Prospectus under Companies Act

Meaning and Definition of a Prospectus

A prospectus is basically a document through which a company (public company) invites applications for its shares or debentures. As per the Companies Act it is any document described or issued as a prospectus and includes a red herring prospectus referred to in section 31 or any notice, circular, advertisement or any other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.[1]

In the case of Rattan Singh v. Managing Director, Mega Transport Co. Ltd.[2] , it was decided by the court that an offer received by selective persons from a private company does not constitute an invitation to buy shares from the public.

To make things clearer, the case of Re South of England Natural Gas and Petroleum Co. Ltd.[3]can be referred to wherein certain situations were mentioned through which one can understand the cases wherein the offer would be treated as public and cases wherein it won’t be treated as public. Those situations are mentioned below:

1. A company making an offer or invitation of securities to a section of the public otherwise than through the issue of prospectus, by way of the private placement, by issuing a private placement letter of offer.
2. When a company makes an offer or invitation of securities to qualified institutional buyers and employees of the company under ESOP, it will amount to an offer made to the public.
3. When a company makes an offer or invitation of securities only to its existing members, it will not amount to an offer made to the public.
4. When a company issues a form of application in connection with a bona fide invitation agreement with respect to such securities, it will not amount to an invitation to offer made to the public.

Contents of Prospectus

• The following things should be mentioned in the prospectus:
• The prospectus should be dated and signed.
• The prospectus should have 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;
• The prospectus should have dates of the opening and closing of the issue, and a declaration about the issue of allotment letters and refunds within the prescribed time;
• The prospectus should have a statement by the Board of Directors about the separate bank account where all monies received out of the issue are to be transferred and disclosure of details of all monies including utilised and unutilised monies out of the previous issue in the prescribed manner;
• The prospectus should have details about the underwriting of the issue and consent of the directors, auditors, and bankers to the issue, the expert’s opinion, if any, and of such other persons, as may be prescribed.
• The prospectus should have the authority for the issue and the details of the resolution passed, the procedure and time schedule for allotment and the issue of securities and the capital structure of the company in the prescribed manner;
• The prospectus should have main objects of public offer; terms of the present issue and such other particulars as may be prescribed.
• The prospectus should have main objects and present the business of the company and its location, and the schedule of implementation of the project.
• The prospectus should have a management perception of risk factors specific to the project, the gestation period of the project, the extent of progress made in the project, deadlines for completion of the project and any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company.
• The prospectus should have a minimum subscription, the amount payable by way of premium, issue of shares otherwise than on cash and details of directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company.
• The prospectus should have disclosures in such manner as may be prescribed about sources of the promoter’s contribution.
• The company should also make a declaration about the compliance with the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder and state such other matters and set out such other reports, as may be prescribed.
• Also, every prospectus issued shall state that a copy has been delivered for registration to the Registrar and specify any documents required for registration.[4]

Reports

The prospectus should also contain the following reports:

• Reports by the auditors of the company with respect to its profits and losses and assets and liabilities and such other matter
• Reports relating to profits and losses for each of the five financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries and in such manner as may be prescribed. If there is a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall set out in such manner as may be prescribed, the reports relating to profits and losses for each of the financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries;
• Reports by the auditors upon the profits and losses of the business of the company for each of the five financial years immediately preceding the issue and assets and liabilities of its business on the last date to which the accounts of the business were made up, being a date not more than one hundred and eighty days before the issue of the prospectus. But if a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall be set out in the prescribed manner, the reports made by the auditors upon the profits and losses of the business of the company for all financial years from the date of its incorporation, and assets and liabilities of its business on the last date before the issue of prospectus
• Reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly.

Golden Rule of Disclosure: Golden Legacy

Nothing in the prospectus should be stated as a fact which is not one or nothing of such value should be omitted, the presence of which might affect the nature or quality of the privileges and advantages which a prospectus holds out as an inducement to take shares. This was called the golden rule of disclosure in the case of New Burnswick Canadian Railway Company v. Muggerdge[5] and as golden legacy in Henderson v. Lacon[6]

Types of Prospectus

There are various kinds of the prospectus, some of which are stated below:

Shelf Prospectus

A prospectus issued by any class or companies prescribed by SEBI for one or more issues of the securities or class of securities specified in the prospectus over a certain period, without the issue of a new prospectus. The provisions for this have been mentioned under section 31.

Red herring prospectus

A red herring prospectus is a prospectus which does not contain complete particulars of the price or quantum of the securities. This prospectus has to be filed with the Registrar at least three days before the opening of the subscription list.[7]

Deemed prospectus

If a company allows or agrees to allot any securities with a view to their being offered for sale to the public, any document by which the offer of sale to the public is made shall be known as the deemed prospectus of the company.[8]

Abridged Prospectus

An abridged Prospectus is a prospectus which contains all the information about the company in a brief. According to the act, no form of application for the purchase of any of the securities of the company should be issued unless it is accompanied by the abridged prospectus. However, it won’t be required in two situations which are, if the securities are not offered to the public or in the case of an underwriting agreement.[9]

Conclusion

Hence, it can be seen that the prospectus of the company is a very vital document for a company. And a lot of factors have been considered by the lawmakers to make sure that there is no scope for any individual or the company for that matter to escape any liability which makes takes place.

Thus, the perspective of the company makes sure that there is effective and efficient working in the company.

[1] The Companies Act,2013, s. 2(70).

[2] (1959) 29 Comp. Cas. 165 (Punj.).

[3] (1911) 1 Ch 573

[4] The Companies Act,2013, s. 26.

[5] (1860) 3 LT 651:30 LJ Ch 242.

[6] (1867) 17 LT 527:59 LJ Ch 794.

[7] The Companies Act,2013, s. 32.

[8] The Companies Act,2013, s. 25.

[9] The Companies Act,2013, s. 33.

[10] The Companies Act,2013, s. 65(1).

[11] (1949) Comp. Cas. 193 (Mad.).

[12] The Companies Act,2013, s. 34.

[13] The Companies Act,2013, s. 447.

[14] (1932) 1KB 442

[15] (1889) 14 AC 337.

Author Details- Bhavi Mago [Student, Vivekananda Institute of Professional Studies]