Law and You > Corporate Laws > Companies Act, 2013 > Prospectus under Companies Act 2013

Under the Companies Act, 2013, a prospectus is a formal document issued by a company that offers securities (such as shares or debentures) to the public. The prospectus is a key element of the process of raising capital and ensures that potential investors receive adequate information about the company’s business, financials, and the risks involved. The act defines a prospectus broadly, covering not only formal public offers but also documents that invite public subscriptions or the purchase of securities.

In this article, we are going to study a “Prospectus of a company”, its objects and types. Section 23 of the Companies Act, 2013 provides for its need.

Prospectus:

According to Section 2(70) of the Companies Act, 2013 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 body corporate. A prospectus is not merely an advertisement. 

Section 23: The Companies Act, 2013

Public offer and private placement.—

(1) A public company may issue securities—

(a) to public through prospectus (herein referred to as “public offer”) by complying with the provisions of this Part; or

(b) through private placement by complying with the provisions of Part II of this Chapter; or

(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder.

(2) A private company may issue securities—

(a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or

(b) through private placement by complying with the provisions of Part II of this Chapter. Explanation.—For the purposes of this Chapter, “public offer” includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.

The biggest monetary advantage enjoyed by a public company is that it can raise huge amounts of capital by inviting members of the public to subscribe to the shares and debentures by issuing a prospectus. It is not obligatory for a public company to issue prospectus and invite members of the public to subscribe to the shares and debentures. Under Section 42 of the Companies Act, 2013 it may finance itself by what is known as ‘private placement’, as for instance, when it sends an offer letter to select a group of persons. Every public company either issue a prospectus or file a statement in lieu of prospectus.

A private company, however, is by definition, prohibited from inviting members of the public to purchase its shares and debentures, and therefore a private company cannot issue prospectus. 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.

Under Section 33(1) of the Companies Act, 2013 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.

As per Section 33(1)(a) and (b) above requirement is not to apply if it is shown that the form of application was issued—(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or (b) in relation to securities which were not offered to the public.

As per Section 33(2), a copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.

As per Section 33(3), if a company makes any default in complying with the provisions of this section, it shall be liable to a penalty of fifty thousand rupees for each default.

Essentials of Prospectus:

1. It invites subscription to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.
3. The invitation should be made by the company or on behalf company.

Characteristics of the Prospectus:

• It is a document by which the company procures its share capital needed to carry on its activities;
• It is an invitation to a member of the public i.e. the public is invited to subscribe to the shares or debentures of the company. It is a general offer open to all;
• It includes any notice, circular, advertisement inviting deposits from the public.
• It must not be exaggerated and it must contain full and honest disclosures. All material facts must be disclosed and should not be concealed. It must not contain false details and untrue statements.

Objectives of Issuing Prospectus:

• To bring to the notice of the public that a new company has been formed.
• To preserve the authentic record of the terms and allotment on which the public have been invited to buy shares or debentures of the company.
• To secure that the directors of the company accept responsibility for the statements in the prospectus.

Contents of a Prospectus:

• Address of the registered office of the company.
• Name and address of company secretary, auditors, bankers, underwriters etc.
• Dates of the opening and closing of the issue.
• Declaration about the issue of allotment letters and refunds within the prescribed time.
• A statement by the board of directors about the separate bank account where all monies received out of shares issued are to be transferred.
• Details about underwriting of the issue.
• Consent of directors, auditors, bankers to the issue, expert’s opinion if any.
• The authority for the issue and the details of the resolution passed therefore.
• Procedure and time schedule for allotment and issue of securities.
• Capital structure of the company.
• Main objects and present business of the company and its location.
• Main object of public offer and terms of the present issue.
• Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
• Details of directors including their appointment and remuneration.
• Disclosure about sources of promoter’s contribution.
• Particulars relation to management perception of risk factors specific to the project, gestation period of the project, extent of progress made in the project and deadlines for completion of the project.

Types of Prospectus:

Deemed Prospectus:

A Deemed Prospectus under the Companies Act, 2013 refers to a document that is treated as a prospectus even though it might not be directly issued by the company offering securities. When a company does not issue a formal prospectus but still offers securities to the public through intermediaries, such as in cases where existing shareholders or third parties sell shares to the public, the document associated with such an offer is considered a deemed prospectus. This provision ensures that all public offers are subject to the same transparency and regulatory scrutiny as those that involve a formal prospectus issued by the company itself. Section 25 of the Companies Act, 2013 deals with it.

It is to be noted that a regular prospectus is issued directly by the company when it offers securities to the public, while a deemed prospectus arises when a third party (e.g., existing shareholders) offers securities to the public, but the company plays a role in the preparation of the offer document.

For example, if a company’s promoter wishes to sell a large portion of their shares to the public, instead of issuing new shares, they can issue an offer for sale. The document used in this case would be treated as a deemed prospectus. Although the company itself is not issuing new shares, it is still involved in preparing the offer document, making it subject to the rules governing a prospectus.

Characteristics of Deemed Prospectus:

• Definition: Section 25(1) of the Companies Act, 2013 states that if a company allows any of its securities to be offered for sale to the public, and the document issued for this purpose is not officially called a prospectus, it is nonetheless treated as a deemed prospectus. This typically applies when securities are offered for sale by an intermediary, such as an existing shareholder or another party, but the company is still involved in the transaction.
• Public Offer of Sale: A deemed prospectus comes into play when securities are offered to the public for sale by someone other than the issuing company, such as an existing shareholder or promoter, and a formal document is used for this purpose. The company must be “a party to the preparation” of the document for the deemed prospectus to apply, meaning the company should have authorized or been involved in the process of making the offer available to the public.
• Liability and Compliance: Once a document is considered a deemed prospectus, it is treated the same as a regular prospectus under the law, and all the regulations governing prospectuses apply. This means that the issuer (or those involved in the offer, such as promoters, directors, or intermediaries) will be liable for any misstatements or omissions in the deemed prospectus, just as they would for a regular prospectus. The same rules regarding filing, disclosures, and liabilities (civil and criminal) apply to the deemed prospectus as they do to a standard prospectus.
• Disclosures: Just like a regular prospectus, a deemed prospectus must contain full and fair disclosures about the company, its financial position, risks associated with the investment, and other relevant details. This ensures that potential investors receive all the necessary information to make informed decisions, even when the securities are being offered for sale by a third party or existing shareholder.
• Offer for Sale by Intermediaries: The deemed prospectus provision is often applied in cases where a company’s securities are sold through intermediaries such as investment banks, promoters, or large shareholders who offer their shares to the public. For example, in a situation where promoters or large shareholders wish to sell their shares to the public, the document detailing the sale will be treated as a deemed prospectus.
• Filing with the Registrar of Companies (ROC): The deemed prospectus must be filed with the Registrar of Companies (ROC) just like any other prospectus. This is crucial for ensuring that the offer is compliant with regulatory requirements and investor protection laws.

Importance of a Deemed Prospectus:

• Investor Protection: It ensures that potential investors receive adequate and accurate information even when the company is not directly issuing new shares, maintaining transparency in the securities market.
• Compliance: The requirement to treat certain documents as deemed prospectuses ensures that companies and intermediaries cannot bypass the regulatory obligations of issuing a formal prospectus when making public offers.
• Liability: Just like in the case of a regular prospectus, those responsible for issuing a deemed prospectus can be held liable for any false or misleading information provided in the document, thus maintaining accountability.

The concept of a Deemed Prospectus under the Companies Act, 2013 ensures that the public offering of securities through intermediaries or third parties is subject to the same regulatory standards as those directly issued by the company. It plays an important role in protecting investors by ensuring full disclosures and legal compliance in all types of public offers. This provision prevents companies and promoters from avoiding the stringent requirements of issuing a prospectus and ensures accountability and transparency in capital markets.

Shelf Prospectus:

A Shelf Prospectus under the Companies Act, 2013 is a type of prospectus that allows certain classes of companies to issue securities to the public in multiple offerings without the need to issue a fresh prospectus each time. It is particularly useful for companies that plan to raise funds frequently through securities over a period, saving them from the repetitive process of drafting a new prospectus for every issue. Section 31 of the Companies Act, 2013 deals with the Shelf Prospectus.

Shelf prospectuses are particularly beneficial for companies that need to raise capital frequently, such as:

• Banks or financial institutions offering bonds or debentures over a period.
• Large corporations with regular funding needs for expansion or project financing.
• Government-backed entities raising funds for public infrastructure projects.

For example, A bank may issue a shelf prospectus to raise capital by offering bonds to the public in several tranches over the next 12 months. After filing the initial shelf prospectus with the ROC and SEBI, the bank can make multiple bond offerings without issuing a new prospectus each time, as long as it updates investors on any material changes through an information memorandum.

Characteristics of a Shelf Prospectus:

• Why to Issue Shelf Prospectus? : A Shelf Prospectus is a prospectus issued by a company intending to offer securities to the public over a certain period. Once the shelf prospectus is filed with the Registrar of Companies.
• Validity of Shelf Prospectus: A shelf prospectus must be filed with the Registrar of Companies and approved by SEBI before it can be used. It remains valid for a period of one year from the date of first offering. This means the company can issue multiple tranches of securities during this period without issuing a new prospectus. This period commences from the opening date of the first offer of the securities.
• Who can Issue Shelf Prospectus? : Public financial institutions, banks, or any company that has been permitted by the Securities and Exchange Board of India (SEBI) can issue shelf prospectus. Other entities as specified by SEBI can also issue a shelf prospectus.
• Information Memorandum: In each subsequent offer after the first issue, the company is required to file an information memorandum that updates the shelf prospectus with material facts or changes that occurred since the previous offer. This ensures that investors are kept informed about the company’s status and any significant changes before subscribing to securities issued under the same shelf prospectus. The information memorandum includes information like the company’s financial position, changes in management, or any other material developments. When any company or a person has received an application for the allotment of securities with advance payment of subscription before any changes have been made, then he must be informed about the changes. If he desires to withdraw the application within 15 days then the money must be refunded to them. After the information memorandum has been filed, if any offer or securities is made, the memorandum along with the shelf prospectus is considered as a prospectus.
• Liability and Compliance: If there is any omission or misrepresentation of facts in the shelf prospectus or information memorandum, the company and its officers may be held liable under the same provisions as a standard prospectus. The company must ensure that all disclosures and updates are accurate and in compliance with SEBI and the Companies Act guidelines.

Importance of a Shelf Prospectus:

• Cost-Effective: It eliminates the need to draft and file a separate prospectus for each offering, thus reducing costs and effort.
• Time-Saving: Since the company doesn’t need to create a fresh prospectus for every issue, it speeds up the process of raising funds.
• Flexibility: The company has the flexibility to issue securities as and when needed during the validity period, based on market conditions and requirements.

A Shelf Prospectus under the Companies Act, 2013 is a flexible and efficient tool for companies seeking to raise capital through multiple securities offerings over a fixed period. By reducing the administrative burden and maintaining transparency, it streamlines the fundraising process while ensuring compliance with legal requirements.

Red Herring Prospectus (RHP)

A Red Herring Prospectus (RHP) under the Companies Act, 2013 is a preliminary version of a prospectus filed by a company intending to raise capital through an Initial Public Offering (IPO). Unlike a standard prospectus, an RHP contains most of the information about the company’s business operations, financials, and risks but excludes details on the price of the securities and the number of shares being offered. These details are finalized and added later, just before the actual issuance of the securities. Section 32 of the Companies Act, 2013 deals with Red Herring Prospectus

For example, A technology company planning to go public issues a Red Herring Prospectus stating that it intends to raise ₹500 crore through an IPO but does not disclose the exact number of shares or the final price at which the shares will be offered. It may, however, provide a price range (say ₹100 to ₹120 per share). After gathering bids from investors, the company finalizes the offer price (say ₹110 per share) and issues a final prospectus with all the details.

Characteristics of a Red Herring Prospectus:

• What is a Red Herring Prospectus?: It is a preliminary prospectus issued by a company that does not provide complete details, specifically regarding the price at which the securities will be offered or the total number of shares on sale. It is used mainly in book-building issues, where the price is determined through bidding by potential investors during the IPO process.
• Filing Requirements: The Red Herring Prospectus must be filed with the Registrar of Companies (ROC) and SEBI (Securities and Exchange Board of India) at least three days before the public offering. The RHP provides most of the information necessary for potential investors to make an informed decision, including the company’s financial statements, business strategy, risks, and management details.
• Missing Information in RHP: The RHP does not mention the final offer price or the number of shares being offered. Instead, it may specify a price band (a range within which investors can bid). While the total value of the offering might be stated, the exact number of shares to be offered is not finalized in the RHP.
• Book-Building Process: The RHP is typically used in the book-building process of an IPO, where potential investors submit bids for the number of shares they wish to buy and the price they are willing to pay. Based on these bids, the final price and allocation of shares are determined. Once the bidding process is complete, the company finalizes the price and share quantity, and this information is filed with the ROC in a final prospectus.
• Purpose of an RHP: The RHP provides potential investors with detailed information about the company to make informed decisions during the book-building process. It allows the company to gauge market demand and investor interest in its shares before finalizing the price and other specifics.
• Transition to Final Prospectus: After the bidding process concludes and the price and number of shares are determined, a final prospectus is filed, replacing the RHP. This final prospectus contains all the necessary details, including the offer price and the size of the issue, and it must be filed with the ROC before the securities are listed on the stock exchange.
• Liability for Misstatements: The company and its directors, promoters, and other officers are liable for any untrue or misleading statements made in the Red Herring Prospectus. The liability extends to civil penalties, and in certain cases, criminal penalties if the RHP contains fraudulent or false information.

Importance of Red Herring Prospectus:

• Transparency: It ensures transparency by providing potential investors with crucial details about the company’s operations, risks, and financial position, even before the final price and share allocation are determined.
• Flexibility in Pricing: The RHP allows the company to adjust the pricing of its securities based on market feedback and investor demand during the book-building process.
• Compliance with Regulations: The RHP is a regulatory requirement in book-building IPOs and must comply with the disclosure norms set by SEBI and the Companies Act, 2013.

The Red Herring Prospectus is a vital document in the book-building process of an IPO, allowing companies to disclose essential information to investors while leaving flexibility in determining the final price and number of shares to be issued. It plays a crucial role in ensuring transparency and compliance under the Companies Act, 2013, while also helping companies maximize the success of their public offerings by responding to market demand.

Abridged Prospectus:

An Abridged Prospectus under the Companies Act, 2013 is a condensed version of a full prospectus that contains the essential information an investor needs to make an informed decision before applying for securities. It is designed to provide a summary of the company’s key details, financial information, and the risks associated with the investment, without the extensive legal and technical details found in a full prospectus. The idea is to make the information more accessible and easier for investors to understand. Section 33 of the Companies Act, 2013 deals with it.

For example, if a company is raising funds through a public issue of shares, it must attach an abridged prospectus with every application form distributed to potential investors. This abridged prospectus would summarize the company’s financial status, the purpose of the issue, risks involved, and other essential details that the investor would need to decide whether to subscribe to the company’s shares.

Contents of Abridged Prospectus:

The abridged prospectus contains the most critical information from the full prospectus, such as:

• Company Overview: Basic details about the company’s business, promoters, and directors.
• Financial Information: Summarized financial statements, including profit and loss accounts, balance sheets, and key financial ratios.
• Risk Factors: A brief description of the main risks involved in the investment.
• Terms of the Offer: The price, the number of securities being offered, and other essential terms.
• Purpose of the Issue: An explanation of how the company plans to use the funds raised.

Characteristics of an Abridged Prospectus:

• What is Abridged Prospectus?: The Abridged Prospectus is a document containing salient features of a prospectus, as defined under Section 2(1) of the Companies Act, 2013. It is issued along with the application form for subscription to securities (e.g., shares or debentures), providing an overview of the full prospectus.
• Mandatory Requirement: According to Section 33 of the Companies Act, 2013, every public company issuing securities must attach an abridged prospectus along with the application form for the subscription of securities. The abridged prospectus ensures that investors are provided with key details before they commit to purchasing the securities.
• Purpose of Abridged Prospectus: The abridged prospectus is meant to simplify the investment decision-making process for investors by providing concise, relevant information. It also promotes transparency and ensures that even if investors do not have time to go through the detailed full prospectus, they are still informed about the most critical aspects of the investment.
• Liability for Misstatements: Similar to the full prospectus, the abridged prospectus must be accurate and truthful. If there are any misstatements or if material facts are omitted, the company and its directors, promoters, and other officers involved can be held liable.
• Filing and Approval: The abridged prospectus, like the full prospectus, must be filed with the Registrar of Companies (ROC) and approved by the Securities and Exchange Board of India (SEBI) before the public offer.

Importance of an Abridged Prospectus:

• Simplifies Information: It reduces the complexity of the full prospectus, making it easier for potential investors, especially retail investors, to understand the core information they need before making an investment.
• Mandatory Disclosure: The abridged prospectus ensures that essential details about the company, the offer, and the risks are disclosed to all prospective investors.
• Investor Protection: By providing a summary of the key elements of the full prospectus, it helps protect investors from making uninformed decisions.

An Abridged Prospectus under the Companies Act, 2013 is a crucial document for ensuring that potential investors are well-informed about the key aspects of a public securities offering. By providing a summary of the full prospectus, it allows for easier understanding while maintaining transparency and regulatory compliance. It plays an important role in promoting investor protection and ensuring that all necessary information is disclosed before investors commit to purchasing securities.

Liabilities During Issuing of Prospectus:

• Civil Liability: In case, misleading documents during the issue of securities amounts to misrepresentation, the aggrieved persons can repudiate the contract. They can claim a refund of their money. Damages can also be claimed from the persons found guilty.
• Criminal Liability: In case any deliberate concealment is made, directors will be punished with a fine of Rs. 5,000 or imprisonment up to two years or both. If it is fraud the fine will extend to Rs. 10,000 or 5 years imprisonment or both.

Statement in Lieu of Prospectus:

When the prospectus is not issued by the company a statement in lieu of prospectus, must be filed with the Registrar at least three days before the allotment of shares. The contents of the statement in lieu of prospectus are very much similar to the prospectus. The statement must be signed by all the directors or their agents authorized in writing.

A private company is prohibited from inviting the public to subscribe to their shares and thus cannot issue a prospectus. Hence these provisions do not apply to a private company.

Case Laws:

In Re. South of England Natural Gas and Petroleum Co. Ltd., (1911) 1 Ch. D. 573 case,  3,000 copies of a document in the form of a prospectus were sent out and distributed among the members of certain gas companies only. The Court held that though the offer was only to a limited class, it was nevertheless an “offer to the public,” as those persons were nonetheless “the public”.

In Nash v. Lynde, (1929) App cases 158 case, Nash applied for certain shares in a company on the basis of a document sent to him by Lynde, the managing director of the company. The document in the form of the prospectus was marked “strictly private and confidential.” The document did not contain all the material facts required by the Act to be disclosed. Nash filed a suit for compensation for loss suffered by him by reason of the omissions. The court observed, “The public is, of course, a general word. No particular numbers are prescribed. Anything from two to infinity may serve. The point is that the offer as such is to be open to anyone who brings his money and applies in due form, whether the prospectus was addressed to him on behalf of the company or not. Private communication is not thus open and does not construe to be a prospectus”. Thus the Court held that the prospectus not to have been “issued”.

Raising Finance:

Companies need funds to sustain in business. These funds can be required for long term or short-term purposes. To suffice their long-term needs, companies issue shares.  Issue of shares can be done in three ways which are

1. private placement of shares
2. public issue
3. Issuing the share to existing shareholders

Public Offer:

A public company may issue securities to the public through the prospectus, this offer is referred as a public offer. This offer must be in compliance with the provisions of the Part I Chapter 3 on Prospectus and Allotment of Securities and SEBI Act, 1992.

Section 23 of the Companies Act, 2013 mentions Public issue as a way of raising funds through the public. It means the selling or marketing of share for subscription by the public by issue of prospectus. The importance of the public offer is by issuing share to public and getting listed to recognized stock exchanges in India.

There can be two types of public offer-

• Initial Public Offer: It is the first offer made by a company to the public. Initial public offer is usually made to raise the capital of a small scale company to expand it.
• Further Public Offer: It is issuing shares to investors by a company already listed on a stock exchange. It is a stock issue of extra shares made by a public company that has already gone through its initial public offer process. 

The public offer can be made by the company as well as the existing shareholders either as a fresh issue of securities or as an offer for sale. A fresh issue of securities is the issue of shares by the company to the public, whereas an offer for sale is the proposal by existing shareholders to sell their shares.

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