Deemed Prospectus: Section 25 Of Companies Act 2013
Updated: Oct 2, 2022
Section 25 of Companies Act 2013
"Company may hire an issuing house (underwriters) or co to comply with all legal requirements and issue its securities. The company issues or agrees to issue – full or substantial shares to hired house or company. The document issued by the hired persons is deemed to be prospectus of the main company".
Conditions for a document to be called deemed prospectus –
• Issuing house or company allots or offers within 6 months for the agreement with the main company.
OR
• Consideration is not received by the company before the offer is made by issuing a house or co. to the public.
WHAT IS A PROSPECTUS?
A prospectus of a company is defined under section 2(70) of The Company’s Act. It is a legal document that explains the securities or shares of the company which have been offered to the public. The document can be any circular, advertisement, notice, or any kind of manuscript which serves the purpose of inviting offers from the general public for the purchase of shares or securities of a company. The motive behind providing a prospectus to the public is to raise capital.
Since a prospectus contains necessary and detailed information about the company’s securities that are put to sale, it allows the investors to make informed decisions regarding investment in the shares of the company. It is important for the issuing company to always file the prospectus with the regulator.
What is a Deemed Prospectus?
A deemed prospectus is a type of prospectus which is defined under section 25(1) of The Company’s Act. As the name suggests, a deemed prospectus is a document that is deemed to be the prospectus of a company. In general, any offer for the sale of its stock by a company when presented in the form of a detailed document addressed to the public is deemed to be a prospectus.
More specifically, the concept of deemed prospectus becomes important when a company intends to issue shares via an intermediary in order to bypass compliance regulations issued by the SEBI.
Whenever a company allots or agrees to allot its shares or securities to an intermediary such as a merchant bank, another company, or an issuing house, for the eventual purpose of offering those shares for sale, a document of Offer for Sale is made by the intermediary or issuing house. The document of Offer for Sale is called a deemed prospectus If it satisfies any one of the following two conditions:
Condition 1: The Offer for Sale to the public by the intermediary was made within six months from the allotment of shares to the intermediary; or
Condition 2: The company which allotted its shares to the intermediary has not received any consideration for the shares till the date the Offer for Sale was made by the intermediary.
If any of these two conditions are fulfilled, the document through which Offer for Sale is presented by the intermediary is deemed to become a prospectus of the company allotted its shares to the intermediary. In such a case, all the provisions of content and liability which apply to the prospectus of a company are also applicable to a deemed prospectus.
The purpose of the concept of deemed prospectus here is to make it clear that even though the document of an offer for sale was issued by an intermediary, it will still be deemed to be a prospectus issued by the original company. This helps to pinpoint accountability on the original issuer of shares.
Example of a Deemed Prospectus
Suppose there is a company named XYZ Ltd. that wants to issue its shares to the public without being answerable to the law or without having to follow the gu