The 4 types of prospectus under the Companies Act, 2013 are: Regular Prospectus, issued for IPOs with comprehensive details; Shelf Prospectus, used for multiple securities issuances within one year; Red Herring Prospectus, a preliminary document excluding price and quantity details; and Abridged Prospectus, a concise version for retail investors. These documents ensure transparency, regulatory compliance, and informed investment decisions in public offerings.
A prospectus is a critical document issued by companies to invite public investment by providing key details about operations, financials, and risks. As defined under Section 2(70) of the Companies Act, 2013, different types of prospectuses serve distinct purposes to ensure compliance and transparency. These include the regular prospectus for IPOs, the shelf prospectus for multiple securities issuances, the deemed prospectus for sales through intermediaries, and the abridged prospectus for simplified investor information.
This guide explores various types of prospectus in company law in detail, helping companies adhere to legal norms and enabling investors to make informed decisions.
What is a Prospectus in Company Law?
A prospectus is a legal document issued by companies to the public, inviting them to invest in securities such as shares, debentures, or bonds. It provides comprehensive details about the company’s operations, financial health, risks, and the purpose of the securities being offered.
Under Section 2(70) of the Companies Act, 2013, a prospectus includes any notice, circular, advertisement, or document that offers securities for sale to the public. It ensures transparency in fundraising efforts and helps investors make informed decisions.
Contents of Prospectus in Company Law
The contents of a prospectus, as mandated by the Companies Act, 2013, are designed to provide comprehensive, accurate, and transparent information about the company issuing securities. These contents ensure that investors have all the necessary details to make informed decisions and that the company complies with regulatory requirements.
Mandatory Contents of a Prospectus
Company’s Name and Registered Office Address: Clearly mention the name of the company and the location of its registered office.
Objective of the Issue: Outline the purpose for which the funds are being raised, such as expansion, debt repayment, or new projects.
Details of the Securities Offered
-
- The type of securities (e.g., shares, debentures) and the price at which they are being offered.
- Terms of payment and details of premium, if any.
Company’s Financial Information
- Past financial statements, including profit and loss accounts, balance sheets, and cash flow statements.
- Projections for future performance, if applicable.
Risk Factors: A detailed section highlighting the risks associated with the business or the investment.
Capital Structure
- Authorized, issued, subscribed, and paid-up capital details.
- Any changes in the capital structure in the last five years.
Management Details
- Information about the company’s directors, key management personnel, and promoters.
- Their qualifications, experience, and directorships in other companies.
Underwriters and Brokers: Names and details of underwriters, brokers, or intermediaries involved in the issuance of securities.
Terms and Conditions of the Offer:
- Rules governing the purchase, allotment, and transfer of securities.
- Lock-in periods, if applicable.
Auditor and Expert Opinions: Reports from auditors and experts confirming the accuracy of financial data and projections.
Use of Proceeds: Clear allocation of the funds raised, ensuring transparency in how the money will be utilized.
Pending Litigation and Defaults: Disclose any ongoing legal cases or defaults that might affect the company’s operations.
Declaration by Directors: A declaration by the board of directors confirming that the prospectus contains no false or misleading information.
Material Contracts: Details of contracts entered into by the company that are material to the issue.
Types of Prospectus Under the Companies Act, 2013
The Companies Act, 2013 defines 4 main types of prospectus to meet the needs of different public offerings and regulatory compliance. These include documents issued by companies to invite public investment in securities, ensuring transparency and adherence to legal provisions.
1. Deemed Prospectus
Section 25 of the Companies Act, 2013 governs the deemed prospectus. This document applies when a public company offers securities indirectly, through intermediaries like brokers or underwriters.
Key Features:
-
- Applicable when securities are offered to the public within six months of allotment.
- Treated as a prospectus issued by the company for regulatory compliance.
Example: If a company sells securities through brokers, the document used is considered a deemed prospectus.
2. Red Herring Prospectus
Section 32 outlines the red herring prospectus, which is issued prior to the final prospectus during public offerings.
Key Features:
-
- Excludes details like the final price or the number of securities being offered.
- Filed with the Registrar of Companies (RoC) at least three days before the subscription opens.
Example: Used during IPOs to gauge investor interest before finalizing offer details.
3. Shelf Prospectus
Section 31 regulates the shelf prospectus, which is used for issuing securities in multiple tranches over a specified period without filing a fresh prospectus for each issuance.
Key Features:
-
- Valid for one year from the date of filing.
- Requires an information memorandum for subsequent offers.
Example: Commonly used by public financial institutions or companies issuing bonds.
4. Abridged Prospectus
Section 33 defines the abridged prospectus, a summary document that highlights essential details from the full prospectus.
Key Features:
-
- Accompanies the application form for securities.
- Includes concise information like the purpose of the issue, financial highlights, and risk factors.
Example: Distributed to retail investors for simplified access to critical information.
Key Compliance Requirements for Prospectus
Issuing a prospectus is a critical step for companies seeking to raise funds from the public. The Companies Act, 2013, along with SEBI (Securities and Exchange Board of India) regulations, mandates specific compliance requirements to ensure transparency, accuracy, and investor protection. Here are the key compliance requirements for prospectuses:
1. Filing with the Registrar of Companies (RoC)
- Every prospectus must be filed and registered with the RoC before issuance.
- The RoC ensures that the document complies with statutory requirements under the Companies Act, 2013.
2. Approval from SEBI
- Companies must seek approval from SEBI, particularly for public offerings, to ensure compliance with disclosure norms and guidelines.
- SEBI verifies that the prospectus contains no misleading or false statements.
3. Complete and Accurate Disclosure
The prospectus must disclose all material information, including:
-
- Financial statements.
- Risk factors.
- Purpose of the issue.
- Details of directors and management.
Omission of critical information may lead to penalties or rejection.
4. Declaration by Directors
A declaration signed by the company’s directors must accompany the prospectus, confirming that:
-
- The document contains no false or misleading information.
- The disclosures meet all legal requirements.
5. Use of Abridged Prospectus
- When offering securities to the public, companies must attach abridged prospectus to the application form.
- This document summarises the key details of the full prospectus to ensure accessibility for retail investors.
6. Issuance of Red Herring Prospectus (For IPOs)
If a company opts to issue a Red Herring Prospectus for an IPO, it must:
-
- File the document with the RoC at least three days before the public subscription opens.
- Include all preliminary details except pricing and the number of securities.
7. Prohibition of Misleading Statements
- Under Section 34 and Section 35 of the Companies Act, 2013:
- False or misleading statements in a prospectus can result in civil and criminal liabilities.
- Directors and promoters can face fines up to ₹50 lakh and imprisonment.
8. Information Memorandum (For Shelf Prospectus)
- Companies using a Shelf Prospectus must file an information memorandum with the RoC before issuing subsequent securities.
- This memorandum updates investors on material changes since the initial filing.
9. Compliance with Timelines
- Prospectuses must be issued within the timelines specified under the Companies Act.
- Delays in filing or issuance can result in penalties or legal complications.
Consequences of Non-Compliance
Non-compliance with prospectus requirements can lead to severe consequences, including:
- Rejection of the prospectus by regulatory authorities.
- Penalties for the company, directors, and promoters.
- Loss of investor trust and credibility in the financial market.
FAQs on Types of Prospectus in Company Law
A prospectus is a legal document issued by public companies to invite the public to invest in their securities. It ensures transparency, builds investor trust, and complies with the Companies Act, 2013, by providing detailed information on risks, objectives, and financials.
For an IPO, companies first issue a Red Herring Prospectus (RHP), which provides preliminary details (excluding price and quantity of securities). Once finalized, a Regular Prospectus is issued to the public with complete information.
A Shelf Prospectus allows companies to issue multiple securities over one year without filing a new prospectus for each offering. This saves time, costs, and simplifies the process for entities like PSUs and financial institutions issuing bonds.
An Abridged Prospectus provides a concise summary of essential details, such as the purpose of the issue, financials, and risks. It makes information easily understandable for retail investors, ensuring they make informed decisions without going through lengthy documents.
No, only public companies issuing securities to the public must issue a prospectus. Private companies are exempt unless converting into public companies or issuing securities through a deemed prospectus.
Investors should focus on: Risk Factors: Assess potential challenges or losses. Financial Information: Evaluate the company’s performance and stability. Purpose of the Issue: Understand how the funds will be utilized. Legal Disclosures: Ensure compliance with SEBI guidelines.
Issuing a misleading prospectus can lead to severe penalties under the Companies Act, 2013, including: Fines up to ₹50 lakh. Imprisonment for up to three years. Legal liabilities to compensate investors for losses.
Yes, securities can be sold without a prospectus through: Private Placements: Offering securities to a select group of investors. Deemed Prospectus: When securities are sold indirectly via intermediaries.
The prospectus must be: Drafted according to Sections 26, 31, or 32 of the Companies Act, 2013. Filed with the Registrar of Companies (RoC) for approval. Compliant with SEBI regulations to ensure accuracy and transparency.
Choose a Regular Prospectus for IPOs or initial fundraising. Opt for a Shelf Prospectus if you plan multiple issuances over a year. Issue a Red Herring Prospectus to gauge investor interest before finalizing an IPO. Use an Abridged Prospectus to simplify offerings for retail investors. What is the purpose of a prospectus in company law?
Which type of prospectus is best for an IPO?
What are the advantages of issuing a shelf prospectus?
How does an abridged prospectus help retail investors?
Is a prospectus required for every company raising funds?
What should investors look for in a prospectus?
What happens if a company issues a misleading prospectus?
Can securities be sold without a prospectus?
What is the filing process for a prospectus?
How do I decide which type of prospectus to issue?
Conclusion
Understanding the types of prospectus under the Companies Act, 2013 is essential for both companies and investors. For companies, selecting the correct type of prospectus ensures compliance with legal requirements, fosters transparency, and builds trust with potential investors. For investors, analyzing a prospectus provides critical insights into the company’s financial health, risks, and objectives, enabling informed decisions.
From the Regular Prospectus for IPOs to the Shelf Prospectus for multiple securities issuance, each type serves a specific purpose in raising funds effectively while adhering to regulatory standards. Additionally, documents like the Red Herring Prospectus and the Abridged Prospectus simplify complex information for targeted audiences, ensuring accessibility and clarity.
By complying with the Companies Act, 2013, and SEBI regulations, companies not only secure funding but also strengthen their reputation in the financial markets. Similarly, investors gain confidence in making well-informed choices, fostering a fair and transparent investment ecosystem.
Whether you’re a company planning a public offering or an investor evaluating opportunities, understanding these legal frameworks is crucial to navigating India’s corporate landscape successfully.
Ready to incorporate your company and ensure compliance with Indian laws? Get expert assistance with Vakilsearch’s hassle-free Company Incorporation Services today!
