The prospectus of a body corporate is principally a document mandated under law. The two major purposes sought to be fulfilled by a prospectus is firstly, to furnish requisite information about the body corporate to the public at large and secondly, to serve as an invitation to offer for purchase of its securities (ex., shares, debentures, etc.) to the public. The present article shall deal with as to what is a prospectus, different types of prospectus and a brief overview of the law pursuant to it.
Legal Definition of a Prospectus:
Section 2 sub-section (70) of the Companies Act, 2013, defines a prospectus –
“(70) “prospectus” means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate;”
From the above-stated provision it can be inferred that prospectus refers to any document which has been described or issued by the body corporate as its prospectus. Further, the term prospectus encompasses under its ambit a red herring prospectus pursuant to Section 32 of the Companies Act, 2013 –
“[…] Explanation. – For the purposes of this section, the expression “red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.”
; or alternatively, a shelf prospectus pursuant to Section 31 of the Companies Act, 2013 –
“[…] Explanation. – For the purposes of this section, the expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.”
; or any notice, circular, advertisement or other document that serves as an invitation to offer for the public for the purpose of subscription or purchase of any securities (ex., shares, debentures, etc.) of the body corporate.
In respect of a shelf prospectus, it has to be noted that when filing for the same the company / body corporate is obliged to file the information memorandum. The latter encapsulates all essential facts such as, any change in the financial position of the body corporate / company since the first offer of the security or betwixt the two offers.
Furthermore, pursuant to Rule 10 of the Companies (Registration Offices and Fees) Rules, 2014, the body corporate / company is obliged to file the Information memorandum within 1 month prior to the issue of the second or subsequent offer made by the body corporate / company under the shelf prospectus. Rule 10 of the Companies (Registration Offices and Fees) Rules, 2014, states as under –
“10. Shelf prospectus and Information Memorandum.— The information memorandum shall be prepared in Form PAS-2 and filed with the Registrar along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within one month prior to the issue of a second or subsequent offer of securities under the shelf prospectus.”
Section 25 sub-section (1) of the Companies Act, 2013, provides for a deemed prospectus –“(1) Where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in subsections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof. […]”
Thereby, from the above-stated provision it can be concluded that when a company / body corporate allots or agrees to allot any of the securities (ex., shares, debentures, etc.) of the body corporate / company with the objective to offer all or any of those securities for sale to the general public, any document that is used for purpose of the same shall be deemed to be a prospectus issued by the company / body corporate.
In Kunnamkulam Paper Mills Ltd., v. SEBI, the High Court of Kerala held that in the event of rights issue being made to the existing members with an accompanying right to renounce in others favour, if the number of such others is in excess of 50 the same shall be deemed under law to be a prospectus.
An abridged prospectus is essentially a summary prospectus of a body corporate that the body corporate files before the registrar. The abridged prospectus encapsulates all the essential information present in the prospectus in brief so as to aid a prospective investor to gleam all essential information relevant to the body corporate in a quick and convenient manner.
Section 33 sub-section (1) of the Companies Act, 2013, states as follows regarding an abridged prospectus –
“(1) No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus […]”
Thereby, the above-stated provision mandates that it is impermissible for a form of application for the purchase of any securities of a company / body corporate (ex., shares, debentures, etc.) to be issued if such a form is unaccompanied by an abridged prospectus.
Essential requisites for a document to be considered as a prospectus
For any document to be considered as a prospectus it is essential that certain criteria are met. Firstly, the document in question must serve as an invitation to offer for subscription to securities (ex., shares, debentures, etc.) of the body corporate. Secondly, the invitation to offer must be made to the general public. Thirdly, the invitation to offer must be made by the body corporate or on behalf of the body corporate. Fourthly, the invitation to offer must pertain to securities such as shares, debentures or other such instruments.
A prospectus thereby plays a very important role in the decision-making process of an investor as to whether or not to purchase the security of any company or body corporate. The law thereby, has made stringent provisions regarding the issuing of prospectus by a company or body corporate and the information mandated to be provided by the company or body corporate therein in order to ensure that the public is not duped by unscrupulous business entities.
- The Companies Act, 2013, No.18 Acts of Indian Parliament, 2013 (India).
- The Companies (Registration Offices and Fees) Rules, 2014, Rule 10 (India).
- Kunnamkulam Paper Mills Ltd., v. SEBI, (2013) 178 Comp Cas 371 (Ker).
- Pankhuri Anand, Concept of Prospectus under The Companies Act, 2013, IPleaders.in (Mar.12, 4:52 PM), https://blog.ipleaders.in/concept-prospectus-companies-act-2013/
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