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.
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
- A public listed company who intends to offer shares or debentures can issue prospectus.
- A private company is prohibited from inviting the public to subscribe to their shares and thus cannot issue a prospectus. However, a private company which has converted itself into a public company may issue a prospectus to offer shares to the public.
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.
Red Herring Prospectus (RHP)
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
- According to Section 26 of the Act, every prospectus issued by or on behalf of a company must be dated and that date shall unless the contrary is proved, be regarded as the date of its publication.
- It shall state such information and set out such reports on financial information as may be specified by the SEBI in consultation with the Central Government.
- A copy of the prospectus shall be signed by every director or proposed director or by his agent must be delivered to the registrar on or before the date of publication.
- Every prospectus issued to the public should mention that a copy of the prospectus along with the specified documents has been filed with the registrar.
- If prospectus includes a statement made by an expert, the expert must not be engaged or interested in the formation or promotion or in the management of the company. A written consent of the expert should also be obtained before the issue of prospectus with the statement.
- A prospectus must not be issued more than 90 days after the date on which a copy thereof is delivered for registration. If a prospectus is issued it will be deemed to be a prospectus a copy of which has not been delivered to the registrar.
- A prospectus shall make a declaration about the compliance of the provisions of the act and nothing contained in the prospectus is in contravention of the provisions of the Companies Act, Securities Contracts (Regulation) Act, 1956 and Securities Exchange Board of India Act, 1992.
- Section 27 of the Act states that a company can vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, subject to the approval of an authority given by the company in general meeting by way of special resolution. The details of the notice in respect of such resolution to shareholders shall also be published in the newspapers in the city where the registered office of the company is situated.
Under the Companies (Prospectus and Allotment of Securities) Rules, 2014
- Rule 3 states that every prospectus issued shall contain the following information—
- The reports that the company needs to set out in the prospectus, are given in Rule 4, which are as under
- Other matters and reports which are to be stated in the prospectus, are given in Rule 5. They are as under
Misstatements in the Prospectus
Contravention of Section 26 of the Companies Act, 2013
- If a prospectus is issued in contravention of the provisions of this section, then the company shall be punishable with a fine, not less than fifty thousand rupees which may extend to three lakh rupees, and
- Every person who is party to the issue of the prospectus shall be punishable with imprisonment for a term which may to three years or with a fine, not less than fifty thousand rupees which may extend to three lakh rupees, or with both.
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.
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.