it differ from an ordinary prospectus?

When a company plans a book-built public issue, it often cannot state a final price before the offer opens, yet it must still give the market a document to evaluate.

In many public issues today, the exact price at which shares will be allotted is not fixed in advance - it is discovered through a bidding process within a stated price band, a method known as book-building. A company using this method cannot honestly print a final price in its prospectus before the offer even opens, yet the Act still requires a disclosure document to be available to prospective investors from the very start of the offer period.

Section 32 of the Companies Act, 2013 permits such a company to issue a red-herring prospectus - a document containing every particular an ordinary prospectus would contain, except the complete details of the price of the securities and the exact number being offered. It must be filed with the Registrar of Companies, and, where the issue is or will be listed, with SEBI, at least three days before the subscription period for the issue opens, so that regulators and the market have a genuine opportunity to review it before investors start applying.

Once the offer period closes and the final price and quantum are known (through the book-building process), the company files a final prospectus with the Registrar, which states only the particulars that were missing from the red-herring prospectus - the final price, the exact number of securities allotted, and any other matter that differs from what the red-herring prospectus disclosed. This final prospectus, not the red-herring version, is the one that carries full legal force for the purposes of civil and criminal liability under Sections 34 and 35. …

A common mistake is describing a red-herring prospectus as one that hides information deliberately or is somehow deceptive - 'red herring' is only the technical name for th …