This article has been written by Ms. Sheeren Iqbal at Southern Calcutta Law College, Calcutta
RED HERRING PROSPECTUS
INTRODUCTION
To start with we will first know the meaning of a prospectus according to company law. Any document referred to or released as a prospectus, including any notice, circular, advertisement, or other document inviting public deposits or inviting public offers for the subscription or purchase of any shares or debentures of a body corporate, falls under the definition of a prospectus. According to the Companies Act of 2013, a prospectus may also comprise additional legal papers inviting the public to the offering, such as an advertisement, circular, or notice. Furthermore, only the purchase of a company’s securities should be the purpose of the prospectus’s release. According to Companies Act,2013, Red Herring Prospectus is an expression which is basically a prospectus that does not includes complete particulars of the quantum or price of the securities. Thus, in general terms a preliminary prospectus that a company files with the Securities and Exchange Commission (SEC- An independent federal government regulatory body, the U.S Securities and Exchange Commission , is in charge of safeguarding investors ,ensuring the fair and orderly operation of the securities markets, and promoting capital formation), typically in connection with its initial public offering (IPO- A new stock issuance that offers shares of a private firm to the public for the first time is known as an initial public offering), is referred to as a “red herring”. The maximum information and details of the company and its activities and prospects are given in a red herring prospectus. However, important information about the security issue—such as the price and the number of shares offered—is left out. The term “red herring” is extracted from the bold disclaimer which is in red colour and it is highlighted on the cover page of the preliminary prospectus. A registration statement for the securities being sold has been filed with the SEC, but it hasn’t yet taken effect, according to the disclaimer. The details and information included in the prospectus is incomplete and is alterable. Therefore, before the registration statement takes effect, neither the securities nor offers to purchase them may be offered or accepted. A price or issue size are not specified in the red herring.
OTHER TYPES OF PROSPECTUS IN COMPANY LAW
SHELF PROSPECTUS- According to company law,2013 section 31, explains shelf prospectus as a prospectus which has securities or class of securities included therein and are also issued for subscription in one or more issues on a constant period of time. The validity period provided by the company for this prospectus should not be more than one year which starts with the commencement of first offer.
Deemed Prospectus – Deemed prospectus is specified in Section 25 of the Companies Act of 2013, (1). A document is assumed to be a prospectus via which an offer is made to investors when a corporation permits or agrees to allot any of its securities. By default, the law considers any document that solicits the public to buy securities to be a prospectus.
Abridged Prospectus – An abridged prospectus is a memo that includes all of the prospectus’ key elements as listed by SEBI. This kind of prospectus provides a summary of all the facts in order to let the investor make additional selections. A corporation cannot distribute an application form for the purchase of securities without also providing an abbreviated prospectus.
WORKING OF THE RED HERRING PROSPECTUS
Red herring prospectus, or 32. (1) Prior to the release of a prospectus, a company that plans or intends to make a securities offer may issue a red herring prospectus. Further according to sub-section (2),a company which is intending to issue a red herring prospectus must file it to the registrar on a date which is minimum three days before the inception of the subscription list and the offer.
Sub-section(3) specifies that red herring prospectuses are subject to the same responsibilities as regular prospectuses, and any differences between them must be noted in the prospectus as distinct variants. Under sub-section (4) on shutting down of the offer of securities, the prospectus which states the all total capital raised, closing price of the securities and further it also states other details which are not mentioned in the red herring prospectus shall be filed with the registrar and the Securities and Exchange Board.
The company releases a final prospectus once the registration statement takes effect, which includes the final IPO price and issue size. At the buyer’s discretion, expressions of interest then become orders for the issuance. A registration statement must have at least 15 days between its submission and effective date. The SEC just makes sure that all pertinent information is provided in the registration statement; it does not approve the securities.
RELATED CASE LAWS
1. “Red Herring Prospectus” in the matter of Kimsuk Krishna Sinha v. SEBI contained a false statement. The court ruled that SEBI has the authority to review the draught red herring prospectus and demand the full and accurate disclosure of all material information. The fact that the public offering has been completed does not absolve SEBI of its legal obligation to investigate the accuracy of the prospectus’s statements.
2.According to the court’s ruling in the well-known case New Brunswick and Canada Railway and Land Co. v. Muggeridge, “Only true nature of the company’s venture shall be disclosed and Strict and scrupulous accuracy shall be maintained in drafting prospectus as it invites the public to take shares on the faith of the prospectus.”
3. The well-known case before the Securities Appellate Tribunal [Mumbai bench] is DLF Limited and Ors v. SEBI. DLF claimed in its draught Red Herring prospectus that Sudipti Estates Pvt. Ltd. (SEPL) was a joint venture with DLF. But since they revoked the old prospectus and produced the most recent one, their position has changed. Based on an appealed complaint that the two wholly-owned subsidiaries that are disclosed in DLF’s prospectus were the only shareholders of SELP but that they had disclosed that it was not a co-venture in the later prospectus, the SEBI has prohibited the six directors of DLF from trading in the securities market for three years. The DLF stated that since there was no evidence to suggest that DLF was unfairly benefiting from its partnership with the subsidiaries and since the relationship between DLF and SEPL was not disclosed, the SEBI’s prohibitive order should be overturned. The Tribunal confirmed that DLF violated the DIP guidelines by withholding information pertaining to the subsidiary corporations, but it rejected the SEBI’s prohibitory order, claiming that DLF had not used any materials or documents that would have misled the stockholders. The Tribunal also determined that barring DLF from trading in securities for three years would harm investors’ interests.
CONCLUSION
There are many requirements of listed companies for regulation which compels the company to comply with the exchange commission which will in turn help the investors for making proper investing decisions by going through the details. But when a company remains unlisted before coming in front of public domain for the first time, it becomes difficult for the investors to decide based when there is no information regarding this. This was the basic reason for the introduction of Red herring prospectus. The basic benefits of a red herring prospectus is that it is a basic source of information and details regarding the offering which a company has decided. The basic contents of RHP are, company’s business operations, financial statements, promoter, promoter holding, company’s aim behind raising funds, products nd liabilities of the company. It also contains information like unsolved litigations of the company, risk factors involved financial condition and statement of the company. Thus, for investors RHP proves to be a very useful thing.
SOURCES
1.https://www.ijlmh.com/paper/red-herring-prospectus/
2.https://www.investopedia.com/terms/r/redherring.asp
3. Companies ACT,2013
4. https://www.wallstreetmojo.com/red-herring-prospectus-2/
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