Prospectus of a Company
A document issued by a company to invite the public and the investors for subscribing the securities is called a prospectus. The prospectus contains detailed information on the securities. A public company can issue the prospectus to offer its shares and debentures, whereas a private company cannot issue prospectus.
Invitation to Public
The company issues the invitation to the public for subscribing the securities of a company. If the invitation is for the subscription or purchase of share capital, then anyone can apply in the given form. The invitation should be by the company, on behalf of a company or concerning the intended company.
The following are the circumstances that differentiate the issue of the prospectus:
- If a company offers the shares or debentures to pubic through a prospectus, then it is a public issue
- In some cases, the company would not issue the prospectus, but they would send an offer to the public. The company makes such an offer through notice, advertisement, circular or in any manner
- In some instances, the client will receive the documents which are marked strictly confidential. It would contain the proposed shares along with the application form by the managing director. Moreover, such a document stays in a small circle not open to the public
- When an individual receives an offer, it is not a public offer
- A private company giving an offer to selected persons would be a private offer
- When a promoter of a company provides an offer to his friends or relatives is a private offer
Any class of companies as per the Securities and Exchange Board can file for the Shelf Prospectus . The companies file the Shelf Prospectus with the Registrar of Companies (RoC) at the first stage of the offer. The first offer indicates a period of validity, which does not exceed one year from the date of opening the first offer. Moreover, it does not require a prospectus for the subsequent offers during the validity period. While filing for Shelf prospectus, the company should also file the information memorandum. The information memorandum should contain all the material facts of the created charges, the company’s financial position changes. The companies should file the memorandum within the stipulated time before the issue of the subsequent offers. The filed information memorandum stays as a prospectus along with shelf prospectus whenever the company makes an offer.
If any company or person or company applies for the securities with an advance payment before making the changes, then the company can intimate the applicant about the changes. If the applicant desires to withdraw the applicant, then the company has to return the payment within 15 days.
Note:Â The Shelf Prospectus saves time and expenditure to issue the offer every time.
Red Herring Prospectus
The Red Herring Prospectus does not include the full particulars of the price of the securities. A company planning to make an offer of securities can issue a red herring prospectus before the issue of the prospectus. The companies file the red herring prospectus with the RoC at least 3 days before the opening the offer. The obligations of this are similar to that of any of the prospectus. The variations in the red herring prospectus from the other prospectus are highlighted. While closing an offer, the companies file the prospectus with the RoC and Securities and Exchange Board . It contains the information of the total capital raised whether, by share capital or debt, the closing price of the offer and the other details left out in the red herring prospectus.
Abridged Prospectus is a memorandum which has salient features of the prospectus. There shall be no form of application for issuing any securities unless it has the abridged prospectus. It has four exceptions like:
- When the company does not offer the securities to the public
- The offer is to the members or debenture holders of the company with or without the right to renounce
- The company makes an offer concerning the bonafide invitation to a person. This is to enter into an underwriting agreement concerning the securities
- The shares or the debentures offered should be uniform and similar to the shares and debentures that are already issued
If a person requests a copy of the prospectus, he will be given before the closing of the offer and subscription list. If the company does not comply with any of these provisions, then they will be liable to pay an amount of Rs.50,000 for each default.
Information in Prospectus
Every prospectus issued by a public company or on behalf of it for its formation or subsequently should contain the following information:
- The Name and the address of the company’s registered office, chief financial officer, secretary, legal advisors, auditors, bankers, underwriters and trustees
- Dates of opening and closing of the issue, a declaration regarding the allotment letters and the refunds
- A statement from the Board of Directors regarding the separate bank account
- The details of the underwriting issue
- Consent to the issue from the bankers, directors and auditors. Expert advice if necessary
- Details of the resolution and authority of the issue
- The procedure for allotment andÂ issue of the securities and also its time schedule
- Company’s capital structure in the given manner
- The main objects of the public offer and the terms of the current issue
- The current business of the company, its location and the schedule of its implementation
- Particulars like the project’s management perception of the risk factors, gestation period, the progress, deadlines for completion and pending legal action
- The minimum subscription and the payable amount by premium. The issue shares by other means than cash
- Details regarding the directors, which should include their appointments and remuneration
- Disclosures in the manner given by the company
Reports in Prospectus
Every prospectus issued by a public company or on behalf of it for its formation or subsequently should contain the following report:
- Auditor’s report regarding the profits, losses, liabilities and assets
- Report on the profits and losses for the five financial years
- Auditor’s report on the profits and losses of the company’s business for the five financial years
- Report on the business and its transaction
Filing Copy of Prospectus
The company should not issue the prospectus unless it is delivered to the Registrar for registration with the signatures of all the directors of the company. Every prospectus that is issued should state that it has been delivered for Registration. It should also specify any necessary to be attached in the delivered copy or refer to the statements in the prospectus regarding the documents. The RoC does not register unless the company complies to the requirements for the registration. The prospectus is not valid if the company does not issue it within 90 days from the date of delivering the copy to the RoC.
Statement by Expert
The issued prospectus should not include the statement of the expert. Unless the expert is not a part of the promotion, formation or management of the company and has given written consent. The expert should not withdraw the consent before delivering to the RoC for registration.
If a company issues prospectus in contravention, then the company will be punishable to pay an amount of Rs.50,000 which may extend up to Rs.3 lakhs. Every person being part of the issue of the prospectus knowingly will be liable with to pay an amount of Rs.50,000 which may extend up to Rs.3 lakhs or with imprisonment for a period up to 3 years or with both.
Remedies for Untrue Statement or Mis-statement
If a company issues a prospectus, then it is responsible for the statement in it. The Companies Act, 2013 provides remedies for civil liability and criminal liability.
Civil Liability for Mis-statement
If a subscribed person of the securities suffers any loss or damage because of a misleading statement in the prospectus, then the company is liable to pay for the compensation to every subscribed person of the securities. Every director and promoter of the company is liable to pay for the compensation. The person who authorises the issue of prospectus and the expert who issues the statement is also responsible for paying the compensation. The directors of a company are not liable to the punishment if they have withdrawn from the post before the issuance of the prospectus or if the prospectus was issued without his knowledge and he proves it by public notice. The expert can also escape the liability by proving that after giving consent to the copy, he withdrew before it was delivered to the RoC.
Criminal Liability for Mis-statement
The persons responsible for the issue of such a prospectus that has untrue statements will be liable under Section 447. This section provides that any person who is guilty of fraud will receive imprisonment for 6 months which may extend to 10 years. They shall also pay a fine of an amount not less than that involved in the fraud; this may extend up to three times. If the fraud involves the interest of the public, then the imprisonment period will not be less than 3 years. If the person authorised the issue without prior knowledge and if he proves it, then he is not liable to imprisonment.