4 Types of Prospectus in Company Law: Explained

What is a Prospectus in Company Law?

A prospectus is a legal document issued by companies to the public, inviting them to invest in securities such as shares, debentures, or bonds. It provides comprehensive details about the company’s operations, financial health, risks, and the purpose of the securities being offered.

Under Section 2(70) of the Companies Act, 2013, a prospectus includes any notice, circular, advertisement, or document that offers securities for sale to the public. It ensures transparency in fundraising efforts and helps investors make informed decisions.

Contents of Prospectus in Company Law

The contents of a prospectus, as mandated by the Companies Act, 2013, are designed to provide comprehensive, accurate, and transparent information about the company issuing securities. These contents ensure that investors have all the necessary details to make informed decisions and that the company complies with regulatory requirements.

Mandatory Contents of a Prospectus

Company’s Name and Registered Office Address: Clearly mention the name of the company and the location of its registered office.

Objective of the Issue: Outline the purpose for which the funds are being raised, such as expansion, debt repayment, or new projects.

Details of the Securities Offered

• The type of securities (e.g., shares, debentures) and the price at which they are being offered.

  • Terms of payment and details of premium, if any.

Company’s Financial Information

• Past financial statements, including profit and loss accounts, balance sheets, and cash flow statements.

• Projections for future performance, if applicable.

Risk Factors: A detailed section highlighting the risks associated with the business or the investment.

Capital Structure

• Authorized, issued, subscribed, and paid-up capital details.

• Any changes in the capital structure in the last five years.

Management Details

• Information about the company’s directors, key management personnel, and promoters.

• Their qualifications, experience, and directorships in other companies.

Underwriters and Brokers: Names and details of underwriters, brokers, or intermediaries involved in the issuance of securities.

Terms and Conditions of the Offer:

• Rules governing the purchase, allotment, and transfer of securities.

• Lock-in periods, if applicable.

Auditor and Expert Opinions: Reports from auditors and experts confirming the accuracy of financial data and projections.

Use of Proceeds: Clear allocation of the funds raised, ensuring transparency in how the money will be utilized.

Pending Litigation and Defaults: Disclose any ongoing legal cases or defaults that might affect the company’s operations.

Declaration by Directors: A declaration by the board of directors confirming that the prospectus contains no false or misleading information.

Material Contracts: Details of contracts entered into by the company that are material to the issue.

Types of Prospectus Under the Companies Act, 2013

The Companies Act, 2013 defines 4 main types of prospectus to meet the needs of different public offerings and regulatory compliance. These include documents issued by companies to invite public investment in securities, ensuring transparency and adherence to legal provisions.

1. Deemed Prospectus

Section 25 of the Companies Act, 2013 governs the deemed prospectus. This document applies when a public company offers securities indirectly, through intermediaries like brokers or underwriters.

Key Features:

• Applicable when securities are offered to the public within six months of allotment.

  • Treated as a prospectus issued by the company for regulatory compliance.

Example: If a company sells securities through brokers, the document used is considered a deemed prospectus.

2. Red Herring Prospectus

Section 32 outlines the red herring prospectus, which is issued prior to the final prospectus during public offerings.

Key Features:

• Excludes details like the final price or the number of securities being offered.

  • Filed with the Registrar of Companies (RoC) at least three days before the subscription opens.

Example: Used during IPOs to gauge investor interest before finalizing offer details.

3. Shelf Prospectus

Section 31 regulates the shelf prospectus, which is used for issuing securities in multiple tranches over a specified period without filing a fresh prospectus for each issuance.

Key Features:

• Valid for one year from the date of filing.

  • Requires an information memorandum for subsequent offers.

Example: Commonly used by public financial institutions or companies issuing bonds.

4. Abridged Prospectus

Section 33 defines the abridged prospectus, a summary document that highlights essential details from the full prospectus.

Key Features:

• Accompanies the application form for securities.

  • Includes concise information like the purpose of the issue, financial highlights, and risk factors.

Example: Distributed to retail investors for simplified access to critical information.

Key Compliance Requirements for Prospectus

Issuing a prospectus is a critical step for companies seeking to raise funds from the public. The Companies Act, 2013, along with SEBI (Securities and Exchange Board of India) regulations, mandates specific compliance requirements to ensure transparency, accuracy, and investor protection. Here are the key compliance requirements for prospectuses:

1. Filing with the Registrar of Companies (RoC)

• Every prospectus must be filed and registered with the RoC before issuance.

• The RoC ensures that the document complies with statutory requirements under the Companies Act, 2013.

2. Approval from SEBI

• Companies must seek approval from SEBI, particularly for public offerings, to ensure compliance with disclosure norms and guidelines.

• SEBI verifies that the prospectus contains no misleading or false statements.

3. Complete and Accurate Disclosure

The prospectus must disclose all material information, including:

• Financial statements.

  • Risk factors.

  • Purpose of the issue.

  • Details of directors and management.

Omission of critical information may lead to penalties or rejection.

4. Declaration by Directors

A declaration signed by the company’s directors must accompany the prospectus, confirming that:

• The document contains no false or misleading information.

  • The disclosures meet all legal requirements.

5. Use of Abridged Prospectus

• When offering securities to the public, companies must attach abridged prospectus to the application form.

• This document summarises the key details of the full prospectus to ensure accessibility for retail investors.

6. Issuance of Red Herring Prospectus (For IPOs)

If a company opts to issue a Red Herring Prospectus for an IPO, it must:

• File the document with the RoC at least three days before the public subscription opens.

  • Include all preliminary details except pricing and the number of securities.

7. Prohibition of Misleading Statements

• Under Section 34 and Section 35 of the Companies Act, 2013:

  • False or misleading statements in a prospectus can result in civil and criminal liabilities.

  • Directors and promoters can face fines up to ₹50 lakh and imprisonment.

8. Information Memorandum (For Shelf Prospectus)

• Companies using a Shelf Prospectus must file an information memorandum with the RoC before issuing subsequent securities.

• This memorandum updates investors on material changes since the initial filing.

9. Compliance with Timelines

• Prospectuses must be issued within the timelines specified under the Companies Act.

• Delays in filing or issuance can result in penalties or legal complications.

Consequences of Non-Compliance

Non-compliance with prospectus requirements can lead to severe consequences, including:

• Rejection of the prospectus by regulatory authorities.

• Penalties for the company, directors, and promoters.

• Loss of investor trust and credibility in the financial market.