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Information to be stated in the Prospectus of a Company

Information

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In this article, Bhavesh Bhatia, a student pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses on information to be stated in a prospectus.

Introduction

What is a Prospectus?

A prospectus is a document issued by the company inviting the public and investors for the subscription of its securities. A prospectus also helps in informing the investors about the risk of investing in the company. A Prospectus is required to be issued only after the incorporation of the company. These documents describe stocks, bonds and other types of securities offered by the company. Mutual fund companies also provide a prospectus to prospective clients, which includes a report of the money’s strategies, the manager’s background, the fund’s fee structure and a fund’s financial statements. A prospectus is always accompanied by performance history and financial information of the company. The reason for accompanying such an information along with the prospectus is to make sure that, the investors are well aware of the company’s background and overall performance and the investors do not fall into the prey of investing in a bad company.

Definition of Prospectus under the Companies Act, 2013

Section 2(70) of the Act defines prospectus as, “A prospectus means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”

Thus, it is clear from the above definition of the prospectus that, a prospectus is a just an invitation to offer securities to the public and not an offer in the contractual sense.

Companies that are required to issue a prospectus

Types of Prospectus under the Companies Act, 2013

There are four types of a prospectus, which are as under:

According to Section 2(1) of the Act, abridged prospectus means a memorandum containing such salient features of a prospectus as may be specified by the SEBI by making regulations in this behalf. It means that a company cannot issue application form for purchase of securities unless such form is accompanied by an abridged prospectus.

According to Section 25(1) of the Act, where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public. Any document by which such offer for sale to the public is made is deemed to be a prospectus by implication of law.

According to Section 31 of the Act, Shelf prospectus is a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. Only the companies which have been prescribed by the SEBI can issue a Shelf prospectus with the Registrar.

According to Section 32 of the Act, an RHP means a prospectus which does not have complete particulars on the price of the securities offered and quantum of securities to be issued. A company may issue an RHP prior to the issue of a prospectus. The company shall file RHP with Registrar at least three days prior to the opening of the subscription list and the offer. An RHP carries the same obligations as are applicable to a prospectus and any variation between the RHP and a prospectus shall be highlighted as variations in the prospectus

Matters to be stated in a prospectus

Under the Companies Act, 2013

Under the Companies (Prospectus and Allotment of Securities) Rules, 2014

  1. the names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may be prescribed;
  2. the dates of opening and closing of the issue;
  3. a declaration made by the Board or the Committee authorized by the Board in the prospectus that the allotment letters shall be issued or application money shall be refunded within fifteen days from the closure of the issue or such lesser time as may be specified by SEBI;
  4. a statement by the Board of Directors of separate bank account;
  5. the details of all the utilized and unutilized monies out of the monies collected in the previous issue made by way of a public offer;
  6. the details of the underwriters and the amount underwritten by them;
  7. the consent of trustees, advocates, merchant bankers, registrar, lenders, and experts;
  8. the authority for the issue and the details of the resolution passed, therefore;
  9. the capital structure of the company in the prescribed manner;
  10. procedure and time schedule for allotment and issue of securities;
  11. main objects of the issue, the purpose for requirements of funds, funding plan, the summary of the project appraisal report and such other particulars as may be prescribed;
  12. minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash;
  13. the details of any litigation or legal action pending or taken by any Ministry or Department of the Government or a statutory authority against any promoter of the issuer company during the last five years immediately preceding the year of the issue of the prospectus;
  14. the details of pending litigation;
  15. the details of default and non-payment of statutory dues;
  16. the details of directors including their appointment and remuneration, and particulars of the nature and extent of their interest in the company;
  17. the disclosure for sources of promoters’ contribution;
  1. Reports by the auditors with respect to profits and losses and assets and liabilities of the company.
  2. Reports relating to profits and losses for each of the five financial years.
  3. Reports about the business or transaction to which the proceeds of the securities are to be applied.
  1. Proceeds or any part of the proceeds, of the issue of the shares or debentures, are applied directly or indirectly in the purchase of any business, profits or losses of the business, assets, and liabilities of the business, in purchase or acquisition of any immovable property.
  2. Acquisition by the company of shares in any other body corporate.
  3. Matters relating to terms and conditions of the term loans including re-scheduling, prepayment, penalty, default.
  4. The aggregate number of securities of the issuer company and its subsidiary companies purchased or sold by the promoter group and by the directors of the company.
  5. The Related Party Transactions(RPTs) entered during the last five financial years.
  6. The details of acts of material frauds committed against the company.

Misstatements in the Prospectus

Contravention of Section 26 of the Companies Act, 2013

Criminal Liability for Misstatement in the prospectus

Where a prospectus is issued which includes any statement which is untrue or misleading in form or context or any matter is likely to mislead the investor, then every person who authorizes the issue of prospectus shall be punishable with imprisonment for a term which may not be less than six months, but which may extend to ten years; or a fine not less than the amount involved in fraud but it may extend to three times the amount of fraud; or with both.

Civil Liability for Misstatement in the prospectus

If there is any inclusion or omission of any matter in the prospectus issued, which is misleading and the person who has subscribed the securities has sustained any loss or damage, then the company and every person who is a director, promoter and expert at the time of issue of prospectus, shall be responsible and be liable for punishment under section 36 of the act, and shall be liable to pay compensation to every person who has sustained such loss or damage.

Conclusion

As seen above, a prospectus is a mandatory document for limited companies to commence their business, but its complicated procedure delays the operation of any business, therefore a number of organizations hesitate to issue prospectus to the general public for subscription of share capital & debentures.