The securities of a corporation are described in a document called a prospectus, which is required by law before it may be sold to the public. In the prospectus, investors may learn about the business and why these securities are being sold.[i] . A prospectus is a document that invites the general public to buy stocks, debentures, or other financial instruments. The prospectus must be issued to the general public directly by the firm or an institution acting on its behalf. A prospectus or statement in lieu of a prospectus is required of every publicly traded company. For non-governmental organisations, this is not required. However, in order to become a publicly traded company a private firm must either file a prospectus, if one has already been published, or a statement in lieu of a prospectus.[ii]
Advertisements, circulars, and notices are all examples of legal papers that can be included in a prospectus in accordance with the Companies Act, 2013. In addition, the prospectus should be distributed only for the purpose of purchasing the company’s stocks Section 70[iii] of the Companies Act, 2013 outlines the procedures that must be followed by a private business in order to become a public company. These procedures include the issuance of a prospectus or the filing of a statement in place of prospectus. The Gujarat High Court noted in Hafez Rustom Dalal vs Registrar of Companies[iv], the respondent authority is required to identify the specific assertions in the Prospectus that they find to be misleading or intentional in order to entice the public into subscribing for shares of the Company.
The term “abridged prospectus” refers to a condensed version of the full prospectus that is submitted to the registrar. An abridged prospectus must be provided with the documentation for the acquisition of securities issued by a firm in accordance with Section 33(1)[v] of the Companies Act, 2013. According to Section 2(1) of the Companies Act of 2013[vi], an Abridged Prospectus is a summary of the full prospectus. As required by India’s Securities and Exchange Board, it contains all the essential elements of a prospectus (SEBI).
It’s a condensed version of the full prospectus that includes all the required information but is intended to facilitate a smaller public offering of money. The High Court of Andhra Pradesh stated in The Institute of Chartered Accountants of India v. Mukesh Gang, Chartered Accountant, Referred Case. No.2 of 2011 [vii]that an auditor’s issuance of a fraudulent certificate in connection with a prospectus would constitute a failure to fulfil his statutory responsibilities. Because the public subscribes to the shares based on the invitation, the court continued, he must be believed to be aware of the dangers that arise from such gross ignorance of a false certification.
The security of investor assets is its top concern. Included with the application form, it ensures that potential investors know what to expect from the firm they’re participating in. In comparison to a prospectus, its concise length helps keep public capital issues under budget. By summarising the most crucial sections of the lengthy prospectus, this aids investors by reducing their workload.[viii] Before offering or selling securities to the general public, a corporation is required by law to prepare a prospectus. Because of this, it might be difficult for businesses to raise capital rapidly. The corporation faces a punishment of up to Rs.50,000 per issuance if they don’t distribute prospectuses prior to their offerings. However, companies can save time and still comply with the obligation by filing a shortened version of the mandate. The business may be able to save money and time if this is done. The most important aspect of this situation is realising that the prospectus serves as both a legal requirement and a marketing for the company’s offering. As a result, a shorter shortened prospectus might hinder their marketing efforts but can be advantageous when the firm requires immediate capital.
The application form does not need to be accompanied by a full prospectus if one of the following applies:
- If the public does not have access to the shares/debentures.
- If a bonafide request for an underwriting agreement is received.
There are also certain essentials which are necessary for filing of an abridged prospectus. These are:
- The filing requirements include that the prospectus be typed in Times New Roman and printed on A4 paper. All content must be in Times New Roman, size 10, with a single space between lines.
- No longer than five pages. This is so because its intended conciseness would be compromised by an increase in page count.
- The condensed version of the report needs to be widely disseminated among the public. A copy should also be sent to the Securities and Exchanges Board of India (SEBI).[ix]
All of the identifying information about the firm should be included in the abridged prospectus. This contains the whole company name, brand names, logo etc. Investors can tell the difference between businesses and products with similar names this way as well. The prospectus must also additionally include information about the company’s board of directors. As a general rule, this is already public knowledge, as a listed business has a responsibility to tell its investors of any changes to its board of directors. However, reiterating the same information in the prospectus allows investors to assess their selection using a single document.
Every facet of the offered securities must be described in the prospectus. In the case of an issue of stock, for instance, details on the share class and voting rights should be included. In contrast, if the offering is bonds, the prospectus should detail the bonds’ coupon rate, maturity, face value, and other key features. In a nutshell, an abbreviated prospectus should serve as a one-stop shop for all the offering’s technical details. There is a minimum offering amount that must be met for each offer. This figure may represent the bare minimum of shares that should be purchased from the stock offering. And this could be the bare minimum of bonds you should purchase from an issuer. Information on application fees and other costs associated with the offer should also be included in the prospectus.
An abridged prospectus should nevertheless include information on the offering’s underwriters. Profit and loss statements that have been audited will also be included. This will be useful in convincing potential investors to put money into the business. It is because of such reasons that SEBI has also introduced new disclosure formats for abridged prospectus following a circular dated February 04, 2022.[x] The structure for disclosures in the abridged prospectus has been updated by SEBI to further simplify, give more clarity, and ensure consistency in disclosures across documents, and to include extra but critical information.
Sebi mandated that issuing companies, lead managers, and registrars all have to provide a link to the shortened prospectus on their respective websites and in their price band advertisements. The issuer or its MBs(Merchant Bankers) must also guarantee that the abridged prospectus’s disclosures are complete, accurate, and not misleading. The issuer should also provide key performance indicators (KPIs) and other quantitative criteria to back up any qualitative claims made in the shortened prospectus. In addition, no qualitative claims should be made if they cannot be supported by key performance indicators. Company names, promoter names, issue kinds, fresh issue and OFS components, total issue size, and share reservation information must all be included on the first page of the abridged prospectus under the new rules . Furthermore, the corporation must provide information regarding OFS by the promoter, promoter group, and other shareholders.
It was determined in the case of Iridium India Telecom ltd vs Motorola Incorporated & ors [xi]that the promoter was obligated to provide a true and complete disclosure of all material information since the document was of deemed prospectus type.
The updated structure requires the firm to provide information regarding the price band and the minimum bid lot in the abbreviated prospectus that contains the key elements of the Red Herring Prospectus (RHP). In addition, the issuing business must include information regarding estimated dates for various events, such as the opening and closure of the issue, the beginning of refunds, the crediting of equity shares to allottees’ Demat accounts, and the beginning of trading of equity shares. In addition, the front outer cover page, shortened prospectus, price band marketing, etc., as determined by the insurance provider, must have a Quick Response (QR) code. Prospectuses, abridged prospectuses, and price band advertisements, where applicable, can be downloaded after scanning the corresponding QR code.
To conclude, in order for potential buyers of a company’s shares to make educated judgments, a prospectus is provided to them. A prospectus may be rather lengthy and packed with information, which is why the SEBI requires the publication of “abridged prospectus,” or summary, which condenses the lengthy document down to its essentials. Investors can avoid getting lost in the weeds of the comprehensive prospectus by reading the condensed version instead.
[iii] The Companies Act 2013, §70, No.18, Acts of Parliament, 2013 (India)
[iv] Hafez Rustom Dalal v. Registrar of Companies, 2005 128 CompCas 883 Guj
[v] The Companies Act 2013, §33(1), No.18, Acts of Parliament, 2013 (India)
[vi] The Companies Act 2013, §2(1), No.18, Acts of Parliament, 2013 (India)
[vii] The Institute of Chartered Accountants of India v. Mukesh Gang, Chartered Accountant, Referred Case. No.2 of 2011
[xi]Iridium India Telecom ltd v. Motorola Incorporated & ors CRIMINAL APPEAL NO.688 OF 2005
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