Reading an IPO prospectus in twenty minutes

A red herring prospectus is long because the law requires it to be complete, not because every page matters equally. When I have twenty minutes, I read six parts, in this order.

1. Objects of the issue

Why does the company want the money? Fresh capital for a plant or for repaying debt reads very differently from an offer for sale where existing holders are cashing out and the company receives nothing. The split between the fresh issue and the offer for sale is usually on the cover page.

2. Capital structure and promoter holding

How much will the promoters hold after the issue, and did anyone receive shares at a much lower price in the last year? Pre-IPO placements and the average cost of acquisition for the sellers are in this section.

3. Risk factors, the first fifteen

Lawyers write the risk factors, so most are standard. The first ten to fifteen are specific to the company and are worth reading slowly: customer concentration, regulatory dependence, pending litigation, related-party dealings.

4. Financial statements, three years

Revenue, operating profit, cash from operations and debt, side by side for three years. If profit rises while cash from operations does not, read the notes on receivables. Check whether the restated numbers differ from what the company reported earlier.

5. Basis for the offer price

The company’s own comparison with listed peers on price-to-earnings and similar measures. It tells you how the bankers want the issue to be seen, which is useful even when you disagree.

6. Litigation and outstanding dues

Tax demands, labour matters and cases against promoters, with amounts. One large unresolved demand can matter more than a hundred small ones.

Twenty minutes will not tell you whether to apply. It will tell you whether the issue deserves the next two hours.