To commence with, a prospectus can be stated as a lawful document issued by the company that proposes securities for public sale. Or, a Prospectus is an offer issued to the public to bid for the subscribe shares of a company. By virtue of issuing a prospectus, the company safeguards capital as it invites deposits or offers for shares from the company. A prospectus is necessary to be issued by a public company only; private companies are forbidden to do so. The Companies Act 2013 is important for both companies and subscribers.
With this piece, we tend to deliver knowledge regarding the understanding of a company’s prospectus under the Companies ACT 2013. Topics discussed under this are important essentials of a prospectus, issues of the prospectus, contents of a prospectus and its types.
In Company Law, prospectus plays a significant role, where it contains all the material information (General, Financial & Statutory) of the company i.e., prices and shares detail of the specific company, which helps the public who wishes to buy a share in that specific company. A prospectus is a legally authorized document thus; it must be listed under Register of companies. As per dictionary definition Prospectus means – “A Prospectus is an offer document or data brochure issued by a public company used for attracting offers from the general public for subscribing of shares”. Issuing the prospectus is necessary for a public company but prohibited for a private company.
Prospectus can be defined as:
- Any document described or published as a prospectus”.
- It includes notices, circulars, advertisements, or any document acting as an invitation to offers from the public
According to clause (70) of Section 2 of the Companies Act 2013 the definition of “prospectus” is any document including a red herring prospectus or shelf prospectus as mentioned in Section 32 and Section 31 respectively issued as a prospectus. This document may also contain notice, circular, advertisement or other documents that act as appealing offers from the public for the subscription or purchase of any securities of a body corporate.
A prospectus must be in writing not an oral.
A document is not a prospectus unless it is an invitation to the public, but if it satisfies the condition of invitation to the public, it is a prospectus.
Whether shares have been “offered to the public” is a matter of fact and will depend upon the circumstances of the case.
Offer for the subscription can only be made up to 50 persons and not more than that or a maximum number as may be prescribed [Sec 40(2)].
ISSUE OF PROSPECTUS: (Companies Act, 2013)
On behalf of a public company or by them a prospectus is issued either when the company is formed or after. It can also be issued by or on behalf of any person who is involved or concerned in the formation of a public company at present or before. The issue of the prospectus is defined under Section 26 of Companies Act, 2013:
- If a company does not issue prospectus before 90 days from the date from which a copy was delivered before the registrar, then it is considered to be invalid.
- If a prospectus was issued in contravention under Section 26 of Companies Act, 2013 then the company can be punished with a fine of 50,000/- which may exceed up to 3,00,000/-.
CONTENTS OF PROSPECTUS: (Companies Act, 2013)
The following points mentioned are the contents of a prospectus:
- Address of the registered company office.
- The details of a company secretary, auditors, bankers, underwriters and other relevant employees, their respective names and address.
- The important dates regarding an issue like- opening and closing dates.
- All the allotment letters and refunds declaration within the agreed time.
- A declaration by the board of directors regarding the separate bank account where all payments collected out of shares issued are to be relocated.
- Underwriting of the issue their details.
- The consent of the directors, auditors, bankers regarding the issue, and expert opinion if any.
- The expert for the issue and the particulars of the resolution approved thereof.
- Process and time schedule for allocation and issue of securities.
- The Principal structure of the company with a complete viewpoint.
- Main objects and location of the present business of the company.
- The terms and conditions of Public offer and of the current issue and its purpose.
- Least subscription amount allocated by way of premium, issue of shares else than on cash.
- Details regarding appointment and remuneration of the director
- Sources of promoter’s contribution.
- Include reports like reports by the auditors regarding the financial operation; profit and losses repost for each of the five financial years approximately preceding the financial year of the issue of the prospectus etc.
DECLARATION OF COMPLIANCE
Declarations are very important, and all prospectuses must have it. Declaration of compliance should be made regarding the provisions of the Act and a point that whatever is stated in the prospectus is not conflicting to any provision of the Act. The rules and regulations should be followed which are mentioned in the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.
TYPES OF PROSPECTUS
There are following types of the prospectus of companies:
1. RED HERRING PROSPECTUS
Red herring prospectus is prospectus that doesn’t provide the complete particulars about the significance of the worth of the securities. A company can issue an RHP only prior to the issue of the prospectus. Thus, RHP is also known as an incomplete prospectus. The companies are supposed to file prospectus like these at least 3 days prior to the opening of the subscription list and the offer with the ROC. The RHP carries the same obligation as the prospectus. Variations should be mentioned if it arises between a red herring prospectus and a prospectus. The subscriber has the right to withdraw the application if there is variation within 7 days according to Section60B (7). The notification of withdrawal should be on paper.
2. ABRIDGED PROSPECTUS
As per Section 2 (1) of Companies Act 2013 abridged prospectus is a memorandum covering such salient features of a prospectus that is specified by the SEBI by creating regulations in this matter. This prospectus can be taken as a summary of a prospectus which is filed before the registrar. Section 33(1) of the Companies Act, 2013 also says that when the purchase of securities of a company is issued, it must be escorted by an abridged prospectus. It contains all the useful and money-oriented data to facilitate investor in rational decision and decreases the price of public issue of the principal.
3. DEEMED PROSPECTUS
According to Section 25(1) of the Companies Act, 2013 the document will be considered as a deemed prospectus When any company to offer securities for sale to the public, allots or agrees to allot securities. Let’s take a look at the case of SEBI v. Kunnamkulam Paper Mills Ltd, in this case, it was held by the court that it becomes a deemed prospectus if the number of other rights exceeds fifty, like where the rights issue is made to the existing members with a right to renounce in the favour of others.
4. SHELF PROSPECTUS
According to Section 31 of the Companies Act, 2013 Shelf prospectus can be defined as a prospectus that has been issued by any public financial institution, company or bank for multiple issues of securities or session of securities as stated in the prospectus. Only the companies which have been prescribed by the SEBI can issue of shelf prospectus with the registrar.
The concept of shelf prospectus was introduced in Indian corporate law and 2000. With the 2000 amendment of the companies Act 1956 under Section 62(A) the filing of shelf prospectus was made mandatory for banks whose main object is financing. Companies should file an information memorandum while filing for a shelf prospectus.
For a public company, the prospectus is one of the significant brochures which clarify regarding the company in an all-inclusive method concerning its shares and debentures, whereas it is not mandatory for the private company to issue the prospectus. A prospectus to be valid should be registered thus, making it one of the important requirements of the prospectus and may lead to penal actions that are enshrined under Companies Act, 2013. For the development of any public company, a prospectus plays a major part. Private companies are restricted to issue prospectus.
 Singh Avatar, Company Law, Sixteenth Edition,2015
 SEBI v. Kunnamkulam Paper Mills Ltd. [(2013) 178 Comp Cas 371 Ker]
 Companies Act 2013
Q1. When a document is known as a prospectus?
Q2. What are the types of the prospectus?
Q3. What are the contents of a prospectus?
Q4. Is it necessary for a Public company to have a prospectus?
Q5. Which Act governs the company’s prospectus?