This article is written by Shobhit Verma, 4th-year BCOM LLB student at Khalsa College of Law, Amritsar, during his internship at LeDroit India.
Key Words: Prospectus, Companies Act 2013, Securities, Public Offering, Red Herring Prospectus, Shelf Prospectus, Abridged Prospectus, Deemed Prospectus, Registrar of Companies (ROC), Securities and Exchange Board of India (SEBI).
Abstract: A detailed overview of the different types of prospectuses as defined under the Companies Act, 2013 in India. A prospectus is an important legal document for companies seeking to raise capital from the public. The essential components of a prospectus include company information, promoter details, issue details, risk factors, and compliance with the law. There are four primary types of prospectuses: the deemed prospectus, which addresses indirect public offerings; the red herring prospectus, a preliminary document used for price discovery; the shelf prospectus, designed for companies making multiple offerings; and the abridged prospectus, a summary for quick investor overviews. The legal framework under which these documents operate, highlighting the roles of the Registrar of Companies and the Securities and Exchange Board of India in ensuring transparency and investor protection.
KINDS OF PROSPECTUS
Introduction
A prospectus is a formal legal document issued by the company when it plans to offer its securities to the public. It is an offer document based on which an investor invests in the securities of an issuer company. It contains critical information, which includes detailed insights into the company’s business activities, vision, associated risks, financial standing, and the intended use of the raised capital. The prospectus must accurately reflect the company’s true information.
Prospectus is defined in section 2(70) of the Companies Act, 2013. It refers to any document characterized or issued as a prospectus and comprises a a. Red herring prospectus as defined in section 32; or b. Shelf prospectus mentioned in section 31; or c. Any notice, circular, advertisement, or other document calling for offers from the public for subscription or purchase of any security of a body corporate.
It serves to protect investors by ensuring they have access to essential information before committing their funds, reducing the risk of fraudulent or misleading investments. If a prospectus contains false or misleading information that induces an investor to purchase securities, the investor may have grounds for legal action. Under the Companies Act, 2013, a prospectus must be filed with the Registrar of Companies (ROC) before a company can offer its securities to the public. This ensures compliance with legal standards and protects investor interests.
Contents of a Prospectus:
1. Company Overview: It includes the company’s basic details, including its legal identity, website, registered office, and key personnel responsible for regulatory compliance. This ensures transparency for potential investors.
2. Promoter’s Information: It introduces the individuals behind the company, their financial stakes, and the cost of equity share acquisition by each promoter, offering transparency.
3. Issue Details: It provides a clear delineation of the offer, such as the number of securities offered, price, and trading platform.
4. Risk Factors: It outlines the primary risks associated with investing in the company’s shares, including market volatility, helping investors assess the potential challenges and uncertainties.
5. Key Dates: It includes the critical dates like the issue open date, issue close date, and finalization of allotment date to keep investors updated with significant events in the process of a public offer.
6. Registrar and Lead Manager: It identifies the key intermediaries responsible for managing the issue process and their respective responsibilities, offering investors assistance and grievance redressal.
7. Legal and Regulatory Compliance: It emphasizes the company’s adherence to legal and regulatory frameworks, ensuring that investors understand the compliance landscape.
Kinds of Prospectus: According to the Companies Act, 2013, there are mainly four types of prospectus:
1. Deemed Prospectus: It is covered under Section 25 of the Companies Act, 2013. A deemed prospectus is a simplified document with key details about a company’s securities, helping avoid legal issues when selling them. It is an indirect public offer, without complying with the SEBI guidelines. In simple terms, if a company prefers to offer its securities indirectly through an intermediary, it allots its securities to an intermediary with the understanding that they will then be sold to the public; the document used for this public sale is treated as a prospectus issued by the company itself. The company is held responsible for the accuracy and completeness of the information in the offer document, just as if it had issued a direct prospectus. The intermediary making the offer
may also be liable for misstatements. This ensures that investors who purchase these securities from the intermediary have the same legal protections as if they had purchased them directly from the company.
Conditions: For a document to be legally considered a deemed prospectus, it must satisfy any one of the following two conditions: a. The securities are being offered through an intermediary, and such intermediary has offered these securities for sale to the public within six months from the allotment; or b. If the company that has allotted the shares to an intermediary hasn’t received the full consideration in respect of the securities at the time of the public offer.
Additional Disclosures: a. The deemed prospectus must include additional information beyond what’s normally required in a regular prospectus. i. the net amount the company received or will receive for the securities; and ii. The time and place where the contract for the allotment of the securities can be inspected. b. The persons making the public offer, i.e., directors of the company.
Signature Requirements: a. In case the entity making the public offer is a company, the deemed prospectus must be signed by two directors. b. In case the entity is a firm, it must be signed by at least half of the partners.
2. Red herring prospectus: Section 32 of the Companies Act, 2013, specifically addresses the red herring prospectus. A red herring prospectus is a preliminary prospectus that a company issues when it’s planning to go public. It carries the same obligations as a regular prospectus. Its key characteristic is that it lacks certain crucial details, primarily the price and the number of shares that will be offered. This means that in case the price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size, and the number of
shares is determined later. It is a process of price discovery, and the price .cannot be determined until the bidding process is completed.
Hence, such details are not shown in the red herring prospectus filed with the registrar of companies as per the Companies Act, 2013. Only on completion of the bidding process are the details of the final price included in the prospectus and thereafter filed with the registrar of companies.
The primary purpose of this prospectus is to assess the demand for the securities of the company before finalizing a suitable price and number of shares, but it still provides potential investors with important information about the company’s business, performance, and risks involved.
Timeline for Filing with ROC: The company must file the red herring prospectus with the Registrar of Companies at least three days before the subscription offer opens.
Other Conditions: After the securities offer closes, the company must file a final prospectus with the Registrar and the Securities and Exchange Board. This final prospectus must include: a. Total capital raised (debt and share capital). b. Closing price of the securities c. Any other details not in the red herring prospectus
Advantages:
a. It does not include the final price or the quantity of shares to be sold, leaving the company room to revise these depending on market forces and investor reactions. b. By getting a sense of the market, the company will be able to avoid overpricing the issue and thus minimize the risk of undersubscription. c. It enables the company to start marketing their securities to prospective investors prior to the release of the final prospectus. This assists in creating a buzz and stimulating demand.
3. Shelf prospectus: Section 31 of the Companies Act, 2013, specifically deals with shelf prospectus. A shelf prospectus enables companies, particularly those that frequently raise capital, to streamline the process of issuing securities. In simple terms, a shelf prospectus is a single prospectus for multiple public issues under which the issuer is permitted to offer and sell securities to the public without a separate prospectus for each act of offering for a certain period. So instead of filing a new prospectus for each offering, they file one comprehensive prospectus that “sits on the shelf,” allowing them to offer securities when market conditions are favorable. This offers flexibility and efficiency, reducing the time and costs associated with repeated prospectus filings. The Securities and Exchange Board of India (SEBI) has the authority to define which classes of companies are eligible to file a shelf prospectus through its regulations. An eligible company can file a shelf prospectus with the Registrar of Companies at the time of its first securities offering.
Validity Period: This shelf prospectus has a validity period of up to one year, starting from the date of the first securities offer.
Multiple Offerings: During this validity period, the company can issue subsequent securities offerings without having to file a completely new prospectus each time.
Information Memorandum for Subsequent Offers: For each subsequent offer within the shelf prospectus, the company must file an “information memorandum” with the Registrar. This memorandum must contain details of: a. New charges created; b. Changes in the company’s financial position since the previous offering; c. Other prescribed changes.
Applications and Advance Payments: If the company has received advance payment of subscription and thereafter any changes are made to the terms of the securities, then it must: a. Inform the applicants who have made advance payments about these changes; and b. Offer a full refund within 15 days to applicants if the applicants are not satisfied with the changes and choose to withdraw their application.
Legal Status of Combined Documents: When an information memorandum is filed along with the shelf prospectus, is deemed to be a prospectus. This means that the combined documents contain all the information that is required for investors to make an informed decision.
Advantages: a. Companies can take advantage of favorable market conditions since they can raise securities whenever they feel it will be most beneficial. They are not required to wait for the long procedure of drawing up a new prospectus. b. Filing one shelf prospectus is cheaper compared to preparing and filing several individual prospectuses. c. Companies can raise money swiftly by offering securities without waiting for the preparation of a new prospectus. They can respond instantly to finance requirements or investment opportunities. d. It minimizes the time-consuming task of redrafting and submitting prospectus documents.
4. Abridged prospectus: According to section 2(1) of the Companies Act, 2013, an abridged prospectus is a memorandum that summarizes the salient features of a full prospectus, as specified by the Securities and Exchange Board through its regulations. It is a concise version of the full prospectus, containing key details for investors who are looking for a quick overview before making an investment decision. It doesn’t include all the detailed disclosures found in a full prospectus; it highlights the most essential details of the offering. Its purpose is to provide potential investors with the key, essential information they need to make an informed investment decision, but in a more concise and accessible format.
Advantages: a. It saves investors’ precious time by putting the important information in an easily understandable and compact form.
b. It makes complex business and financial information more easily understandable to a broader base of investors, even those with less financial experience. c. It enables investors to immediately understand the key facts of an investment prospect, so that they can make quicker and better decisions.
Conclusion
A prospectus is a vital legal document that contains essential information about the company, such as its management, financial position, details of issue, and associated risks, which is distributed to the public as an invitation to subscribe to its securities. There are broadly four types of prospectus: Red Herring, Shelf, Abridged, and Deemed. Each of these prospectuses has its own distinct purpose, depending on the nature of the offering and the company’s circumstances. In India, under the Companies Act, 2013, the prospectus must be filed with the ROC and must comply with the regulations set by the SEBI.
