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.
• 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 guidelines issued by SEBI.
For this purpose, XYZ Ltd. agrees to allot its shares to an issuing house in January 2020. The issuing house here was an underwriting company.
This issuing house offers the shares of XYZ Ltd. to the public through a document of Offer for Sale. The shares of XYZ Ltd. are now being offered to the general public not directly via XYZ Ltd. but via the issuing house. This document of Offer for Sale has now been deemed to become the prospectus of XYZ Ltd.
For XYZ Ltd. to directly issue its shares to the general public, it has to comply with Section 26 of The Company’s Act and the SEBI guidelines. But since XYZ Ltd. wanted to be exempted from the regulatory compliances so it could not issue its shares directly to the public.
However, under Indian law, if a company makes use of another company or issuing house for issuing its shares to the public, then the issuing house will be considered representative of the company and the document thus issued by the issuing house will be considered the deemed prospectus of the company that is XYZ Ltd. provided one of the following two conditions need to be fulfilled.
Condition 1: If XYZ Ltd. made an agreement of issuing its shares or allotted its shares to the issuing house in January 2020, then the issuing house has to offer those shares to the public within 6 months. So, if the issuing house offered the shares to the public in April 2020, then it fulfills the first condition and the document of Offer for Sale can be deemed as the prospectus of XYZ Ltd.
Condition 2: When the issuing house offered the shares of XYZ Ltd. to the public, XYZ Ltd. shouldn’t have received any consideration for the same by then. Just like the process of online selling. When a seller sells their product via online companies, they get paid only after their products are sold and revenue is generated through that sale.
Similarly, if XYZ Ltd. does not receive any consideration until the issuing house offers the shares to the public, then the second condition is fulfilled.
If any one of these conditions is fulfilled then the document has become the deemed prospectus of XYZ Ltd.
Another interesting question arises here as to who would be the director in the prospectus? Since the prospectus was offered by the issuing house, the director of the issuing house will be presumed to be the director in the deemed prospectus.
So, it can now be said that a deemed prospectus is the assumption of a document as the prospectus of a company.
Effects of the Deemed Prospectus
All rules and provisions of prospectus are now applicable to the deemed prospectus i.e. Section 26 (Matters to be stated in the prospectus), Mis-statement also, etc.
Signature – In the case of a company – 2 directors and in the case of a firm = 50% of the partners. Directors or partners are deemed to be the director of the main company.
Motive – As issuing company is the face of the transaction and the main company is behind the curtain so to make prospectus provisions applicable to the main company.
If a company allows or agrees to allot any securities of the company with a view to all or any of those.
Deemed prospectus/offer for sale securities being offered for sale to the public, any document by which they offer for sale to the public is made shall for all purposes be deemed to be a prospectus.
The document “Offer for sale” is an invitation to the general public to purchase the shares of the company through an intermediary, such as an issuing house or a merchant bank.
In short, any document issued on behalf of the company for the purpose of selling securities to the public shall be treated as a deemed prospectus. Its is sufficient if the prospectus is signed on behalf of the company or firm by 2 directors of the company or by not less than ½ of the partners in the firm, as the case may be, either themselves or by their agent authorized in writing.