Concept of Prospectus Under the Companies Act, 2013 by Snigdha Mohapatra at LexCliq

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. A prospectus is basically a formal and legal document issued by a body corporate that acts for inviting offers from the public for subscription or purchase of any securities. Every public company is entitled to issue a prospectus for its shares or debentures. But, the same is not required for a private company.

Essentials for a document to be called a Prospectus

For any document to considered as a prospectus, it should satisfy the following conditions.

1. The document should invite the subscription to public share or debentures, or it should invite deposits.
2. Such an invitation should be made to the public.
3. The invitation should be made by the company or on behalf company.
4. The invitation should relate to shares, debentures or such other instruments.

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. Every public company either issue a prospectus or file a statement in lieu of a prospectus. This is not mandatory for a private company. But when a private company converts from a private to a public company, it must have to either file a prospectus if earlier issued or it has to file a statement in lieu of a prospectus.

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 Prospectus

Types of the prospectus are as follows.

1. Shelf Prospectus: A shelf prospectus can be defined as a prospectus that has been issued by any public financial institution, company or bank for one or more issues of securities or class of securities as mentioned in the prospectus. When a shelf prospectus is issued then the issuer does not need to issue a separate prospectus for each offering he can offer or sell securities without issuing any further prospectus. The provisions related to shelf prospectus has been discussed under section 31 of the Companies Act, 2013. The regulations are to be provided by the Securities and Exchange Board of India for any class or classes of companies that may file a shelf prospectus at the stage of the first offer of securities to the registrar.
2. Red herring prospectus: Red herring prospectus is the prospectus that lacks the complete particulars about the quantum of the price of the securities. A company may issue a red herring prospectus prior to the issue of prospectus when it is proposing to make an offer of securities. This type of prospectus needs to be filed with the registrar at least three days prior to the opening of the subscription list or the offer. The obligations carried by a red herring prospectus are the same as a prospectus. If there is any variation between a red herring prospectus and a prospectus then it should be highlighted in the prospectus as variations. The applicant or subscriber has the right under Section60B(7) to withdraw the application on any intimation of variation within 7 days of such intimation and the withdrawal should be communicated in writing.
3. Abridged Prospectus: Section33(1) of the Companies Act, 2013 also states that when any form for the purchase of securities of a company is issued, it must be accompanied by an abridged prospectus. The abridged prospectus is a summary of a prospectus filed before the registrar. It contains all the features of a prospectus. An abridged prospectus contains all the information of the prospectus in brief so that it should be convenient and quick for an investor to know all the useful information in short. It contains all the useful and materialistic information so that the investor can take a rational decision and it also reduces the cost of public issue of the capital as it is a short form of a prospectus.
4. Deemed Prospectus:  A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013. When any company offer securities for sale to the public, allots or agrees to allot securities, the document will be considered as a deemed prospectus through which the offer is made to the public for sale. The document is deemed to be a prospectus of a company for all purposes and all the provision of content and liabilities of a prospectus will be applied upon it. In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where a rights issue is made to the existing members with a right to renounce in the favour of others, it becomes a deemed prospectus if the number of such others exceeds fifty.

Contents of a Prospectus

For filing and issuing the prospectus of a public company, it must be signed and dated and contain all the necessary information as stated under section 26 of the Companies Act,2013:

1. Name and registered address of the office, its secretary, auditor, legal advisor, bankers, trustees, etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where receipts of issues are to be kept.
4. Statement of the Board of Directors about the details of utilization and non-utilisation of receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation period of the project, any pending legal action and other important details related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the company.
14. Reports for financial information such as auditor’s report, report of profit and loss of the five financial years, business and transaction reports, statement of compliance with the provisions of the Act and any other report.

All the companies should ensure that the details given in a prospectus are true and not ambiguous.  Where a prospectus is issued which includes any statement which is untrue or misleading in form or context or any matter is likely to mislead the investor or persons who have subscribed the securities has sustained any loss or damage, then the company and every person who is a director, promoter and expert at the time of issue of the prospectus may be held criminally liable as well as civil liability maybe imposed on them.