A prospectus of a company under Company Law is a document issued by the company inviting the public and investors to subscribe to its securities. A prospectus also helps in informing the investors about the risk of investing in the company.
The Prospectus is required to be issued only after the company incorporation. These documents describe stocks, bonds, and other types of securities offered by the company. Mutual fund companies also provide a prospectus to prospective clients, which includes a report of the fund’s strategies, the manager’s background, the fund’s fee structure, and the fund’s financial statements.
A prospectus is always accompanied by the performance history and financial information of the company. The reason for accompanying such information along with the prospectus is to make sure that the investors are well aware of the company’s background and overall performance, and the investors do not fall into the trap of investing in a bad company.
Definition of Prospectus in Company Law
Definition of prospectus in Company Law under Section 2(70) of the Act is;
“A 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 a body corporate.”
Example of a Prospectus of a Company
In an IPO, the prospectus tells potential shareholders about the company’s plans and business model.
For insurance and investment fund customers, a prospectus lists out the objective of the product, inclusions, exclusions, fees, etc.
For an ETF, a prospectus informs likely investors of the fund’s goals, history, portfolio, fees and costs, and other financial details.
Companies Required to Issue a Prospectus
- A Publicly Listed Company that intends to offer shares or debentures can issue a prospectus.
- A Private Company is prohibited from inviting the public to subscribe to its shares and thus cannot issue a prospectus. However, a private company that has converted itself into a public company may issue a prospectus to offer shares to the public.
What are the Contents of Prospectus in Company Law?
The offer document is called a prospectus in case of a public issue and a letter of offer in case of a rights issue.
The offer document shall contain the information and statements specified in Part A of Schedule VI of Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. The content of a prospectus under the Companies Act 2013 should include:
1. Name of the company, its logo, date and place of incorporation, corporate identity number, telephone number, address of its registered and corporate offices, website address, and e-mail address.
2. Nature, number, and price of specified securities offered, type of issuance(book built or fixed price), and issue size.
3. Name of the promoter, details of the issuer or any of its promoters or directors being a wilful defaulter.
4. Clause on “General Risk”.
5. Clause on “Issuer’s Absolute Responsibility”.
6. Names, logos, and addresses of all the lead manager(s) with their titles who have signed the due diligence certificate and filed the letter of offer with the board, along with their telephone numbers, website address, and e-mail address.
7. Name, logo, and address of the registrar to the issue, along with its telephone number, website address, and e-mail address.
8. Issue schedule (i.e., Date of opening of the issue and closing of the issue).
9. Name(s) of stock exchanges where the specified securities are listed and the details of their in-principle approval for listing obtained from these stock exchange(s).
10. Offer document summary.
11. Risk factors.
12. General information about the company and its capital structure.
13. Particulars of the issue: It contains Objects of the issue, Requirements of funds, Funding plan (Means of finance), information about financial partners and strategic partners of the project, Appraisal, Schedule of implementation, Deployment of funds, Sources of financing of funds already deployed, Deployment of balance funds, Interim use of funds, Expenses of the issue, Basis for issue price, Tax benefits.
14. Details of business of the company: It contains Industry overview and Business overview, History and corporate structure of the issuer, Shareholders’ agreements and other agreements, Management (details of Board of directors and senior management), Corporate Governance, Key Managerial Personnel, Promoters, Dividend policy.
15. Financial Information of the issuer: It contains the restated financial information of the issuer, other financial information, Management discussion, and the analysis of financial condition, results of the operation, and capitalisation statement.
16. Financial information of the issuer in further public offers.
17. Legal and other information: It contains Outstanding litigation and material developments, and government approvals.
18. Information with respect to group companies.
19. Other regulatory and statutory disclosures.
20. Offering information: It contains the terms of the issue and the issue procedure.
21. Undertaking by the issuer in connection with the issue.
22. Utilization of issue proceeds.
23. Restrictions on foreign ownership of Indian securities, if any.
24. Description of equity shares and terms of the Articles of Association.
25. Declaration by the issuer.
Case Law
In Rex v. Kylsant, the Court held that every statement made in the company’s prospectus should be true. The company published the rates of dividends paid for a number of years in one of the statements.
However, the company paid dividends out of realised capital earnings rather than trading profits. It kept this crucial information hidden. The prospectus contained incorrect material particulars, and authorities found Lord Kylsant, the managing director and chairman, guilty of fraud.
Conclusion
A well-drafted prospectus is more than just a legal requirement, it is a powerful tool to build trust with investors and ensure smooth capital raising. By complying with Section 26 of the Companies Act, 2013, companies can avoid legal risks and present a transparent financial and operational picture.
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