Any document that is referred to or distributed as a prospectus falls under the definition of prospectus. Any notification, circular, advertisement, or other material that serves as an invitation to offers from the general public is also included in this. Any securities of a corporate body should be the subject of such an invitation to offer. Prospectuses such as red herring and shelf are also regarded as prospectuses.
The prospectus is a legal document that lists the financial securities that the company is selling to investors. A financial product’s features, prospects, and promise are described in depth in this legal document for market participants and investors to consider. Potential clients must receive it as required by law. The Companies Act of 2013 lists four different forms of prospectuses: deemed prospectus, red herring prospectus, and shelf prospectus.
When a company wants to raise money by issuing a number of bonds, they will utilize a prospectus called a shelf prospectus. An invitation to the general public to invest in securities is made via a prospectus, which can be a notification, advertisement, or other type of document.
Public limited companies are required to publish a prospectus before issuing securities. To generate money through multiple bond issuances, any public limited company may issue a shelf prospectus. Businesses that publish shelf prospectuses are required to submit a Form PAS-2 Information Memorandum.
Section 31 of the 2013 Companies Act specifies Shelf Prospectus. It is released whenever a business or public financial organization offers the public new securities. The prospectus’s validity duration must be specified by the firm and cannot exceed one year.
Relevance of a prospectus
- To educate the public about the issue
- To reflect the company’s stance on the offering’s conditions and the distribution procedure.
- To guarantee that the promoters and directors of the company are held accountable.
What a document must contain to qualify as a prospectus
There are two requirements that must be met for a document to qualify as a prospectus.
- A deposit request or an invitation to subscribe for public shares or debentures should be included in the document.
- The public should be extended such an invitation.
- The invitation must be sent by the business or on its behalf.
- The invitation must be in relation to securities like shares or debentures.
Method for submitting and releasing a prospectus
As stated in section 33, an application form for securities is only issued when it is accompanied with a note that contains all the elements of a prospectus known as an abridged prospectus.
The following are exceptions to this rule:
- When a person receives an application form as an invitation to sign an underwriting agreement for securities.
- There has been a request made for privately offered securities.
A public company’s prospectus must be signed, dated, and contain all required information in order to be filed and issued, as stated in section 26 of the 2013 Companies Act:
- The title and registration address of the company, as well as the names of its secretary, auditor, legal counsel, bankers, trustees, etc.
- Dates of the issue’s opening and closure.
- Statements made by the board of directors regarding the need to keep issuance receipts in separate bank accounts.
- Statement from the Board of Directors describing the specifics of using and not using earlier issue receipts.
- Expert opinions and the endorsement of the directors, auditors, and bankers.
- Issue authority and specifics of the resolution adopted for it.
- Time and procedures set aside for the allocation and issuance of securities.
- The way that may be prescribed for the capital structure of the.
- The purpose of a public offering.
- The business’s purpose and where it is located.
- Information about the risk factors of the individual project, its gestation period, any litigation that is currently pending, and other significant project-related details.
- Minimum membership requirements and the premium payment amounts.
- Information on the directors, including their salaries and the level of their ownership in the company.
- financial information reports, such as the auditor’s report, the report of profit and loss for the previous five fiscal years, the business and transaction reports, the statement of conformity with the Act’s provisions, and any other report.
Filling of a copy to the registrar
According to subsection 4 of section 26 of the Companies Act of 2013, a prospectus cannot be released by a company or on its behalf unless a copy is provided to the registrar for registration on or before the date of publication.
Everyone, whose name appears in the prospectus as a director or proposed director, or the appointed attorney on his behalf, must sign the document.
Delivery of a prospectus copy to the registrar
In accordance with section 26(6) of the Companies Act 2013, the prospectus must state on its face that a copy has been given to the registrar. Along with the copy of the prospectus, the statement should also specify the document that was presented to the registrar.
The registrar must register a prospectus, according to Section 26(7). This section specifies the circumstances under which the registrar may register a prospectus.
- It satisfies the criteria of this provision, or section 26 of the 2013 Companies Act; and
- All of the individuals included in the prospectus have signed it with their written consent.
Release of a prospectus following registration
A prospectus is deemed invalid if it is not released within 90 days after the date when a copy was provided to the registrar.
Violation of the section
A corporation may be penalized under section 26 of the Companies Act 2013 if a prospectus is published in violation of that provision (9). The following is the penalty for the violation:
- A fine of at least Rs. 50,000 and up to Rs. 3,000,000 is imposed.
The following penal provisions apply to anyone who learns that a prospectus is being issued in violation of section 26 after learning that prospectus is in existence.
- A sentence of up to three years in jail, or
- More than Rs. 50,000 but not more than Rs. 3, 00,000 in fines.
Shelf Prospectuses Must Be Published by Certain Entities –
- Institutions referred to as Public Financial Institutions (PFIs) are those in which the Central Government controls more than 51% of the fully paid-up shares. India’s Life Insurance Corporation, Industrial Finance Corporation, and Industrial Finance Corporation are examples of public financial institutions.
- If the state, the federal government, or other public sector banks directly possess at least 51% of a bank, such bank is considered to be in the public sector.
- Non-banking Finance Corporations (NBFCs): NBFCs are financial organizations that offer a range of banking services but lack a banking license.
- An organization is considered to be listed if its securities are traded on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), or the Calcutta Stock Exchange (CSE)
The prospectus’s advertisement
The rules governing prospectus advertising are found in Section 30 of the Companies Act of 2013. This section states that it is required to specify the contents of the company’s memorandum regarding the object, members’ liabilities, the amount of the share capital, signatories and the number of shares subscribed by them, and the capital structure of the company whenever the advertisement of a prospectus is published in any way. Following are many types of prospectuses.
- Prospectus Red Herring
- Bookcase Prospectus
- Concise prospectus
- Considered Prospectus
A shelf prospectus is a prospectus that has been published by any firm, bank, or public financial institution for one or more issues of the securities or classes of securities that are stated in the prospectus. When a shelf prospectus is published, the issuer is no longer required to publish a separate prospectus for every offering; instead, he may sell or offer securities without publishing any additional prospectuses.
Under Section 31 of the 2013 Companies Act, the issues relating to shelf prospectus have been discussed.
For every class or classes of corporations that may submit a shelf prospectus at the time of the first sale of shares to the registrar, the Securities and Exchange Board of India is to establish the regulations.
The prospectus must specify how long it will be valid, and it should not be longer than a year. Beginning on the first day of the first offer of the securities, this period is in effect. No separate prospectus is necessary for any second or subsequent offer.
Memorandum of Information [Section 31(2)]
The information memorandum must be submitted by the company that is submitting a shelf prospectus. All relevant information should be included, including any charges incurred and changes to the company’s financial status after the initial offer of the security or between the two offers.
In accordance with Rule 4CCA of Section 60A(3) of the Companies (Central Government’s) General Rules and Forms, 1956, it must be submitted to the registrar three months prior to the issuance of the second or subsequent offer made under the shelf prospectus.
When a corporation or individual receives a request for the allocation of securities with an advance subscription payment before any adjustments have been made, he or she must be made aware of the changes.
A corporation must also include an information memorandum when submitting a shelf prospectus. The money must be returned to them if he decides to cancel the application within 15 days.
If a securities offer is made following the filing of the information memorandum, both the memorandum and the shelf prospectus are regarded as prospectuses.
Prospectus Red Herring
An incomplete description of the amount of the price of the securities is referred to as a red herring prospectus. In cases where a corporation intends to make a securities offer, it may first release a red herring prospectus.
This kind of prospectus must be submitted to the registrar at least three days before the subscription list or the offer is opened. Similar to a prospectus, a red herring prospectus carries the same obligations. It should be noted in the prospectus as variances if there are any differences between a red herring prospectus and a prospectus.
The prospectus must disclose the entire amount raised, whether it was done through debt financing or share capital, after the securities offer has closed. Additionally, it must include the securities’ closing price. The registrar and SEBI must be notified of any additional information that is not contained in the prospectus.
A variation notice may be withdrawn by the applicant or subscriber under Section 60B(7) within 7 days of the notice; the withdrawal must be made in writing.
A prospectus that has been submitted to the registrar is summarized in the shortened prospectus. It has every component of a prospectus. In order to make it comfortable and quick for an investor to learn all the pertinent information in brief, an abridged prospectus condenses all of the prospectus’ information.
Abridged prospectuses must be enclosed with any form for the acquisition of a company’s stocks, according to Section 33(1) of the Companies Act, 2013.
It is a condensed version of a prospectus that provides all the pertinent and relevant information needed for the investor to make an informed choice. It also lowers the cost of a capital public offering.
A presumed prospectus has been declared in accordance with Companies Act of 2013 section 25(1).
The document will be regarded as a presumed prospectus via which the offer is made to the public for sale if any corporation, in order to offer securities for sale to the public, allots or agrees to allot stocks. For all intents and purposes, the document shall be deemed to be a prospectus of the Company, and shall be subject to the obligations and provisions of a prospectus.
When a rights issue is issued to the existing members with the option to renounce in favour of others, the court held in SEBI v. Kunnamkulam Paper Mills Ltd. that if there are more than fifty of these additional members, the rights issue is deemed to be a prospectus.
Basically, a prospectus is a formal, legal document that a corporate organisation issues to solicit public proposals for the subscription or purchase of any securities. A prospectus for shares or debt obligations may be released by any publicly traded corporation. A private corporation is exempt from this requirement, though.
A prospectus must meet both mandatory requirements and be registered in order to be considered genuine. Any prospectus is deemed invalid and in violation of the rules for valid prospectuses if it is not registered. This is against section 26’s penal code (9).
The company’s memorandum must always be included in any advertisements or prospectuses that are created. A corporation may release a red herring prospectus in place of a prospectus when it is presenting a proposal for an offer of securities. When a corporation needs to make an offer on one or more securities or classes of securities, it can also issue a shelf prospectus instead of needing to issue a prospectus before making an offer on each security.
Therefore, a prospectus is crucial for each publicly traded company, and it must adhere to the rules established by the 2013 Companies Act.
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