Definition
Risk Factors (Offer Document)
Risk factors are the section of an IPO prospectus that discloses the principal risks an investor faces in the company and the issue.
Every Indian offer document must contain a detailed risk factors section covering internal risks (dependence on key customers, litigation, related-party transactions, promoter issues) and external risks (regulation, competition, economic conditions). SEBI requires these to be specific and quantified where possible, not boilerplate.
Sophisticated investors read the risk factors closely, as they often reveal red flags not obvious from the headline financials. The section is meant to ensure investors make an informed decision rather than relying on the marketing of the issue.
Related terms
- Draft Red Herring Prospectus (DRHP)A DRHP is the preliminary offer document a company files with SEBI when it wants to make an IPO, disclosing its business, financials and risks but not the final issue price.
- Related-Party TransactionsRelated-party transactions (RPTs) are deals between a company and parties connected to it, such as promoters, directors or group entities.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.