INTRODUCTION
1. Capital in a company is vital because it indicates a company’s available
finance and is used by businesses to pay for the ongoing production of goods
and services in order to produce a profit.
2. More the capital, the more the expansion of the company. Companies can
raise funds through debt or equity financing. In such cases, a prospectus
becomes an essential tool.
3. A prospectus is a detailed document containing information on the
securities issued by a company to invite the potential public and investors to
subscribe to the securities.
PROSPECTUS UNDER THE
COMPANIES ACT, 2013
1. SECTION 2(70) OF THE COMPANIES ACT, 2013 defines a prospectus as
“any document described or issued as a prospectus and includes a red
herring prospectus referred in SECTION-32 or shelf prospectus referred to
in SECTION 31 or any notice, circular, advertisement or other document
inviting offers from the public for the subscription or purchase of any
securities of a body corporate.”
2. In other words, a prospectus is any advertisement, circular, or document
that invites public deposits or offers to subscribe or purchase any shares or
debentures of a corporate body.
3. The company’s operations and objectives, along with the purpose of the
securities being offered are disclosed in a prospectus. A prospectus may
only be issued by a public company to offer its shares and
debentures.
4. A private company cannot issue a prospectus because private companies
are relatively small in size, thus, they issue fewer shares, and share
transferability is limited, resulting in low liquidity of the private company’s
stocks.
5. A prospectus is released by or on behalf of a public company with regard
to the company’s formation or on behalf of any individual who is, has been,
or has expressed interest in the creation of a public business. The individual
is known as the ‘promoter’ of the company.
6. A promoter is defined under SECTION 2(69) as a person who is acting
solely in a professional capacity and who is:
1. A person that the company has recognised in the annual return,
2. A person with the authority over the company’s operations
directly or indirectly, acting as a shareholder, director or in
another capacity,
3. A person under whose advice, directions, or instructions the
company’s board of directors ordinarily acts.
CONTENTS OF A PROSPECTUS
A prospectus must enlist the following details:
1. Name of the company,
2. The registered address of the company,
3. Objectives and purpose of the company,
4. Purpose of the issue of prospectus,
5. Nature and capital structure of the business,
6. Name, location, and the number of shares that signatories have
subscribed,
7. Qualification shares of the directors,
8. Details on redeemable preference shares and debentures,
9. Remuneration of directors and promoters,
10. Minimum subscription for allotment,
11. Date of opening and closing of the issue,
12. Information on underwriting commission and brokerage,
13. Name and address of the company’s auditor, secretary, bankers
and trustee,
14. Particulars of material documents,
15. Forecasted rate of dividend and voting rights.
REQUIREMENTS FOR THE ISSUANCE OF
A COMPANY’S PROSPECTUS
SECTION 26 deals with the legal requirements for the issuance of a
prospectus. The requirements are as follows:
1. Every prospectus must be issued by or on behalf of a public
company or behalf of a person involved in or interested in the
establishment of the company.
2. The prospectus has to be duly dated and signed. It must provide the
information and set out the financial information reports required by
the Securities and Exchange Board of India (hereinafter
referred to as SEBI) under SEBI Act, 1992 in consultation with the
Central Government.
3. A company is required to certify that the provisions, rules, and
regulations under the CA, 2013, as well as a statement that nothing
in the prospectus is in violation of the SECURITIES CONTRACTS
(REGULATION) ACT, 1956 and the SEBI ACT, 1992.
4. The issue of a prospectus or application form for shares or
debentures to existing members or debenture holders of a company
is exempt under SECTION 26(1) even if an applicant has a right to
surrender the shares in favour of any other person or not
under SECTION 62(1)(A)(II).
5. The date stated in the prospectus will be regarded to be the date of
its issuance of a prospectus or a form of application regardless of
whether it was released prior to, in compliance with, or after the
foundation of a company.
6. It must be ensured that on or before the date of its publication, a
copy duly signed by every person who is named as a director or
proposed director of the company or by his duly authorised attorney
must be delivered to the Registrar for filing otherwise a prospectus
cannot be issued by or on behalf of a company.
7. A statement claiming to be made by an expert may not be included
in a prospectus issued under Section 26(1) unless the expert is a
person who is not, and has not been, involved in any form of
management or operations of the company. Written consent to the
issue of the prospectus must be given, and must not withdraw his
consent prior to delivery of a copy of the prospectus to the Registrar
for filing. A statement to that effect must also be included in the
prospectus.
8. Every prospectus issued must mention that a copy has been
supplied to the Registrar for filing and must specify any documents
that must be attached to the copy supplied. It may also refer to
statements within the prospectus that list the requisite documents
as per the provision of Section 26(1).
9. If a prospectus is issued more than 90 days after a copy is delivered
to the Registrar, it is deemed to be invalid. If a prospectus is issued
in violation of provisions mentioned under Section 26, the company
will be penalised with a fine not less than fifty rupees and not
exceeding three lakh rupees. Any individual who voluntarily
participated in the issuance of the prospectus would be penalised to
a fine of not less than fifty thousand rupees and cannot exceed
three lakh rupees.
TYPES OF PROSPECTUSES
According to the CA, 2013, there are four types of prospectuses: Red Herring,
Shelf, Abridged, and Deemed;
1. RED HERRING
1. A red herring prospectus is defined under SECTION 32 OF THE CA, 2013.
A red herring prospectus does not provide detailed information about the
quantum, or quantity, and price of the securities offered.
2. It is used for the book-building process. The process through which an
issuer seeks to identify the price at which an initial public offering (IPO) will
be offered is known as book building.
3. An issuer often creates a book for institutional investors to make offers for
the quantity of shares and the estimated amount of money they will pay. The
issuer examines the data and estimates the final price for the security using
an average value.
4. A red herring prospectus is subject to the same obligations as a
prospectus, and any difference between the red herring prospectus and the
prospectus must be identified as ‘deviations in the prospectuses’.
5. Following the close of the offer of securities, the prospectus must state the
total capital raised, whether by debt or share capital, and the closing price of
the securities, as well as any other details not included in the red herring
prospectus, and must be filed with the Registrar and the SEBI.
2. SHELF
1. The shelf prospectus is outlined under SECTION 31 OF THE CA, 2013. A
shelf prospectus offers securities for subscription in one or more issues over a
specific period of time without the need for a fresh prospectus to be issued.
2. This is done especially in projects where the issue size is substantial, and
large sums of money are required to be raised in order to save on the
expense of filing a new prospectus every time.
3. Any company may file a shelf prospectus with the Registrar at the stage of
the first offer of securities, and the validity period of such prospectus
shall not exceed one year, which shall begin from the date of
opening of the first offer of securities under the prospectus and in
respect to subsequent offers of securities issued during the period of validity
of that prospectus in accordance with the guidelines issued by SEBI. A fresh
prospectus is not required to be issued for the offer of securities.
4. A company filing a shelf prospectus must file an information
memorandum with the Registrar within one month under RULE 10 OF
THE COMPANIES (PROSPECTUS AND ALLOTMENT OF SECURITIES)
RULES, 2014, prior to the issue of a second or subsequent offer of
securities, containing all updated charges in the facts, the company’s
financial position that changed between the previous offer of securities and
the succeeding offer of securities, or any other changes.
5. Prior to applying any changes, a company or any other person shall inform
applicants of the changes, and if they express willingness to withdraw their
application, the company or other person shall reimburse money received as
a subscription within fifteen days.
6. When an information memorandum is submitted with the shelf prospectus
at the time of the offer for securities, it is considered a prospectus.
3. ABRIDGED
1. SECTION 2(1) OF THE CA, 2013 outlines an abridged prospectus. It
means a memorandum containing the salient features of a prospectus as per
the regulations specified by the Securities and Exchange Board.
2. SECTION 33 mandates the issuance of application forms for securities
along with an abridged prospectus. Section 33 shall not be applicable to the
application form issued for:
1. A valid invitation to a person to engage in an underwriting
agreement with regard to such securities; or
2. Securities that were not offered to the public.
3. A copy of the prospectus shall be sent to any individual who requests it
prior to the close of the subscription list and the offer. If a corporation fails to
comply with the provisions of Section 33, it would be liable for a penalty of
fifty thousand rupees for each default.
4. DEEMED
1. SECTION 25 OF THE CA, 2013 discusses deemed prospectuses. A
deemed prospectus is a document that is assumed to represent a company’s
prospectus.
2. A deemed prospectus is a document that contains an offer for sale made
by the intermediary or issuing house on behalf of a company that allots or
agrees to allot its shares or securities through an intermediary, such as a
merchant bank, another business, or an issuing house.
3. A company usually opts for a deemed prospectus to avoid complying with
regulations issued by the SEBI.
4. A deemed prospectus is considered a document of offer for sale if it meets
any of the following criteria’s:
1. The intermediary made an offer to sell shares to the public within six
months of the allotment of shares; or
2. The company which allotted its shares to the intermediary has not
received payment in exchange for the shares the offer for sale was
made by the intermediary.
LIABILITY FOR MISSTATEMENT
IN A PROSPECTUS
1. The SEBI COMPLAINTS REDRESSAL SYSTEM (SCORES), introduced by
SEBI, requires all listed businesses to address shareholder complaints. The
SEBI’s centralised online grievance redress system allows investors to file
complaints, follow up on them, and see the progress of their resolution from
any location.
2. The SEBI Act, 1992, imposes penalties on the corporation for non-
compliance. The liabilities for misstatement in a prospectus can be classified
into two liabilities-
a) civil liability under SECTION 35 and
b) criminal liability under SECTION 34 of the CA, 2013.
CIVIL LIABILITY (SECTION 35)
A person who subscribed to the securities must prove that the prospectus
was issued by the company and the statements were untrue. A person who
has subscribed to the securities of a company can claim compensation for
misstatements in the prospectus against:
1. The company,
2. The director of the company,
3. A person who has authorised to be named as a director of the
company or has consented to become a director, either immediately
or after a period of time,
4. A promoter of the company,
5. A person who has authorised the issue of the prospectus, or
6. An expert under Section 26(5).
shall be liable to pay compensation to every subscriber of securities of the
company who has incurred loss or damage.
The following are the exceptions to civil liability:
1. The person withdrew his permission or consent prior to the
prospectus’s release, and it was issued without his authority or
consent, or
2. The prospectus was released without his knowledge or consent, and
upon discovery of its release, a reasonable public notice is released
stating that the prospectus was released without his knowledge or
consent,
3. The individual had reasonable grounds to believe that the expert
was competent to make the assertion and that the document is an
accurate copy, or a right and appropriate extraction of the report or
valuation.
CRIMINAL LIABILITY (SECTION 34)
1. If any statement in a prospectus is untrue, false, deceptive, or likely to
mislead in any form, context, or omission in which it is offered, and the
person who approves the distribution of such a prospectus is accountable
under the SECTION 447.
2. It exempts any person who proves that the statement or omission was
irrelevant or the person had reasonable grounds to believe the statement
was accurate, or that the omission was significant at the time the prospectus
was issued
CONCLUSION
A prospectus contains information about the company, its management,
financial stability, and other essential information, and it is distributed to the
general public and investors to encourage them to subscribe to the securities
of the company. A prospectus can be classified into four types: Red Herring,
Shelf, Abridged, and Deemed. Each prospectus performs differently, which
may help a company make a reasonable investment decision. Identifying the
appropriate type of prospectus for issuing securities helps the company to
make an informed investment strategy. As a result, a prospectus is essential
for every public company, and it must be issued in accordance with the terms
of the Companies Act, 2013.
