Corporate Law, also inferred as Company Law or Business law is a body that regulates the rights and code of companies organizations and businessmen. Any advertisement offering shares or debentures of the company for sale to the public is a prospectus. The law is aimed at easing the process of doing business in India and improving corporate governance by making companies more accountable.
Section 2(70) of the Companies Act 2013 defines Prospectus as “any document issued for advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate”.
A Prospectus is an invitation issued to the public to offer for purchase/subscribe shares or debentures of the company. In other words, any advertisement offering shares or debentures of the company Private limited companies are strictly prohibited from issuing a prospectus and they cannot invite the public to subscribe to their shares. A prospectus can only be issued by public limited institutions. Making it an open invitation prolonged to the public at large.
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.
The prospectus is a legal document, which outlines the company’s financial securities for sale to the investors. According to the companies act 2013, there are four types of the prospectus, abridged prospectus, deemed prospectus, red herring prospectus, and shelf prospectus.
The prospectus is a legal document for market participants and investors to pursue, detailing the features, prospects, and promise of a financial product. It is mandated by the law to be supplied to prospective customers.
In an IPO, the prospectus tells potential shareholders about the company’s plans and business model.
For insurance and investment fund customers, a prospectus lists out the objective of the product, inclusions, and exclusions, fees, etc.
For an ETF, a prospectus informs likely investors of the fund’s goals, history, portfolio, fees and costs, and other financial details.
What is a Prospectus and its importance?
The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.
Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.
To notify the public of the issue
To put the company on record with regards to the terms of the issue and allotment process
To establish accountability on the part of the directors and promoters of the company
Types of prospectus
According to Companies Act 2013, there are four types of prospectus.
Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.
Red Herring Prospectus – Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.
Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.
Abridged Prospectus – Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.
A prospectus is basically a formal and legal document issued by a body corporate which acts for inviting offers from the public for subscription or purchase of any securities. Every public company is entitled to issue the prospectus for its shares or debentures. But, the same is not required for a private company. A prospectus for being a valid one it must contain essential requisites and it must be registered. If any prospectus is not registered, it is considered as an invalid one and with contravention to provisions laid down for the valid prospectus.
Whenever the advertisement if the prospectus is made, it must contain the memorandum of the company. When a company is making a proposal for an offer of securities, then prior to 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.
So, a prospectus plays an important role for any public company and it must be under the provisions laid down under the Companies Act 2013.
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