As the title suggests, this article is going to cover all the important aspects of a prospectus that might interest you and increase your knowledge about the topic. We will cover in detail, the definition, importance, types and contents of a prospectus. All minor details that can better explain prospectus will not be missed. So let’s move on to the definition of prospectus first, to get the basic idea.
What is a Prospectus?
A prospectus is issued by the public company for offering its securities to the public. It is a legal document, containing the information as prescribed by the securities and exchange board in India and issued as the provision mentioned in section 26 of the companies act 2013. It explains, in detail, a share offer to the investors.
- Before issuance of prospectus to the public, a copy of the prospectus should be delivered to the registrar that is signed by company’s directors, proposed directors and authorized attorney.
- It should be issued within ninety days from the day on which a copy has delivered to the registrar.
- It shall mention on its face that a copy of it delivered to the registrar and specify the document that is attached to prospectus.
- If it contained a statement it should made by an expert which is not interest in management of the company and a written consent made by the expert for the issue of it and that consent is not withdraw by the expert before a copy submitted to the registrar.
- The date mentioned in it shall be the date of issuance of it.
Consequences of not issuing prospectus as per section 26?
- The company shall be punishable with a fine which is not less than Rs. 50,000 and not exceeding Rs. 3,00,000.
- Every party who is the party in the issuance of the prospectus shall be imprisonment that may extend to 3 years or with fine of nor less than Rs. 50,000 and not exceeding Rs. 3,00,000 or with both.
In terms of finance particularly, it is a voluminous booklet that is used to serve the following purposes:
- To invite public to invest in the company shares.
- For the advertisement of an organization.
- For providing details of the share offer.
- To inform the public about investment security, so that the relevant public could make a more thoughtful and informed decision about investment. The risks associated with the investment are clearly explained, usually in the beginning of the prospectus.
Which Companies are obligated to issue Prospectus?
A point to remember here is that every public company is obligated to file it, whenever offering investment securities to the public. Also, any private company that has converted into a public company will also follow this rule.
Purpose and Importance of Prospectus
If you are considering investing in a company shares, you must thoroughly know the details of the company and security itself. Going through the it will serve this purpose.
Following are some points that explain the purpose and importance of prospectus:
- Company details:
An important part of it is the details of the issuing company. It gives the whole picture of that company. For example, it’s financial information, its operations, goals, objectives, business plan, litigations etc. All this information will give you a better understanding about the company you are going to invest in.
- Security/Offering details:
It provides you with the details of the security as well. If a company is issuing stocks and bonds, they will give details about the shares issued, offering price, risk factors, dividend policy and other relevant information.
If a company issues it for mutual fund, it will entail all fund’s objectives, distribution policy, investment strategies, risks, instructions on how to buy and sell shares of fund, and other significant details.
Being well aware of the investment offering will resolve all your queries and will give you a clearer view of the offering.
- Risks associated with investment:
Before subscribing to the shares of the company, you must be aware of the risks that might arise after investment. A prospectus also solves this problem by giving details of the risks associated with the offer. So you must go through it to get an insight of these likely risks.
Types of Prospectus
Until now, we have seen prospectus as a whole, so now we will take a look at its different types.
There are four types of prospectus. These are:
According to section 31 of the Companies Act, a shelf prospectus can be issued by a public company if its securities are issued over more than one issue. It is issued at the time of first offer of company’s securities. This company will provide a time limit for the validity of this prospectus, which cannot exceed a year. During this period of time, there is no requirement to issue a new prospectus for a new offering, because shelf prospectus will be valid for this new offer. An information memorandum is filed by the company along with the filing of shelf prospectus before to the issue of subsequent offer of securities. Information memorandum shall contain any new changes created and changes in the financial position of the company during the period of the issuance of first issuance of securities and subsequent issuance if securities.
Red herring Prospectus
Red herring prospectus does not contain the information regarding quantum (quantity of shares to be issued) and/or price of the share. This prospectus is issued prior to the issue of main prospectus, and the purpose is to declare the offer at least 3 days before the opening of offer. On Closing of the offer, prospectus shall contain the information total capital raised, closing price of securities and other information, not containing in the red herring prospectus.
Abridged prospectus is a compact or summarized form of prospectus that contains all the information of the prospectus, making it quick and easy for investors to understand. No share application form can be issued by a company unless an abridged prospectus is attached to it. However it is not required for an underwriting agreement, and for the securities that are not offered to the public. If a company fails to attach it to the application form, it will legally be charged Rs. 50, 000 for each default.
A main company may hire an issuing house or another company to issue its securities into the market. The issuing house/hired company submits a document that is known as deemed prospectus, on behalf of the main company. A document can be called as a deemed prospectus if:
- The offer for sale is made within six months of the agreement with the main company.
- If consideration is not received by company before offer is made by issuing house/hired company to the public.
Contents of Prospectus
- Brief history of the company.
- Name and address of the company.
- Information of the project, company, stock exchange etc.
- Name and address of managers/trustees.
- Share capital of company.
- Size of present issue.
Terms of present issue:
- Payment procedure, terms of payment, authority of issue.
- Apply-availability of prospectus.
- Tax benefits to company and shareholders.
Particulars of the Issue:
- Purpose of issue.
- Cost of the project.
- Location of the project.
- Company’s history, objects and present business.
- Address of managers/managing directors.
- Products or services.
- Profit and loss account.
- Accounting policy.
- Shareholders equity and liabilities.
Payment Details related to:-
- Payment/ Refund
- Dividends etc.
Penalty of untrue statements in prospectus
Some dishonest company promoters may alter or conceal the facts by making untrue statements in it. Such people are accountable for:
- Civil Liabilities:
They will pay for the loss of the person who suffered damage because of untrue statements.
- Criminal Liabilities: They shall be punished with imprisonment and/or fine.