PROSPECTUS AND ITS TYPES

We have learnt that land, labor capital, and entrepreneur are the basic needs for any business or company to be started. Each of them is important in their own way. For the smooth working of a business, these factors must function cohesively. Capital is such an element of a business that not only provides financial aid to the business but also encourages the business to expand to a larger scale.

In India, if a company has to raise capital, especially by inviting investments from the public, it has to be done in compliance with the laws and regulations in force. Depending upon the nature of and size of the company, the conditions for raising capital differ too. When a company proposes to build its capital with the help of the public (either in the form of equity or debt), it has to first inform them formally about the same. The document through which a company invites applications from the public to invest in its capital (whether equity or debt) is called as a prospectus.

It is by referring to the prospectus that the prospective investors of a company may get a clear idea about the way in which the company intends to raise capital i.e either by issuing shares or debentures.

Hereafter, we shall look upon the legal provisions that apply to a prospectus with respect to the Indian Companies Act.

About a prospectus:

In simple terms a prospectus is a document in the form of notice, circular or advertisement which invites applications from the public, offering to purchase or subscribe to the securities (i.e shares, debentures, etc.) issued by the company.

The following provisions majorly apply to public companies and not private companies. This is because private companies are not permitted by law to issue any securities to the public.

Things that a prospectus must consist of: (Section 26)

1) A prospectus must be properly dated and have the required signatures.

2) Details of financial information of the company issuing prospectus shall be as specified by SEBI and the Central Government.

3) A company is not required to issue a prospectus

- if it issues shares or debentures to its existing members or debenture holders. OR

- if it issues shares or debentures belonging to the same class and which were issued previously.

4) A copy of the prospectus has to submit to the Registrar of Companies (ROC) before publishing it. Such a copy should have the signatures of all those persons who are directors of the company or by an authorized attorney on their behalf.

5) A statement given by an expert who is not directly or indirectly involved in the company’s formation must be included in the prospectus before it is filed with the ROC.

6) The fact that a copy of the prospectus has been filed with the ROC as aforesaid must be mentioned on the prospectus.

7) The prospectus must be issued to the public before 90 days have passed from it being filed with the ROC.

Types of Prospectus:

The following are the types of the prospectus which are permitted to be issued by companies under the Indian Companies Act.

(a) Shelf Prospectus

(b) Red Herring Prospectus

(c) Deemed Prospectus

(d) Abridged Prospectus

We shall get the basic idea of each type of prospectus with respect to the Companies Act:

(a) Shelf Prospectus: (Section 31)

1) When more than one issue of securities of the same class are issued by the company, a shelf prospectus is issued for the same.

2) A shelf prospectus is issued provided the time gap between the initial and subsequent issue of securities is not more than 1 year.

3) In the meantime, any changes in the financial information or new charges created by the company between the initial and subsequent issues, an information memorandum shall be filed with the ROC in the prescribed form 1 month before the subsequent issue.

4) The persons who have paid the subscription money in advance shall be given an option to withdraw the same after the information memorandum is filed. The company shall refund the subscription monies of such persons within 15 days.

5) Shelf Prospectus coupled with information memorandum together shall be called as a prospectus.

6) The cost involved in issuing a separate prospectus for another issue is saved by issuing a shelf prospectus.

(b) Red herring prospectus (RHP)

1) It is a document that is filed prior to issuing of the actual prospectus.

2) Details pertaining to the price and volume of securities to be issued are not mentioned in the red herring prospectus.

3) This prospectus is required to be filed 3 days prior to the issue opening date.

4) When a company raises capital through by way of book building, RHP is issued prior to the issue as the price of securities is not pre-determined.    

(c) Deemed Prospectus:

Any other document making an offer for sale of securities to the public shall be assumed to be the same as an actual prospectus. This means all laws applying to a prospectus shall apply to a deemed prospectus as well.

(d) Abridged Prospectus:

All things which form part of the prospectus are compiled in a summarized way. The task of understanding the technical terms of the prospectus shall be reduced for the investors.

Conclusion:

Every company issuing the prospectus shall ensure that all the information given in the prospectus shall be true without any misleading facts and omissions. In case the investors suffer any loss by relying on the facts given in the prospectus, then the company shall be liable to make good the losses so incurred by investors.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.