What is the Prospectus of a Company? Explained

A prospectus is a document that is issued by a company in order to invite the public and the investors in order to subscribe to securities. A prospectus will contain detailed information on the securities. A prospectus can be issued by a public company in order to offer shares and debentures while a prospectus can not be issued by a private company.

Invitation for the Public

A company issues invitations to the public in order to subscribe to the securities of  a company. The invitation is known as a prospectus of a company. If the prospectus of a company is intended towards the subscription of purchasing of the share capital of the company, then anyone is eligible to apply in the form. The prospectus of a company can either be by the company, related to the intended company or on behalf of the company.  The following situations are responsible for differentiating the issue of a prospectus of a company:

1. If the prospectus of a company is issued in order to offer shares or debentures to the public, then it will be considered a public issue.
2. If the prospectus of a company is not issued but the concerned company still sends an offer to the public, then this offer is made via advertisements, notices, circulars or some other ways.
3. In some cases, the client may receive documents that are marked as giggly confidential. They would contain the shares offered along with the application form from the MD(Managing Director). Also, this document remains confined among a small circle of people and is not open to the public.
4. In case an offer is received by the public, then the offer is not considered to be a public offer.
5. An offer given by a private company to selected individuals is considered to be a private offer.
6. When an offer  is provided to the relatives or friends of the promoter of the company, it is considered to be a private offer.

Shelf Prospectus of a Company

Any type of company can file for a Shelf Prospectus of a company as per the guidelines of SEBI(Securities and Exchange Board of India). The shelf prospectus of a company is filed with the Registrar of Companies(ROC) at the offer’s first stage. The first offer shows a validity period which does not exceed a year from the first offer’s date of opening. Moreover, a prospectus is not required for the subsequent offers that are made during the validity period. At the time of filing for a shelf prospectus of a company, the company also needs to file for an information memorandum. The information memorandum must constitute all the material facts of the charges that are created and the financial position changes of the company. The companies need to file an information memorandum within the specified time period before issuing any subsequent offers. Whenever a company makes an offer, then the information memorandum that is filed will stay as a prospectus of a company along with the shelf prospectus.

Red Herring Prospectus of a Company

A Red Herring Prospectus of a Company does not contain the full details of the price of the securities. Any company that wishes to issue an offer of securities may issue a red herring prospectus before issuing the prospectus of a company. The red herring prospectus is filed with the ROC at least 3 days prior to the opening of the offer. The red herring prospectus has obligations that are similar to other prospectus of a company. At the time of closing of an offer, the companies will have to file the prospectus with the SEBI and the ROC. This will contain the information of the total amount of capital that is raised either by debt or share capital, the closing price of the offer and all the other details that are not mentioned in the red herring prospectus of a company.

Abridged Prospectus of a Company

An abridged prospectus is like a memorandum that contains important features of the prospectus of the company. There is no application form in order to issue any sort of securities until it contains the abridged prospectus. There are four exceptions to it:

• When the company is not going to offer the securities to the public
• When the offer was made to the debentures or members of the company either with or without a right to renounce.
• When the offer made by the company is related to a bonafide invitation that is made to a person. This is done in order to enter a written agreement related to the securities.
• The debentures and shares that are offered must be similar to the debentures and shares that have already been issued.

In case a person wishes to have a copy of the prospectus of the company, then he will be given the copy before the closing of the offer and the subscription list. In case a company does not follow the above listed provisions, then a penalty of Rs. 50000 will be levied on the company for each default.

Information in the Prospectus of a Company

Every prospectus of a company that is issued by either a public company or on behalf of a public company for its formation, must contain the information that is listed below:

1. The address and the name of the registered office of the company, chief financial officer, legal advisors, secretary, auditors, underwriters, bankers and trustees.
2. A declaration that contains details related to the allotment letters and the refunds and the opening and closing dates of the issue.
3. A statement from the Board of Directors related to a separate bank account.
4. The information of the underwriting issue.
5. Consent of bankers, directors and auditors to the issue.
6. Information regarding the authority of issue and the resolution.
7. The process for allotment and issuing of securities and the time of schedule for it.
8. The capital structure of the company in the given manner.
9. The terms of the current issue and the main reasons behind the public offer.
10. The company’s current business, its location and the implementation schedule of the company.
11. Details such as the management perception of risk factors of the project, progress, gestation period, deadlines for completion and legal actions that are pending.
12. The payable amount by premium and the minimum subscription.
13. Disclosures as specified by the company
14. Details about the directors including their remuneration and appointments.

The prospectus of the company that was issued must not include the statement of an expert until and unless the expert is a part of either of promotion or formation or management of the company and has already given  written consent. The expert is not supposed to withdraw his consent before delivering it for registration to the ROC.

Penalty that can be levied

If a company violates the provisions while issuing a prospectus of a company, then the company will have to face a penalty of Rs. 50000 which may end up extending to Rs. 3 lakhs. Every individual who is a part of the issue of the prospectus of the company voluntarily, will also be liable to pay an amount of Rs. 50000 which may also extend up to Rs. 3 Lakhs. The individual may also be imprisoned for 3 years.

Methods to Fix Untrue Statements

There are some solutions in case you end up with a mis-statement of the prospectus of the company under Companies Act,2013 . These are:

• Civil Liability for Untrue Statement:

In case an individual who has subscribed for securities faces damage or loss due to a misleading statement present in the prospectus of a company, then the company will have to compensate each and every subscribed individual. Each and every director and promoter of the concerned company will be liable to pay compensation. The person who is responsible for the authorisation of the issue of the prospectus of a company and the expert who is responsible for issuing the prospectus of the company are also liable to pay for the compensation. The directors who left the post before the issuance of the defective prospectus or the prospectus that has a misleading statement will not be punished.Also, the experts who withdrew from their post before their consent was sent to ROC are also safe from the punishment.

• Criminal Liability for an Untrue Statement:

​The  individual who is responsible for issuing such a prospectus of a company that contains a misleading or untrue statement will be liable under Section 447. Under this section, any individual who is guilty of fraud will have to face 6 months of imprisonment which may also end up extending to 10 years. They will also have to pay fines of an amount that is not less than the amount of the fraud or maybe equal to three times the amount of fraud. In case the fraud consists of the interest of the public, then the time period for imprisonment will be either 3 years or more. In case the person who issued the prospectus proves that the issue was performed without any prior knowledge, then he can escape the imprisonment.