Everything You Need to Know About Prospectus

Introduction

Section 2 (70) of the Companies Act of 2013 defines a prospectus. Any document that is referred to or distributed as a prospectus falls within the definition of a prospectus. Any notification, circular, advertising, or other material that serves as an invitation to offers from the general public is also included in this.

Any securities of a corporate entity should be the subject of such an invitation to offer. Prospectuses such as red herring and shelf are also regarded as prospectuses.

It refers to a formal document that a public company issues to solicit proposals from the general public to subscribe to its shares. It contains all relevant information on the shares that a company makes available to the public. Additionally, it often aids investors in making investing choices.

After reading this article, you will have a thorough grasp of the prospectus and its types, how to file and publish a prospectus, and prospectus-related issues. So read it all the way through; you’ll find it to be quite useful.

Red Herring Prospectus

An Explanation of a Draft Red Herring Prospectus

When a business plans to raise money from the public by selling shares of the business to investors, SEBI (Securities and Exchange Board of India) requires that the business submit an offer document, commonly referred to as a Red Herring Prospectus.

Because it includes comprehensive information on the company’s activities, finances, promoters, and goals for filing an IPO, the document is particularly helpful to investors. Additionally, it describes the potential risks for investors as well as how the firm plans to use the funds that will be obtained.

Why are Investors Interested in Red Herring Prospectus?

Reading The Draft Red Herring Prospectus (DRHP) of a company is a wonderful technique to determine if it has strong potential or not since it might be difficult to choose the proper company to invest in.

Investors are interested to discover how successful the firm will be and reasons why they should invest in it when any IPO is launched or about to launch.

Investors must concentrate on their research rather than relying on the views of others when making investing selections. This is where making use of the RHP might be advantageous. Investors might not be able to read the red herring prospectus in its entirety, though. Here are the key portions of a red herring prospectus that investors must consult while evaluating the firm, for ease of use.

Here are a Few Points an Investor Should Check out in a Draft Red Herring Prospectus

Company information

This section discusses a company’s primary functions and business practices. To hold control of this specific portion should you decide to become a shareholder, the firm will use your investment in its primary operation, thus as a prospective shareholder, you need to pay close attention to this section.

Financial details

The financial statements and audit reports of the firm are included in one of the most significant segments. The financial statement will give you as an investor a general sense of potential dividend payments depending on the earnings stated. Based on the financial statement, you may evaluate the security and profitability of your upcoming investment.

Risk considerations

Under the heading “Risk Factors,” businesses outline the potential dangers that might affect their operations and company. While many concerns are often stated, some deserve more examination.

For instance, it could be a smart idea to steer clear of the IPO if you discover that the firm has several open legal disputes. To discover the true dangers that can endanger the company’s future growth, you should be able to read between the lines as an investor.

Utilizing proceeds

A company may launch an IPO for several reasons. Learn what the business plans will do with the money it receives from the IPO. Does the business intend to pay off debt, buy new assets, or obtain the working cash it needs? Additionally, look at the capital structure of the business to determine whether any significant private investors have invested in it.

Industry overview

The standing of the firm concerning its rivals is disclosed in a red herring prospectus. The paper also includes performance trends for the sector to which the organization belongs. If you’re anticipating a certain company’s initial public offering (IPO), you should research the numerous business and economic factors involved, the supply and demand dynamics, and the company’s prospects for the future.

Management

The prospects of a corporation are greatly influenced by its management. The management is in charge of developing plans on a variety of fronts, including promoting expansion, growth, refurbishment, marketing, etc. Information on directors, promoters, and other important management employees, including names, credentials, and titles, may be found in this section.

It could also contain details about any criminal prosecutions, financial delinquencies, or ongoing legal actions against these individuals. Because many of them might be risk factors, it is crucial to review this section.

Dividend policy

Even though it is not required to declare dividends, some businesses have a formal dividend policy that is detailed in this area under the RHP.

Promoters

This section contains information on the company’s promoters or promoter groups.

Strategies

The company’s plans for establishing itself and attaining growth are discussed in this section. The tactics include:

product-level, geographic, market-level, etc.

Investors can better comprehend the company’s strategy for making money with the aid of this information.

Strengths

The company’s advantages over rivals are outlined in the Red Herring Prospectus. Investors must read this information after learning about the company’s operations and current rivals. They will be better able to comprehend the company’s potential and growth possibilities thanks to this.

Capital structure

This section includes information on:

The equity share capital of the issuing business.

Amount of authorized shares.

capital that was issued, subscribed to, and paid up before the IPO.

the promoters of the company’s equity share capital’s history.

Shelf Prospectus

An Explanation of the Shelf Prospectus

Section 31 of the 2013 Companies Act discusses the provisions relating to shelf prospectuses.

A prospectus that has been issued by a public financial institution, business, or bank for one or more of the issues of securities or classes of securities specified in the prospectus is known as a shelf prospectus.

When a shelf prospectus is released, the issuer can sell or offer securities without releasing another prospectus, eliminating the requirement for the issuer to produce a new prospectus for each offering.

The Securities and Exchange Board of India will issue the rules for any class or classes of firms that are eligible to submit a shelf prospectus at the time of the initial sale of securities to the registrar.

The prospectus must specify its validity duration, which should not be more than one year. This time frame starts on the first day of the initial offering of the securities. There is no need for a new prospectus for every second or subsequent offer.

A corporation must submit an information memorandum along with its shelf prospectus filing.

Information Memorandum [Section 31(2)]

It is necessary for the firm submitting a shelf prospectus to also submit an information letter. It should include all relevant information about the newly incurred costs and any changes to the company’s financial situation after the first offer of the security or between the two offers.

According to Rule 4CCA of Section 60A(3) of the Companies (Central Government’s) General Rules and Forms, 1956, it must be lodged with the registrar three months before the issuance of the second or following offer made under the shelf prospectus.

Any organization or person that has received a request for the allocation of shares with a subscription advance payment before any modifications have been made is required to notify them of those changes. The money must be returned to them if the applicant decides to withdraw their application within 15 days.

If a securities offer is made after the information memorandum has been filed, both the memorandum and the shelf prospectus are regarded as prospectuses.

Abridged Prospectus

An Explanation of the Abridged Prospectus

A prospectus that has been submitted to the registrar is summarized in the Abridged prospectus. It has every component of a prospectus. To make it comfortable and quick for an investor to learn all the pertinent information, in brief, an Abridged prospectus condenses all of the prospectus’ material.

Abridged prospectuses must be enclosed with any form for the acquisition of a company’s stocks, according to Section 33(1) of the Companies Act, 2013.

It is a condensed version of a prospectus that provides all the relevant information needed for the investor to make an informed choice. It also lowers the cost of a capital public offering.

What is Disclosed in Abridged Prospectus?

• The total number of pages and whether the issue is 100% Book Building or Fixed Price must be disclosed by the issuer before conducting a public offering of shares.
• The issuer’s name and logo, corporate identity number, information about its registered office and registrar, and contact information.
• The dates of the issue’s beginning and closure, together with details on the price, the minimum bid, and the name of the reputable stock exchange where the specified shares are listed.
• Information about the company’s promoters, board of directors, and ten largest shareholders.
• The company’s top five most significant pending lawsuits, along with the amount at stake, any disciplinary actions taken by SEBI or the stock exchange against the promoter or group companies, including any actions still pending from the previous five years, and ongoing criminal investigations against the promoter.
• Information about joint ventures, subsidiaries, and group companies.
• All pending government and other clearances are listed in detail.
• Asset and liability summary, information on dividend and bonus issues, profit and loss account for the last five years, and approved, issued, subscribed, and paid-up capital.
• Company/group, project/object particular risks should be addressed in bold, italics, and be underlined. Risks resulting from offenses/litigations/losses.
• The project’s objectives, cost, and funding options.
• Data about the stock market, including the greatest and lowest closing prices, total volume (separately for all stock exchanges), and the biggest aggregate turnover of shares traded during the previous six months.

Deemed Prospectus

An Explanation of the Deemed Prospectus

A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013.

The document will be regarded as a Deemed prospectus via which the public is being offered securities for sale by any corporation that allots or agrees to allot securities. The document is treated as a prospectus of a corporation, and all provisions regarding its content and obligations apply.

In SEBI v. Kunnamkulam Paper Mills Ltd., the court determined that when a rights issue is offered to the current members with the option to renounce in favor of others, it is regarded to be a prospectus if there are more than fifty such others.

The Deemed Prospectus must Include the Important Topic Aspects

• The company’s name, registered office address, and objectives.
• Information on the signatories of the memorandum, including their shareholdings.
• Details on the directors.
• Details about the shares being issued, their class, and their voting rights.
• The minimum subscription payment amount.
• The amount owing upon application allocation and any later calls.
• The issues underwriters.
• The company’s auditors.
• In audited reports, the firm’s profits and losses are detailed.

Process for Submitting and Issuing a Prospectus

Application Forms

According to section 33, a memorandum including all the elements of a prospectus known as an abbreviated prospectus is required when submitting an application for securities.

This regulation has the following exceptions

When someone is invited to participate in an underwriting arrangement for securities by way of an application form.

A request was made for securities that were not made available to the public.

Prospectus Reports

The following report must be included in every prospectus released by or on behalf of a public company before or following its formation:

Report from the auditor on the assets, liabilities, and earnings

Report on the five-year financial results, including profits and losses

Report from the auditor detailing the business’s gains and losses over the previous five fiscal years

Describe the company and its transactions.

Filing of a Copy with the Registrar

A prospectus may not be issued by a company or on its behalf unless a copy is provided to the registrar for registration on or before the date of publication, according to sub-section 4 of section 26 of the Companies Act, 2013.

Every individual whose name appears in the prospectus as a director or potential director, or the appointed attorney on his behalf, must sign the document.

Delivery of a Prospectus Copy to the Registrar

The prospectus must state on its face that a copy of it has been given to the registrar in accordance with section 26(6) of the Companies Act of 2013. The statement must also refer to the document that was filed to the registrar with the prospectus copy.

Prospectus Issues

Filing the Prospectus with the Registrar

A prospectus is declared invalid if it is not released within 90 days after the date when a copy was provided to the registrar.

Violation of the section

• A corporation may be penalized under section 26 of the Companies Act 2013 if a prospectus is published in violation of that provision (9). The following is the penalty for the violation:
• A fine of at least Rs. 50,000 and up to Rs. 3,000,000 is imposed.

The following criminal penalties apply to anybody who learns that a prospectus is being issued in violation of section 26 after learning that the prospectus is in existence.

• A sentence of up to three years in jail, or
• Greater than Rs. 50,000 but not more than Rs. 3,00,000.

Misstatement of a Prospectus

Before subscribing to or buying securities from the firm, individuals may rely on the prospectus, a reliable legal document. However, any inaccuracy in the prospectus will result in a fine or jail time as punishment. A false or deceptive statement, as well as one that omits information, is considered a misstatement and is included in the prospectus.

Liability for misstatement in a Prospectus

Civil liability (Section 35) and criminal liability are the penalties for making false statements in a prospectus (Section 34).

1.     Civil liability (S.35)

A person who purchased stocks based on a deceptive prospectus may pursue legal action against the firm, its directors, promoters, experts, and anybody else who gave the go-ahead for the prospectus’ release, according to Section 35 of the Companies Act of 2013.

1.1.Actions against the company

There are two viable remedies for suing a company

(a)   Cancel the contract

If the buyer of the shares discovers any inaccuracies in the prospectus, he or she may cancel the agreement and get a refund of the money paid to the seller of the securities.

If the individual can demonstrate the following, they have the right to retract or terminate the contract

• The corporation issued the prospectus on its behalf;
• The assertion must be false;
• A substantial misrepresentation must be made in the statement;
• He must have relied on the statement when applying for securities, and the deception must have caused the shareholders to purchase the securities;
• The false statement must be factual rather than illegal.
• That he acted quickly to void the agreement before the business enters liquidation and within a reasonable amount of time.

(b)   Damages for fraud

In this scenario, the individual merely seeks compensation from the business but is unable to cancel the agreement due to the unreasonable delay, affirmation (providing an assurance), and the start of the winding-up process. At this point, the shareholder has the right to sue the firm for the false representation and seek damages.

1.2.Remedies against the directors, promoters, experts, and anyone else who authorized the issuance of the prospectus

In the event that it is established that a prospectus was issued with the intent to defraud the applicants, everyone referred to in subsection (1) of Section 35 shall be held personally liable for any losses or damages incurred by anyone who subscribed to the securities based on that prospectus, without any cap on liability.

Defenses that can be used to escape criminal responsibility

If the individual establishes what is required by Section 35 (2) of the Act,

• A director of the firm had previously granted his approval for the prospectus’ release, but he later revoked it, indicating that the prospectus was released without his knowledge or approval;
• That the prospectus was created without his knowledge or approval, and that after becoming aware of this, he made a reasonable public disclosure of its creation.

Legal Responsibility (S.34)

When a prospectus contains an inaccurate statement, criminal culpability arises under Section 34 of the Companies Act of 2013, and anybody who approved the release of the prospectus is subject to punishment under Section 447.

The penalty consists of a minimum 6-month sentence that may be increased to a maximum of 10 years in prison, a fine that may equal the amount of the fraud, may be increased to three times the amount involved in the fraud, or both.

Defenses accessible to someone charged with a crime

If a person can show that, the defenses are available under criminal law.

Such a claim or omission was irrelevant;

He had a legitimate basis to believe that inclusion or exclusion was required;

He has good reason to believe that the statement was accurate.

Contents in the Prospectus

Brief Description

• Name and Addresses– It contains the company’s name and registered office address. The Company Secretary, Auditor, Chief Financial Officers, Legal Advisor, Banker, and Trustee’s names and addresses must also be included.
• Issued/Listed at (Name of Stock Exchange).
• Beginning and ending Date of issue– Specifics regarding the beginning and closing dates for the subscription list.
• Ratings of the bonds and shares.
• Information on underwriters.
• A Board of Directors’ statement– The Board of Directors made a declaration regarding the specific bank account where the proceeds from the issuance will be put. The Board of Directors also makes public how much money they spent or utilised.
• The agreement of the directors, auditors, bankers, professional opinion, or another individual, as may be required.

The Company’s Capital Structure is as Follows

• Issued, paid up, and subscribed capital
• Size of the current problem

Conditions of the Current Issue

• The relevant Authority.
• Procedure and timetable for issuing and allocating securities.
• How to Apply- Prospectus Availability and Subscription Terms & Payment Mode.
• Special tax advantages for the company and its owners.

Particulars of the Issue

• Goals of the Problem.
• Project Price.

The business, Management, and Project

• Background information about the promoters, teamwork, etc.
• Resources and facilities

The Products and Services

• Information on the project’s gestation period, threat factors for certain projects, or impending legal proceedings relating to such projects.

 The Company’s Financial Performance

• Data from the balance sheet, the profit and loss account
• Any modification to accounting principles during the last three years
• Shares and debt securities are quoted on the stock market.
• Information on all payments, including refunds, interest, dividends, and dues.

Information on Businesses Under the Same Management

• Provide all the information about any firms that are managed by the same people.

Conclusion

A public firm that is about to raise money must only release the prospectus since it is a legal document. The prospectus is crucial in helping investors decide whether to subscribe for securities (shares, debentures, and other related instruments).

It is essentially a request for an offer to subscribe for shares. It contains comprehensive details on the Board of Directors, the Firm Secretary, the management of the company, the capital structure, the financial results, the most recent projects the company has undertaken, and other relevant data.

It must be registered and contain all requirements to be considered a genuine prospectus. Any prospectus that has not been registered is deemed invalid.

Any misrepresentation of a prospectus, such as an inaccurate statement or a statement intended to deceive someone, was considered a crime, and the offender was subject to a fine or imprisonment.

To raise capital, a public business must release a prospectus; however, if a private company decides to go public, the MOA should be accompanied by a prospectus or a statement in place of a prospectus.

This article has been submitted by Prerna Gala, an incoming law student at Pravin Gandhi College of Law.