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The Companies Act 2013 defines prospectus as any document issued as a prospectus. A prospectus is a formal document provided by the company when a company wants to sell its securities or bonds to the public. It includes all the necessary details about the sale, which contains the company’s financial position, the number of shares offered and types of securities being offered, etc. In simple words it is the formal document that a Public company issues to invite offers from the public for subscribing to its shares.
The biggest monetary advantage of a public company is that it has the ability and power to raise huge amounts of capital from the public by inviting them to subscribe to the shares and debentures. However, it is not mandatory for a public company to issue a prospectus and invite the public to subscribe to the shares and debentures. A private company, however, is not allowed to invite the public to subscribe its shares and debenture, hence a private company cannot issue a prospectus. But in case, when a private company is converting into a public company, it must have either filed a prospectus earlier or has to file a statement in lieu of the prospectus.
A prospectus can be defined as a disclosed document describing a company’s securities that have been put on sale. The prospectus usually discloses the company’s operations together with the purpose of the securities being offered to the public.
As per the Companies Act, 2013, a prospectus contains information such as advertisement, circular or notice among other legal documents inviting the public for the offering. In order for a document to be considered a prospectus, it should act as an offer for the public to purchase shares, debentures or other instruments. Also, the prospectus should be issued by the company or an institution on behalf of the company and made for the public.
Section 2(70) of the Company’s Act defines the prospectus. Prospectus can be defined as “any document which is described or issued as a prospectus.” This includes any notice, circular, advertisement or any other document acting as an invitation to offers from the public.
REQUIREMENTS AS TO ISSUE OF PROSPECTUS OF A COMPANY
There are some requirements that a company has to comply with before issuing it. Those are:-
- Material matters should be disclosed.
- Moreover it must bedated.
- Company must file a duly signed copy of the prospectus to Registrar of companies for its registration.
- Company shall also file this with various agencies such as SEBI, Stock exchanges and other agencies.
- SEBI examines the draft of Prospectus to ensure disclosures and compliances.
STATEMENT IN LIEU OF PROSPECTUS
Every public company either issues a prospectus or files a statement in lieu of a prospectus. This process is not mandatory for a private company. But when a private company converts from private to public company, it must either file a prospectus if earlier issued or it has to file a statement in lieu of the 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 its capital structure.
OBJECTIVES OF ISSUING THE PROSPECTUS
- To inform the public that a new company has been formed.
- To maintain an authentic record of the terms and allotment on which the public have been invited to buy its shares or debentures.
- To know the investment strategies and objective of the company
- To make the directors of the company accept responsibility for the statements in the prospectus.
CONTENTS OF PROSPECTUS
The contents of the prospectus have been specified in Schedule II of the Companies Act. The important contents in the prospectus include the following:
- Name and address of the company
- Objects of the company
- Full particulars of the signatories to the Memorandum and number of shares taken by them.
- The names, addresses, and occupations of the directors, managing directors or managers, etc.
- The number and classes of shares.
- The minimum subscription
- The qualification shares of a director and the remuneration of the directors.
- The amount payable on application, on the allotment, and on calls.
- The names and details of the underwriters.
- The estimated amount of preliminary expenses.
- The names and addresses of the auditors of the company.
- Particulars about reserves and surplus.
- Voting rights of the different classes of shares.
- Reports of the auditors regarding profits and losses of the company.
CONSEQUENCES DURING THE ISSUE OF PROSPECTUS
In case of misleading prospectus amounting to misrepresentation, the aggrieved persons can repudiate the contract and can claim a refund of their money.
In case any intentional concealment is made, directors will be punished with a fine of Rs. 5,000 or imprisonment up to two years or both. If it is found to be a fraud the fine will extend to Rs. 10,000 or 5 years imprisonment or both.
TYPES OF PROSPECTUS
Shelf Prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. In simple terms Shelf Prospectus is a single prospectus for multiple public. The issuer does not need to issue a separate prospectus for each offering he can offer or sell securities without issuing any further prospectus.
SECTION 31(1) : SHELF PROSPECTUS
“Any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required.”
In simple words, shelf prospectus is the prospectus that has been issued by any public financial institution, company or bank for one or more issues of securities or class of securities as mentioned in the prospectus. A company is required to issue a prospectus each time analysing the capital market. It might lead to unnecessary repetitions if the company is making more than one prospectus in a year to raise funds. Shelf prospectus is the kind of prospectus which remains valid for a specified time period during which offers for securities may be made by the company to the public without going through a long process.
The regulations are provided by the SEBI for any class or classes of companies that may file a shelf prospectus at the stage of the first offer of securities to the registrar. Only the companies which have been prescribed by the SEBI can issue a Shelf prospectus with the registrar. The period commences from the opening date of the first offer of the securities and it should not be exceeding one year. In respect of a second offer of the same securities issued during the validity period of that prospectus, no further prospectus is required.
SECTION 31(2): INFORMATION MEMORANDUM
An information memorandum is required to be filed by a company filing a shelf prospectus which shall contain all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed. Such Information Memorandum shall be considered to be a prospectus under the Section.
Where a company or any other person has received an application for the allotment of securities with advance payment of subscription before any changes have been made, they shall intimate about the changes to the applicants. If the person desires to withdraw the application within 15 days then the money must be refunded to them.
I.M. TO BE PREPARED IN FORM PAS-2
According to the rules, the information memorandum shall be prepared in Form PAS-2 and filed with the Registrar along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within one month prior to the issue of a second or subsequent offer of securities under the shelf prospectus.
PROVISO TO SECTION 31(2): The section also provides a benefitting provision for the investors, the proviso provides that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as a subscription within fifteen days thereof.
RED HERRING PROSPECTUS
Red herring Prospectus means a prospectus that does not include full particulars of the quantum or price of the securities included therein. In simple terms, a red herring prospectus is an offer document that contains most of the information pertaining to the company’s operations and prospects but does not include key details of the issue such as the price and the number of shares offered. A company may issue a red herring prospectus prior to the issue of prospectus when it is proposing to make an offer of securities.
According to section 32, a company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus. Such prospectus needs to be filed with the registrar at least three days prior to the opening of the subscription list or the offer. This type of prospectus carries the same obligation as other prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
When the offer of securities closes then the prospectus should state the total capital raised either raised by the way of debt or share capital. It also has to state the closing price of the securities and any other details which have not been included in the prospectus need to be registered with the registrar and SEBI.
According to section 2(1) of the Act “abridged prospectus” means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations on this behalf. Section 33 of the Act provides that no form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus. A copy of the prospectus shall be furnished to him on a request being made by any person before the closing of the subscription list and the offer.
Nothing aforesaid shall apply if it is shown that the form of application was issued—
(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or
(b) in relation to securities that were not offered to the public.
It is a document which the company issues in case of an offer for the sale of securities to the public. Moreover, this document is an invitation to the public to purchase the shares of the company through an intermediary such as Issuing House. An issuing house is a bank or other financial institution that registers, distributes and sells securities on behalf of other companies. Issuing house acts as an intermediary between the company and the public.
A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013. Where any company to offer securities for sale to the public, allots or agrees to allot securities, any document by which the offer of sale to the public is made will be considered as a deemed prospectus. The document is deemed to be a prospectus for all purposes and all the provision of content and liabilities of a prospectus will be applied.
A Prospectus is a legal document that a Public Company needs to issue for inviting the public to subscribe to its shares. It is a disclosure document that gives all the essential information about every aspect of the company. It shows the future prospectus of the company. It invites the public to purchase shares or debentures of the company. Whenever the advertisement of the prospectus is made, it must contain the memorandum of the company. When a company is proposing an offer of securities, then before 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.