Law and You > Corporate Laws > Companies Act, 2013 > Types of Prospectus

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 shall discuss the types of the 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. 

There are four types of prospectus as follows:

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.

Conclusion:

The Companies Act, 2013 provides for several types of prospectuses, each serving distinct purposes depending on the nature of the securities offering and the method used to raise capital. These prospectuses are designed to ensure transparency, investor protection, and compliance with legal requirements when companies offer securities to the public. The most common type is regular prospectus which is used for public offerings, providing detailed disclosures about the company, its financials, risks, and the terms of the offering. It ensures that investors receive comprehensive information to make informed decisions. Abridged Prospectus is a shortened version of the full prospectus, containing only the essential information. It is attached to every application form for purchasing securities, simplifying the investment decision-making process for retail investors while ensuring they are still informed of the most critical details. Shelf Prospectus allows companies to raise funds in multiple tranches over a period (up to one year) with a single filing, making it a cost-effective and efficient way to raise capital without repeatedly issuing new prospectuses. Red Herring Prospectus is a preliminary prospectus used during the book-building process of an IPO, which excludes pricing and the number of securities to be offered. It allows companies to gauge investor interest and finalize the offering details based on market demand. Deemed Prospectus is treated as a prospectus even though it is issued by intermediaries or shareholders offering securities for sale to the public. This ensures that any document associated with public offers is subject to the same scrutiny and liability as a regular prospectus.

Each type of prospectus serves a critical function in the capital-raising process, ensuring compliance with regulatory frameworks, fostering investor trust, and providing necessary disclosures. The diversity in prospectus types reflects the flexibility needed by companies to efficiently raise capital while maintaining investor protection and transparency in public offerings. These provisions under the Companies Act, 2013 ensure that both companies and intermediaries adhere to legal standards, safeguarding the interests of the investing public.

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