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The Companies Act, 2013 defines a prospectus under section 2(70 ). Prospectus can be defined as “any document which is described or issued as a prospectus”. This also includes 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.
Essentials for a document to be called as
a prospectus
For any document to considered as a prospectus, it should satisfy two conditions.
- The document should invite the subscription to public share or debentures, or it should invite deposits.
- Such an invitation should be made to the public.
- The invitation should be made by the company or on the behalf company.
- The invitation should relate to shares, debentures or such other instruments.
Statement in lieu of prospectus
Every public company either issue a prospectus or file 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. The provisions regarding the statement in lieu of prospectus have been stated under section 70 of the Companies Act 2013.
Golden Rule Of Disclosure: Golden Legacy
Nothing in the prospectus should be stated as a fact which is not
one or nothing of such value should be omitted, the presence of
which might affect the nature or quality of the privileges and
advantages which a prospectus holds out as inducement to take
shares. This was called as the golden rule of disclosure in the case
of New Burnswick Canadian Railway Company v.
Muggerdge [5] and as golden legacy in Henderson v. Lacon [6]
Advertisement 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. Types of the prospectus as follows. Red Herring Prospectus Shelf Prospectus Abridged prospectus Deemed Prospectus
Shelf Prospectus
Shelf prospectus can be defined as a 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. When a shelf
withdraw the application within 15 days then the money must be refunded to them. After the information memorandum has been filed, if any offer or securities is made, the memorandum along with the shelf prospectus is considered as a prospectus. Red herring prospectus Red herring prospectus is the prospectus which lacks the complete particulars about the quantum of the price of the securities. A company may issue a red herring prospectus prior to the issue of prospectus when it is proposing to make an offer of securities. This type of prospectus needs to be filed with the registrar at least three days prior to the opening of the subscription list or the offer. The obligations carried by a red herring prospectus are same as a prospectus. If there is any variation between a red herring prospectus and a prospectus then it should be highlighted in the prospectus as variations. When the offer of securities closes then the prospectus has to 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. Any other details which have not been included in the prospectus need to be registered with the registrar and SEBI. The applicant or subscriber has right under Section60B(7) to withdraw the application on any intimation of variation within 7 days of such intimation and the withdrawal should be communicated in writing. 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. Section33(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
A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013. When any company to offer securities for sale to the public, allots or agrees to allot securities, the document will be considered as a deemed prospectus through which the offer is made to the public for sale. 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. In the case of SEBI v. Kunnamkulam Paper Mills Ltd. , it was held by the court that where a rights issue is made to the existing members with a right to renounce in the favour of others, it becomes a deemed prospectus if the number of such others exceeds fifty.
Process for filing and issuing a prospectus
Application forms
As stated under section 33, the application form for the securities is issued only when they are accompanied by a memorandum with all the features of prospectus referred to as an abridged prospectus.
- 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. Filing of copy with the registrar As stated under sub-section 4 of section26 of the Companies Act, 2013 , the prospectus is not to be issued by a company or on its behalf unless on or before the date of publication, a copy of the prospectus is delivered to the registrar for registration. The copy should be signed by every person whose name has been mentioned in the prospectus as a director or proposed director or the assigned attorney on his behalf. Delivery of copy of the prospectus to the registrar As per section26(6) of the Companies Act 2013 , the prospectus should mention that its copy has been delivered to the registrar on its face. The statement should also mention the document submitted to the registrar along with the copy of the prospectus. Registration of prospectus Section26(7) states about the registration of a prospectus by the registrar. According to this section, when the registrar can register a prospectus when:
- 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 after registration If a prospectus is not issued before 90 days from the date from which a copy was delivered before the registrar, then it is considered to be invalid. Contravention of section If a prospectus is issued in contravention of the provision under section 26 of the Companies Act 2013, then the company can be punished under section 26(9). The punishment for the contravention is: Fine of not less than Rs. 50,000 extending up to 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.
