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. There are essentials for a document to be called as a Prospectus. For any document to considered as a prospectus, it should satisfy certain 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. Statement in lieu of prospectus
Every public company either issue a prospectus or file a statement in lieu of prospectus. This is not mandatory for a private company. But when a private company converts from private to public company, it must have to either file a prospectus if earlier issued or it has to file a statement in lieu of prospectus. The provisions regarding the statement in lieu of prospectus have been stated under section 70 of the Companies Act 2013
Advertisement of Prospectus: Section 30 of the Companies Act 2013 contains the provisions regarding the advertisement of the prospectus. This section states that when in any manner the advertisement of a prospectus is published, it is mandatory to specify the contents of the memorandum of the company regarding the object, member’s liabilities, amount of the company’s share capital, signatories and the number of shares subscribed by them and the capital structure of the company. Types of the prospectus as follows.
- Red Herring Prospectus
- Shelf Prospectus, Abridged prospectus, Deemed Prospectus
What is abridged prospectus?
A prospectus is defined under section 2 of the Companies Act, 2013. (70) as “any document that is described or issued as a prospectus”. This includes any notice, circular, advertisement, or other documents that serve as an offer to the public for the purchase of any corporate body’s securities. A document must meet any of the two criteria from among the following to be considered a prospectus.
The document should either invite deposits or subscriptions to public shares or debentures. The public should be invited to such an event. The invitation should be issued by or on behalf of the company. The invitation should be related to shares, debentures, or other similar financial instruments.
Every publicly traded firm must either issue a prospectus or file a statement in lieu of one. For a private corporation, this is not required. However, when a private company changes to a public corporation, it must either file a prospectus if one was previously released or a statement in lieu of a prospectus. Section 70 of the Companies Act 2013 specifies the provisions governing the statement in lieu of prospectus.
Why is a Prospectus Needed?
The provisions for the advertisement of the prospectus are found in Section 30 of the Companies Act 2013. This section states that when a company is making an offer for sale of its shares in any way, the contents of the company’s memorandum stating the objective, members’ liabilities, the amount of the company’s share capital, signatories, and the number of shares subscribed by them, and the company’s capital structure must be specified. In short, all the information that is important for investors to make an informed decision about the company, its finances, its promoters, and its area of operation are required to be contained in the prospectus.
Types & forms of Prospectus
The following are the different types of prospectuses.
Deemed Prospectus – As Per section 25(1) of the Companies Act of 2013, a document is deemed to be a prospectus if the company approves allot or offers securities to the public that document would be called as Deemed Prospectus.
Red Herring Prospectus – This is the prospectus that must be filed with the registrar before the offer. In particular, with the prospectus that is lacks in information such as the specific price or quantum of securities being offered.
Shelf Prospectus – When a company is making an offer of issuing more than one type of securities then the prospectus it issues is called a shelf prospectus.
Abridged prospectus – An abridged prospectus contains all the essential information regarding the company, its financial history, its promoters, and its offer for sale.
There are a few criteria that an abridged prospectus must meet to be attached to an application form. These are the criteria:
Basic details as per SEBI circular CIR/IMD/DF-1/19/2012 dated. July 25, 2012.
It must be printed on A4 paper and typed in Times New Roman font. The font size must be at least 10 points. Line spacing must be at least 1.00, condensation must be avoided, and typical letter-spacing must be at 100% scale.
If needed, the font size for headings and subheadings can be modified. The major headings should use capital letters, bold fonts, and boxes. The main subheadings should be bold and enclosed in boxes. Other subheadings should be bolded and underlined.
Various headings and subheadings should be numbered in a consistent manner or with distinct methods of numbering.
The order in which the contents are presented must not be changed.
In the event that the application form is torn, attach it in such a way that none of the information is affected.
Tables and pointers can be used to make information more accurate and clear.
It must provide directions for filling out the form, making a payment, and dealing with risk factors. And such data should be presented in pointer style, with each line starting on a new line.
The following sentence must be in bold at the top of every page. “IN THE NATURE OF FORM 2A – MEMORANDUM CONTAINING SALIENT FEATURES OF THE PROSPECTUS”
To effectively express any associated risks with the situation, risk factors should be mentioned.
Wherever needed, a reference to the prospectus can be made.
What is Abridged Prospectus?
An abridged prospectus is defined as a memorandum comprising such prominent aspects of a prospectus as may be prescribed by the Securities and Exchange Board by establishing regulations in this matter, according to section 2(1) of the Companies Act 2013.
It is therefore a document containing a prospectus summary. Its objective is to summarize the prospectus, which contains the information prescribed by the Securities and Exchange Board of India (SEBI), without leaving out any significant factors.
The Abridged prospectus’s Meaning, Purpose, and Importance:
Its primary goal is to protect the rights of investors. It has been made mandatory with the application form so that investors are aware of their rights, consequences, and outcomes when investing in a specific company.
Because it is shorter than a prospectus, it reduces the cost of a public capital issue.
It saves investors time by allowing them to glean the most important information from the detailed prospectus at a glance.
Elements of Abridged prospectus
When is it not necessary to issue it?
In the following situations, an abridged prospectus is not required to be attached to the application form:
If the shares/debentures are not made available to the general public.
In the event that a bonafide invitation to enter into an underwriting agreement is received.
Prospectus of a Company
A document issued by a company to invite the public and the investors for subscribing the securities is called a prospectus. The prospectus contains detailed information on the securities. A public company can issue the prospectus to offer its shares and debentures, whereas a private company cannot issue prospectus.
Invitation to Public
The company issues the invitation to the public for subscribing the securities of a company. If the invitation is for the subscription or purchase of share capital, then anyone can apply in the given form. The invitation should be by the company, on behalf of a company or concerning the intended company.
The following are the circumstances that differentiate the issue of the prospectus:
- If a company offers the shares or debentures to pubic through a prospectus, then it is a public issue
- In some cases, the company would not issue the prospectus, but they would send an offer to the public. The company makes such an offer through notice, advertisement, circular or in any manner
- In some instances, the client will receive the documents which are marked strictly confidential. It would contain the proposed shares along with the application form by the managing director. Moreover, such a document stays in a small circle not open to the public
- When an individual receives an offer, it is not a public offer
- A private company giving an offer to selected persons would be a private offer
- When a promoter of a company provides an offer to his friends or relatives is a private offer
Any class of companies as per the Securities and Exchange Board can file for the Shelf Prospectus. The companies file the Shelf Prospectus with the Registrar of Companies (RoC) at the first stage of the offer. The first offer indicates a period of validity, which does not exceed one year from the date of opening the first offer. Moreover, it does not require a prospectus for the subsequent offers during the validity period. While filing for Shelf prospectus, the company should also file the information memorandum. The information memorandum should contain all the material facts of the created charges, the company’s financial position changes. The companies should file the memorandum within the stipulated time before the issue of the subsequent offers. The filed information memorandum stays as a prospectus along with shelf prospectus whenever the company makes an offer.
If any company or person or company applies for the securities with an advance payment before making the changes, then the company can intimate the applicant about the changes. If the applicant desires to withdraw the applicant, then the company has to return the payment within 15 days.
Note: The Shelf Prospectus saves time and expenditure to issue the offer every time.
Red Herring Prospectus
The Red Herring Prospectus does not include the full particulars of the price of the securities. A company planning to make an offer of securities can issue a red herring prospectus before the issue of the prospectus. The companies file the red herring prospectus with the RoC at least 3 days before the opening the offer. The obligations of this are similar to that of any of the prospectus. The variations in the red herring prospectus from the other prospectus are highlighted. While closing an offer, the companies file the prospectus with the RoC and Securities and Exchange Board. It contains the information of the total capital raised whether, by share capital or debt, the closing price of the offer and the other details left out in the red herring prospectus
Abridged Prospectus is a memorandum which has salient features of the prospectus. There shall be no form of application for issuing any securities unless it has the abridged prospectus. It has four exceptions like:
- When the company does not offer the securities to the public
- The offer is to the members or debenture holders of the company with or without the right to renounce
- The company makes an offer concerning the bonafide invitation to a person. This is to enter into an underwriting agreement concerning the securities
- The shares or the debentures offered should be uniform and similar to the shares and debentures that are already issued
If a person requests a copy of the prospectus, he will be given before the closing of the offer and subscription list. If the company does not comply with any of these provisions, then they will be liable to pay an amount of Rs.50,000 for each default.
Information in Prospectus
Every prospectus issued by a public company or on behalf of it for its formation or subsequently should contain the following information:
- The Name and the address of the company’s registered office, chief financial officer, secretary, legal advisors, auditors, bankers, underwriters and trustees
- Dates of opening and closing of the issue, a declaration regarding the allotment letters and the refunds
- A statement from the Board of Directors regarding the separate bank account
- The details of the underwriting issue
- Consent to the issue from the bankers, directors and auditors. Expert advice if necessary
- Details of the resolution and authority of the issue
- The procedure for allotment and issue of the securities and also its time schedule
- Company’s capital structure in the given manner
- The main objects of the public offer and the terms of the current issue
- The current business of the company, its location and the schedule of its implementation
- Particulars like the project’s management perception of the risk factors, gestation period, the progress, deadlines for completion and pending legal action
- The minimum subscription and the payable amount by premium. The issue shares by other means than cash
- Details regarding the directors, which should include their appointments and remuneration
- Disclosures in the manner given by the company
Reports in Prospectus
Every prospectus issued by a public company or on behalf of it for its formation or subsequently should contain the following report:
- Auditor’s report regarding the profits, losses, liabilities and assets
- Report on the profits and losses for the five financial years
- Auditor’s report on the profits and losses of the company’s business for the five financial years
- Report on the business and its transaction
Filing Copy of Prospectus
The company should not issue the prospectus unless it is delivered to the Registrar for registration with the signatures of all the directors of the company. Every prospectus that is issued should state that it has been delivered for Registration. It should also specify any necessary to be attached in the delivered copy or refer to the statements in the prospectus regarding the documents. The RoC does not register unless the company complies to the requirements for the registration. The prospectus is not valid if the company does not issue it within 90 days from the date of delivering the copy to the RoC.
Statement by Expert
The issued prospectus should not include the statement of the expert. Unless the expert is not a part of the promotion, formation or management of the company and has given written consent. The expert should not withdraw the consent before delivering to the RoC for registration.
If a company issues prospectus in contravention, then the company will be punishable to pay an amount of Rs.50,000 which may extend up to Rs.3 lakhs. Every person being part of the issue of the prospectus knowingly will be liable with to pay an amount of Rs.50,000 which may extend up to Rs.3 lakhs or with imprisonment for a period up to 3 years or with both.
Remedies for Untrue Statement or Mis-statement
If a company issues a prospectus, then it is responsible for the statement in it. The Companies Act, 2013 provides remedies for civil liability and criminal liability.
Civil Liability for Mis-statement
If a subscribed person of the securities suffers any loss or damage because of a misleading statement in the prospectus, then the company is liable to pay for the compensation to every subscribed person of the securities. Every director and promoter of the company is liable to pay for the compensation. The person who authorises the issue of prospectus and the expert who issues the statement is also responsible for paying the compensation. The directors of a company are not liable to the punishment if they have withdrawn from the post before the issuance of the prospectus or if the prospectus was issued without his knowledge and he proves it by public notice. The expert can also escape the liability by proving that after giving consent to the copy, he withdrew before it was delivered to the RoC.
Criminal Liability for Mis-statement
The persons responsible for the issue of such a prospectus that has untrue statements will be liable under Section 447. This section provides that any person who is guilty of fraud will receive imprisonment for 6 months which may extend to 10 years. They shall also pay a fine of an amount not less than that involved in the fraud; this may extend up to three times. If the fraud involves the interest of the public, then the imprisonment period will not be less than 3 years. If the person authorized the issue without prior knowledge and if he proves it, then he is not liable to imprisonment
In APL Industries Ltd. v. Securities and Exchange Board of India,
The SEBI (Securities and Exchange Board of India) ordered the company to refund the amount of subscription to the subscriber where the public issue of share was unsubscribed.
In Derry v. Peek,:The prospectus of a company contained that the company has been authorized to use steam power in moving its trams. But, the authority that was authorized to approve the Board of Trade refuses its approval. The court held that there is no misstatement in the prospectus, the Board of Directors was not held guilty of fraud, because they were honest and they mentioned the statement in a good faith. They were not intended to deceive anyone.
In Henderson v. Lacon,:In the prospectus, it is contended that the directors and their friends have subscribed a large portion of and they now offer to the public remaining shares. But in reality, the directors had subscribed only 10 shares each. The court held that the subscribers can rescind the contract.
In Arnison v. Smith,:The court held that, in the prospectus, the non-disclosure of facts does not amount to misrepresentation unless the concealment has prevented an adequate appreciation of what was stated.
In Peek v. Gurney:The court held that-
- Every man must be held responsible for the consequence of false representation made by him to another, upon which the other acts and is injured.
- The aforesaid false representation was made with the intention that it should be acted upon by the third person in the manner resulting in injury.
- Such injury must be an immediate consequence and not remote.
The prospectus is a legal document only issued by a public company on the verge of raising funds. The prospectus plays a major role in the decision-making of the subscribers for the subscription of securities (shares, debentures, and other related instruments). It is merely an invitation to offer for the subscription of shares. It includes detailed information of the company’s Board of Directors, Company Secretary, company’s management, capital structure, financial performance, recent projects of a company, and other related information.
For being a valid prospectus, it should contain all the essential requisites and it must be registered. If any prospectus is not registered then, it is considered invalid. For any misstatement of a prospectus i.e. untrue statement or misleading statement to deceive anyone, then such person was held guilty and was liable for fine or imprisonment.
The public company must issue a prospectus for raising funds but, in case of private company converts into public then they should issue a prospectus or statement in lieu of prospectus with the memorandum of association (MOA) on its conversion into a public company.
Reference of Statutes and Books
- The companies Act, 2013
- Companies (Prospectus and Allotment of Securities) Rule 2012
- Companies Rule 2014
- Singh Avatar, Company Law, Seventeenth Edition, 2018, Companies Act, 2013, Section 2(70), Companies Act, 2013
- Section 32, Companies Act, 2013
- Section 31, Companies Act, 2013
- Under Section 35 (1) of the Companies Act, 2013,
- the term “person” includes directors, company secretary, auditor, chief financial officer, banker or other authorized officers.,(2017) 200 Comp Cas 440 (Del),(1889) LR 14 AC (HL),(1867) LR e Eq 249,(1889) LR 41 Ch D 348,(1873) LR 6 (HL) 377
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