Red Herring Example

Overview of Red Herring Example

An initial prospectus filed by a company with the regulator, usually in connection with its initial public offering (IPO) is known as a red herring. Information related to the operations of a company is contained in the red herring prospectus. Such a prospectus is issued to potential investors. A red herring prospectus does not consist of information about the price of securities, the number of securities to be issued and the amount of issue.

Examples of Red Herring Prospectus

Examples of Red Herring are as follows:

Example 1 – Extract of Red Herring Prospectus of a Beverage Company

The promoter of Thomas Ltd.: Mr. Thomas Stovell

Public issue of [x] equity shares of the face value of $10 each of Thomas Ltd. for cash at a price of $ [x] per equity share including a share premium of $ [x] per equity share aggregating $ [x]. The issue shall constitute [x]% of the fully diluted post-issue paid-up capital of our company.

• Risks: Since this is the first public issue of the issuer, there is no formal market for the equity shares.
• Overview: The aggregate soft drinks market in our country saw aggregate sales of 16,000 million liters in 2018 amounting to $20 billion. The main segments constituting soft drinks are carbonated soft drinks, bottled water, and juices. They account for 90% of the total volumes sold. The remaining 10% consists of ready-to-drink tea and coffee, concentrates, sports and energy drinks. There are two distribution channels – off-trade and on-trade. Those sales that take place at grocery stores, hypermarkets and supermarkets are known as off-trade sales. Those sales which take place through restaurants, bars, clubs, etc. are on-trade sales.
• Summary of Business: Thomas Ltd. is a fruit juice manufacturing company with a primary focus on mango and strawberry fruit. The company primarily offers two drinks – Mango Delight and True Strawberry. These are available in the PET bottle, tetra pack and a tin can. The company enjoys a 7% market share in the mango fruit segment and a 4% market share in the strawberry fruit segment. They have a wide distribution network with 567 distributors spread throughout the country.

Example 2 – Extract of Red herring Prospectus of a Bank (Equity Shares)

• The promoter of Safe Trust Bank: Safe Trust Financial Holdings Limited & Financial Literacy Trust
• General Risk: Investments in equity products involve a degree of risk and investors should not invest any funds in the issue unless they can afford to take the risk of losing their investment.
• Industry Overview: Household savings have seen a rising trend in the country. It has increased from 18% of GDP in FY2008-09 to 25% of GDP in FY18-19. The GDP of our country has grown by 6.8% CAGR in the last 10 years. It is estimated to grow at 7.1% in FY19-20 as per government estimates.
• Summary of Business: Safe Trust Bank is a commercial bank focusing on serving the under-banked segment in the country. The bank has a banking license that permits it to offer banking services throughout the country. The bank was incorporated on 21^st January 2015 and commenced its operations on 15^th April 2017. The asset products include retail loans and Small and Medium Enterprise (SME) loans. Other products include internet banking, mobile banking, debit cards, credit cards and distribution of third-party insurance/mutual fund products. As on 31^st March 2019, the deposits and Gross Advances stood at $6,063 million. The net interest margin (NIM) stood at 4.32%.

Example 3: Extract of Red herring Prospectus of a Hotel Company

Stevels Hotel Ltd. was incorporated as Graham Hotels Pvt. Ltd. on 5^th January 2015.

• General Risks: Investors are advised to read the risk factors carefully before taking investment decisions enumerated in this offer.
• Book Running Lead Managers: Coulthard Financial, Beehive Capital, Morgan Strauss Capital
• Industry Overview: Chain-affiliated hotel rooms have increased in the country at a rate of 11% CAGR in the last 10 years. Hotels can be divided into luxury-upper upscale, upscale, upper midscale and midscale-economy. The growth rates related to these are given:

• Key impact factors include domestic tourism, foreign tourist arrivals, access infrastructure, leisure travel, and business travel.
• Summary of Business: Stevels Hotel Ltd. is an owner and developer of high-end hotels. The hotel has been primarily located in big cities. Competitive strengths include strategic location, experienced management, and customer satisfaction. There are 1,890 hotel rooms located in 17 properties throughout the country. The average room rent is $210 per night and average occupancy over the last 5 years has been 79.13%.

Example 4 – Extract of Red Herring Prospectus of a Life Insurance Company

• Overview: Our country’s total share in the global life insurance premium is just 1%. This means there is tremendous scope in the country for this sector to grow as life insurance is still under-penetrated. The life insurance industry in the country has grown at 7% CAGR in the last 10 years. It is expected that the demand for ULIP’s (Unit Linked Insurance Plans) will increase in the years ahead. Digitization is a key trend in the insurance sector with increasing internet and mobile penetration.
• Summary of Business: The key managerial personnel includes Steve Smith, Mathew George, and Sydney Davenport. Life Safe Ltd. is the most profitable private insurer amongst all private insurers in our country in 2018. The net worth recorded is $1.2 billion. The solvency ratio is 178% above the mandated 150%. The Profit after tax (PAT) in 2018 was $240 million and return on equity (ROE) was 20%. They have focused on creating a multi-channel distribution platform. Dividends paid have increased at a rate of 12% CAGR in the last 5 years. However, past dividends are not an indicator of future dividends.

Conclusion –  Red Herring Example

Red herring prospectus serves the useful purpose of providing information to potential investors. Though it is a very lengthy document, it gives a wealth of information about the operations and financials of a company. An investor can read the red herring prospectus to take an informed decision as regards to whether to invest in a company.

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