Prospectus under Company Law

 

Introduction

The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined as “any document which is described or issued as a prospectus”. Prospectus plays a significant role, where it contains all the material information (General, Financial & Statutory) of the company i.e., prices and shares the detail of the specific company, which helps the public who wishes to buy a share in that specific company. As the prospectus is a legally mandated document it must be registered under the Register of companies. This also includes any notice, circular, advertisement or any other document acting as an invitation to offers from the public. Such an invitation to offer should be for the purchase of any securities of a corporate body. Shelf prospectus and red herring prospectus are also considered as a prospectus.

Definition 

  – “A Prospectus is an offer document or information booklet issued by a public company used for inviting offers from the general public for subscribing of shares”.

According to the Companies Act 2013: – A prospectus is defined under section 2(70).

Prospectus can be defined as:

ü  any document described or published as a prospectus”

ü  It includes notices, circulars, advertisements, or any document acting as an invitation to offers from the public.

Essentials for a document to be called a prospectus

For any document to consider as a prospectus, it should satisfy two conditions.

1. The document should invite the subscription to public share or debentures, or it should invite deposits.
2. Such an invitation should be made to the public.
3. An invitation should be made by the company or on behalf of the company.
4. An invitation should relate to shares, debentures or such other instruments. 

Statement in lieu of prospectus

Each public company either issue a prospectus or file a statement in lieu of prospectus. This is not mandatory for a private company. But when a private company converts from a private to a public company, it must have either file a prospectus if earlier issued or it has to file a statement in lieu of a prospectus.

The provisions regarding the statement in lieu of prospectus have been stated under section 70 of the Companies Act 2013.

Advertisement of prospectus

Section 30 of the Companies Act 2013 contains the provisions regarding the advertisement of the prospectus. This section states that when in any manner the advertisement of a prospectus is published, it is mandatory to specify the contents of the memorandum of the company regarding the object, member’s liabilities, amount of the company’s share capital, signatories and the number of shares subscribed by them and the capital structure of the company. 

Kinds of Prospectus 

1.  RED HERRING PROSPECTUS: sec 32

• The prospectus which lacks the complete particulars about the quantum of the price of the securities.
• Issues this prospectus prior to the issue of prospectus when it is proposing to make an offer of securities.
• Red Herring prospectus needs to be filed with the registrar at least three days prior to the opening of the subscription list or the offer.

2.  SHELF PROSPECTUS: sec 31

• Provisions related to shelf-prospectus has been discussed under 31 of Companies Act, 2013.
• Issued by the public financial institutions, company, or bank.
• When a shelf prospectus is issued then the issuer does not need to issue a separate prospectus for each offering, he can offer and sell without issuing a further prospectus.
• The Company that is filing a shelf prospectus is required to file the information memorandum.
• Information Memorandum consists of all the facts regarding the new charges created, what changes have undergone in the financial position of the company since the first offer of the security or between the two offers.

3.  ABRIDGED PROSPECTUS: 2(1)

• Consists of a memorandum, which contains the prospectus all the information of the prospectus in brief so that it should be convenient and quick for an investor to know all the useful information in short.

4.  DEEMED PROSPECTUS:(25(1).

• Provided that any company to offer securities for sale to the public allots or agrees to allot securities, the document will be considered as a deemed prospectus through which the offer is made to the public for sale.

Process for filing and issuing a prospectus

Application forms

As stated under section 33, the application form for the securities is issued only when they are accompanied by a memorandum with all the features of the prospectus referred to as an abridged prospectus.

The exceptions to this rule are:

• When an application form is issued as an invitation to a person to enter into an underwriting agreement regarding securities.
• Application issued for the securities not offered to the public.

Filling of copy to a Registrar 

As stated under sub-section 4 of section26 of the Companies Act, 2013, the prospectus is not to be issued by a company or on its behalf unless on or before the date of publication, a copy of the prospectus is delivered to the registrar for registration.

The copy should be signed by every person whose name has been mentioned in the prospectus as a director or proposed director or the assigned attorney on his behalf.

Delivery of copy of the prospectus to the registrar

As per section26 (6) of the Companies Act 2013, the prospectus should mention that its copy has been delivered to the registrar on its face. The statement should also mention the document submitted to the registrar along with the copy of the prospectus.

Registration of prospectus

Section26 (7) states about the registration of a prospectus by the registrar. According to this section, when the registrar can register a prospectus when:

1. It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013; and
2. It contains the consent of all the persons named in the prospectus in writing.

Issue of prospectus after registration

If a prospectus is not issued before 90 days from the date from which a copy was delivered before the registrar, then it is considered to be invalid.

Contravention of section

If a prospectus is issued in contravention of the provision under section 26 of the Companies Act 2013, then the company can be punished under section 26(9). The punishment for the contravention is:

• Fine of not less than Rs. 50,000 extending up to 3,00,000.

If any person becomes aware of such prospectus after knowing the fact that such a prospectus is being issued in contravention of section 26 then he is punishable with the following penal provisions.

• Imprisonment up to a term of 3 years, or

Fine of more than Rs. 50,000 not exceeding Rs. 3,00,000.

CONCLUSION 

A prospectus is basically a formal and legal document issued by a body corporate that acts for inviting offers from the public for subscription or purchase of any securities. Every public company is entitled to issue the prospectus for its shares or debentures. But, the same is not required for a private company.

A prospectus for being a valid one it must contain essential requisites and it must be registered. If any prospectus is not registered, it is considered as an invalid one and with contravention to provisions laid down for the valid prospectus. Such contravention is punishable under section 26(9).

Whenever the advertisement if the prospectus is made, it must contain the memorandum of the company. When a company is making a proposal for an offer of securities, then prior to issuing a prospectus, it may issue a red herring prospectus. A company can also issue a shelf prospectus when it has to make an offer to one or more securities or class of securities and then it does not have to issue a prospectus before issuing an offer of each security.

So, a prospectus plays an important role for any public company and it must be under the provisions laid down under the Companies Act 2013.