Introduction

A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. A prospectus is filed for offerings of stocks, bonds, and mutual funds.

The prospectus can help investors make more informed investment decisions because it contains a host of relevant information about the investment or security.

What is a Prospectus and its importance?

The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.

Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.

1. To notify the public of the issue
2. To put the company on record with regards to the terms of the issue and allotment process
3. To establish accountability on the part of the directors and promoters of the company

Types of prospectus

According to Companies Act 2013, there are four types of prospectus.

Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.

Red Herring Prospectus – Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.

Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.

Abridged Prospectus – Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.

What is prospectus and its contents?

The prospectus contents are specified in the Companies Act. The prospectus must touch over the following content points:

1. Details of the company, such as name, registered office address, and objects
2. Details of signatories to the Memorandum and their shareholding particulars
3. Details of the directors
4. Details of shares offered and the class of the issue as well as voting rights
5. Minimum subscription amount
6. The amount payable on application, on allotment, and on further calls
7. Underwriters of the issue
8. Auditors of the company
9. Audited reports regarded profit and losses of the company.

Conclusion

A prospectus is basically a formal and legal document issued by a body corporate which 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 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.

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