February 10, 2024 at 07:44 AM
Amidst the landscape of the capital market, the issuance of securities has a key role in raising capital for companies. “The Companies Act, 2013, led to substantial reforms in the security market by introducing provisions with “the intent of guaranteeing transparency and safeguarding investor interests.” One of the Provision Section 32 of Companies Act says about “Red Herring Prospectus (RHP)” which governs the preparation and filing of it. In the said provisions we are going to discuss the implications.
“Section 32, Red herring prospectus.-
(1) A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
(2) A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer.
(3) A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
(4) Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.
Explanation.—For the purposes of this section, the expression “red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein”
The “Red Herring” prospectus is a preliminary prospectus that does not contain the final offering price or the number of securities being offered along with it provides key information about the company and the proposed offering that allows investors to make informed decisions.
An Initial Public Offering (IPO) allows investors to evaluate a company’s potential, a process that involves extensive scrutiny of various parameters including its business model, market competition, and financial standing. Analysing given factors, investors can understand an RHP effectively, empowering themselves to make informed investment decisions aligned with their financial goals and risk factors.
Outlined below are key pointers to analyse an RHP effectively and make informed investment decisions:
This precedent says that an obligation which are applicable in the case of a RHPs prospectus shall carry Information Memorandum (IM) and (Red Herring Prospectus).There is no specific direct case laws or precedents on Red Herring Prospectus (RHP), it’s important to consider broader legal principles and some important cases related to companys disclosures and securities regulation to focus on the advantage of accurate and transparent disclosure in offering documents. In the said case, a judgement on the RHP (Red Herring Prospectus) compliances emphasised on legal compliance and transparency while issuing securities to the public. It also focuses on the requirement for companies using a shelf prospectus for multiple securities offers to file an Information Memorandum (IM) under certain circumstances and before subsequent securities offerings. The shelf prospectus main objective is to focus on raising funds through bond sales, offering transparency and protecting the rights of published investors. The vital role of investors examined within the document pertaining to all relevant information consists of financial health, risk factors, current and future financial plans, use of proceeds, and any important material changes made from the initial offer. Companies had urged to consider potential challenges led by the one-year validity of the shelf prospectus and to file information memoranda disclosing updates on company finances, changes in content, and new risks before subsequent offerings.
The said precedent highlights the need of diligence of regulatory authorities to ensure adherence to disclosure norms in the protection of investors interest.
Section 32 of the Companies Act, 2013 emphasises the companies adhering to compliances when they offer securities to the public. RHP mandates to furnish all essential information of this company to the Investors. Providing fundamental information by the company RHP shall be a prerequisite and any deviation from accurate information in the document can face consequences like resulting in heavy penalties and losses for the company and stakeholders due to misrepresentation or dissemination of required information. The importance of this provision ensures the objective of the protection of investors’ rights and the prevention of financial nuisances in the issuance of securities by Companies.
1. How does Section 32 of the Companies Act, 2013, regulate the contents of the Red Herring Prospectus?
Section 32 of the Companies Act, 2013, mandates important disclosure in the RHP to provide investors with accurate information about the operations, finances, and risks of the company.
2. What are the important provisions in Section 32 regarding the modification of the Red Herring Prospectus after its filing?
Section 32 provides important provisions that require companies to promptly disclose any material changes to the RHP through an Abridged Prospectus, ensuring transparency to investors.
3. What are the potential effects for companies that fail to comply with the requirements outlined in Section 32 when drafting their Red Herring Prospectus?
Consequences for Non-Compliance with Section 32 may result in regulatory sanctions, legal liabilities, and reputational damage for companies, which leads to breaking investor confidence and market integrity.