A prospectus is a formal document provided by the company when a company wants to sell its securities or bonds to the public, it contains all the necessary details about the sale, that includes the company’s financial position, the number of shares offered and types of securities being offered, etc (Section 2(70) of the Company Act, 2013). Prospectus in Company Act is defined as a document that describes or issues as a prospectus or any other document inviting offers from the general public for the subscription or purchase of any securities of a body corporate. A prospectus is mandatory to be issued or in lieu by a public company (Section 70 Company Act, 2013)
For a document to be called a prospectus, it should satisfy two conditions.
1. The document invites the subscription to public share or debentures, or deposits.
2. The invitation is made to the public.
3. The invitation is made by the company or on behalf the company.
4. The invitation is related shares, debentures or such other instruments.
Advertisement of prospectus (Section 30 of the Company Act 2013)
When the prospectus is advertised, must specify the contents of the memorandum i.e. the object, member’s liabilities, amount of the company’s share capital and the number of shares subscribed by the subscribers and the capital structure of the company.
Types of Prospectus
The types of the prospectus are as follows:
• Red Herring Prospectus
• Shelf Prospectus
• Abridged prospectus
• Deemed Prospectus
Shelf Prospectus
Shelf prospectus is defined as a prospectus that has been issued by a public financial institution i.e. company or bank for issues of securities or class of securities as mentioned in the prospectus. With a shelf prospectus being issued the issuer does not need to issue a separate prospectus for each offering (Section 31 of the Company Act, 2013). The validity period of this prospectus is not to exceed one year and this period commences from the opening date of the first offer of the securities.
Red herring prospectus
Red herring prospectus lacks the complete particulars about the quantum of the price of the securities. A red herring prospectus is generally issued prior to prospects when proposing to make an offer of securities.
The obligations carried by red herring prospectus are the same as a prospectus. If there is any variation between the two prospectus then it should be highlighted.
After the closing of the offer of securities the prospectus state the total capital raised either by the way of debt or share capital. It also contains the closing price of the securities.
The applicant or subscriber has a right (Section 60B (7) of the Company Act, 2013) to withdraw the application on any intimation of variation within 7 days of such intimation and this withdrawal should be communicated in writing.
Abridged Prospectus
The abridged prospectus is a summary of the prospectus that has been filed before the registrar. This prospectus contains all the features of a prospectus. An abridged prospectus contains information of the prospectus in brief that is convenient and quick for an investor to be informed of all the useful information in short.
When any form for the purchase of securities of a company is issued, it should be accompanied by an abridged prospectus (Section 33(1) of the Company Act, 2013). As it contains all the useful and materialistic information so an investor can take a rational decision and also reduces the cost of public issues of the capital as it is basically a short form of a prospectus.
Deemed Prospectus (Section 25(1) of the Company Act, 2013)
When a company offers security that is not for sale to the public, allots or agrees to allot securities, the document is considered as a deemed prospectus through which the offer is made to the public for sale.
Procedure of Prospectus
Application forms (Section 33 of Company Act, 2013)
The application form for the securities is issued only when accompanied by a memorandum with all the features of prospectus referred to as an abridged prospectus.
The exceptions to this rule are:
• When an application is issued as an invitation to a person to enter into underwriting agreement regarding securities.
• Application issued for the securities and is not offered to the public.
Registration of prospectus
According to Section 26(7) of Company Act, 2013, the registrar can register a prospectus when:
1. It fulfills the requirements as mentioned under Section 26 of the Company Act
2. It contains the consent of all the persons as mentioned in the prospectus in writing.
Issue of prospectus after registration
When a prospectus is not issued before 90 days from the date from which a copy was delivered before the registrar, then such a prospectus is considered to be invalid.
Remedies for misrepresentation in a prospectus
The investors’ interpretation of the financial position, liabilities and the current market position of a company is based on its prospectus. Hence, it becomes essential to not conceal or misrepresent any fact on the prospectus.
A statement is said to be misrepresented when:
1. It is an untrue statement,
2. It intends to produce the wrong statement,
3. Conceals material facts,
4. Omits material facts.
An investor, investing based on a misrepresented prospectus has a right to either claim damages or rescind the contract.
Conclusion
A prospectus is a formal and legal document issued by a body corporate which acts as an invitation to attract offers from the public for subscription or purchase of any securities.
A valid prospectus contains essential requisites and it must be registered. When a prospectus is not registered, it is considered an invalid prospectus.
A prospectus is a document where the shareholders form an opinion of its financial position and market share hence a prospectus is a very important document and must be made by utmost care.
“The views of the authors are personal“
Frequently Asked Questions
What does a prospectus contain?
A prospectus contains all the necessary details about the sale. That includes the company’s financial position, the number of shares offered and types of securities being offered, etc.
Is prospectus a legal compulsion?
Every public company is legally required to issue the prospectus for its shares or debentures. But, the same is not a compulsion for a private company.
What can be said as a misrepresented Prospectus?
A misrepresent prospectus is when:
1. There is an untrue statement,
2. Intends to produce the wrong statement,
3. conceals material facts,
4. omits material facts.
