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An Analysis: Prospectus

'If the Prospectus had mentioned the possibility, it might have enhanced the value of stocks'~ Ralph Nieders

A Prospectus is a legal document describing a company's security that has been put on sale. It is a legal disclosure document that provides information about an investment offering to the public, and that is required to be filed with the Securities and Exchange Commission (SEC) or local regulator. The Prospectus contains information about the company, its management team, recent financial performance, and other related information that investors would like to know.

According to section 2(70) of Company's Act 2013, Prospectus can be defined as "any document which is described or issued as a Prospectus" and also any notice, circular, advertisement or any other document acting as an invitation to offers from the public. Such an invitation to offer should be for the purchase of any securities of a corporate body. Shelf Prospectus and red herring Prospectus are also considered as a Prospectus.

A Prospectus should be issued to public as an invitation for subscribing public share or document. It can be issued directly by the company or on the behalf of company. Every public company either issues a Prospectus or files a statement in lieu of Prospectus. This is not mandatory for a private company. But when a private company converts from private to public company, it must have to either file a Prospectus if earlier issued or it has to file a statement in lieu of Prospectus.

Section 30 of the Companies Act 2013 contains the provisions regarding the advertisement of the Prospectus. This section states that when in any manner the advertisement of a Prospectus is published, it is mandatory to specify the contents of the memorandum of the company regarding the object, member's liabilities, amount of the company's share capital, signatories and the number of shares subscribed by them and the capital structure of the company.

The Prospectus benefits both the company and the investors. The Prospectus is the mirror showing the reflection of the company. It by providing the details about the company helps investors to make decision. The investors examine the financial status of a company to make sure it is financially stable enough to uphold its obligations. The Prospectus is issued by the company with the intention of raising funds. It helps company to acquire money from the market. When it is Initial Public Offer of the company it helps in introducing the company to the market.

Components of a Prospectus

Section 26 of Company's Act 2013, provides the details that a Prospectus should contain. The Prospectus should be duly signed and dated for a public company.

A Prospectus should contain:

  1. Name and registered address of the office, its secretary, auditor, legal advisor, bankers, trustees, etc
  2. Date of the opening and closing of the issue.
  3. Statements of the Board of Directors about separate bank accounts where receipts of issues are to be kept.
  4. Statement of the Board of Directors about the details of utilization and non-utilisation of receipts of previous issues.
  5. Consent of the directors, auditors, bankers to the issue, expert opinions.
  6. Authority for the issue and details of the resolution passed for it.
  7. Procedure and time scheduled for the allotment and issue of securities.
  8. The capital structure of the in the manner which may be prescribed.
  9. The objective of a public offer.
  10. The objective of the business and its location.
  11. Particulars related to risk factors of the specific project, gestation period of the project, any pending legal action and other important details related to the project.
  12. Minimum subscription and what amount is payable on the premium.
  13. Details of directors, their remuneration and extent of their interest in the company.
  14. Reports for the purpose of financial information such as auditor's report, report of profit and loss of the five financial years, business and transaction reports, statement of compliance with the provisions of the Act and any other report.

As per section 26 of Company's Act 2013, the Prospectus of a company must be issued only on the date of publication; it should not be issued before or after the date. The copy of Prospectus should be delivered to the registrar for registration. The Prospectus should also contain the date when it was delivered to the registrar. The Prospectus should be signed by all the directors whose name has been mentioned in the Prospectus.

Registration of Prospectus
Section 26(7) of the Act states that the registrar will register the Prospectus if:
  • It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013; and
  • It contains the consent of all the persons named in the Prospectus in writing.

Issue of Prospectus

The Prospectus of a company must be issued within 90 days of delivering the copy to the registrar. If the Prospectus is not delivered within the prescribed time, it will be considered invalid.

If the Prospectus is in contravention to the section 26 of the Act, it will be considered invalid, and the company will be liable for fine under section 26(9) for Rs. 50,000 to Rs. 3, 00,000. If any person becomes aware of such Prospectus after knowing the fact that such Prospectus is being issued in contravention of section 26 then he is punishable with the following penal provisions.

Imprisonment up to a term of 3 years, or
Fine of more than Rs. 50,000 not exceeding Rs. 3,00,000

Types of Prospectus:

  • Red Herring Prospectus
  • Shelf Prospectus
  • Abridged Prospectus
  • Deemed Prospectus
  • Red Herring Prospectus

Red Herring Prospectus

The Red Herring Prospectus does not include the full particulars of the price of securities. A company planning to make an offer of securities can issue a red herring Prospectus before the issue of the Prospectus. The companies file the red herring Prospectus with the ROC at least 3 days before the opening the offer. The obligations of this are similar to that of any of the Prospectus. The variations in the red herring Prospectus from the other Prospectus are highlighted.

While closing an offer, the companies file the Prospectus with the ROC and Securities and Exchange Board. It contains the information of the total capital raised whether, by share capital or debt, the closing price of the offer and the other details left out in the red herring Prospectus.

Shelf Prospectus

The companies file the Shelf Prospectus with the Registrar of Companies at the first stage of the offer. The first offer indicates a period of validity, which does not exceed one year from the date of opening the first offer. Moreover, it does not require a Prospectus for the subsequent offers during the validity period.

While filing for Shelf Prospectus, the company should also file the information memorandum. The information memorandum should contain all the material facts of the created charges, the company's financial position changes. The companies should file the memorandum within the stipulated time before the issue of the subsequent offers. The filed information memorandum stays as a Prospectus along with shelf Prospectus whenever the company makes an offer.

Abridged Prospectus

The abridged Prospectus is a summary of a Prospectus filed before the registrar. It contains all the features of a Prospectus. An abridged Prospectus contains all the information of the Prospectus in brief so that it should be convenient and quick for an investor to know all the useful information in short. Section 33(1) of the Companies Act, 2013 also states that when any form for the purchase of securities of a company is issued, it must be accompanied by an abridged Prospectus. It contains all the useful and materialistic information so that the investor can take a rational decision and it also reduces the cost of public issue of the capital as it is a short form of a Prospectus.

Deemed Prospectus

As per Section 25(1) of the Companies Act, 2013, a document will be deemed to be a Prospectus if the company agrees to allot or offer securities to the public. The document from which the offer is made to the public for sale is deemed Prospectus. The document is deemed to be a Prospectus of a company for all purposes and all the provision of content and liabilities of a Prospectus will be applied upon it.

Prospectus is a formal legal document that provides details about the company to general public. It invites investors for investing in the company in the form of shares, debentures or any other investments. The Prospectus must be registered and according to the conditions specified in the Act.

Every public company and private company who is converting in public company issues a Prospectus or the Prospectus is issued on their behalf. It contains information about management team and financial position of the company. It can be issued at various stages of public offer. When a company is making a proposal for an offer of securities, then prior to issuing a Prospectus, it may issue a red herring Prospectus.

A company can also issue a shelf Prospectus when it has to make an offer one or more securities or class of securities and then it does not have to issue a Prospectus before issuing an offer of each security.

Prospectus is an important document from the point of view of both company and investors hence; it is governed by the Companies Act 2013.

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