Prospectus in Company Law

A prospectus is a key document in the world of corporate law that influences investment choices. This legal document offers all the information on a company's shares that are available for public subscription or purchase. A prospectus, which is governed by the Enterprises Act, compels enterprises to reveal relevant information about their financial situation, management, business practices, and related risks to maintain transparency and safeguard investors. The prospectus is a crucial tool for prospective investors, assisting them in weighing the risks and possibilities associated with any capital raising strategy—whether it be an IPO, rights issue, or another strategy. Scroll through the article to know all about prospectus in the Company Law.

What Is A Prospectus?

Important details about a firm and its securities—which are available to the general public for subscription or purchase—are provided in a prospectus, a legal document. It is a vital source of knowledge that helps prospective investors make wise investment choices.

Before purchasing the company's securities, investors should read a prospectus, which contains comprehensive information on the financials, management, operations, dangers, and other pertinent details.

A prospectus is governed by the Companies Act in the context of company law, which lays out the specifications and rules for creating and distributing prospectuses. To guarantee for openness and investor protection, the Companies Act specifies the required disclosures that must be included in a prospectus. Before a prospectus is used to offer securities to the general public, it needs to be registered with the regulatory body.

Companies that want to generate money through public offerings, such as rights issues, follow-on public offerings, and initial public offerings (IPOs), frequently employ prospectuses. It is an important document that aids prospective investors in weighing the benefits and drawbacks of purchasing shares from a firm.

Importance Of A Prospectus

The following highlights the significance of prospectus guidelines:

• Invitation for Investment: An invitation to invest is a document that an organisation releases before it makes offers to the general public for investments. It is, therefore, a request for investment.
• Company Information: Provides specifics on the goals, objectives, financial standing, managerial information, and other aspects of the business.
• Authenticity: Genuine and lawful, investors may trust this authentic document as it ought to have been submitted to the SEC.
• Identifies Investing Hazards: By providing information on the securities being sold, the company's financial status, its amount of market debt, its ability to repay debt, and other relevant factors, this document explains the risks associated with the offer.
• Assistance in Decision-Making: Based on the business's financial situation and the reason for raising capital, the prospectus regulation assists investors in making well-informed judgements about whether it is worthwhile to participate in this company, particularly in the offer that the company makes.
• Aids in the Company's Capital Raising: This document provides details about the offer made for fundraising. As a result, it contributes to raising the amount of money allocated for business purposes such as growth, capital investment, debt repayment, etc.

Importance in Advertisement

According to Section 30 of the Act, specific information must be included whenever a prospectus is promoted in any way for a call for securities subscription. These details include the memorandum's language on the main goal of the fund-raising, the members' liability, the total amount of capital invested in shares, the signatories' names and the number of shares they each subscribed for, and the company's capital structure.

Importance of a Prospectus for Investors

A legal document that informs the public about an investment offering and is required to be presented to the relevant authorities is called a prospectus. Investors may learn about the dangers involved in purchasing securities or funds, which is highly helpful. Risks are often addressed in passing early in the prospectus and then covered in greater detail later on. Investors have an obligation to examine the firm's financial statements to ensure that it is solvent enough to meet its commitments when the company is raising capital through the sale of bonds or stocks.

Contents Of A Prospectus

For filing and issuing the prospectus of a public company, it must be signed and dated and contain all the necessary information as stated under Section 26 of the Companies Act, 2013:

• Name and other crucial information, such as the registered address of the office, its secretary, auditor, etc.;
• The dates of issue, including the opening date and the closing date;
• Undertakings of the Board of Directors regarding separate bank accounts to keep receipts of the issue;
• Undertakings of the Board of Directors regarding the details of utilisation and non-utilisation of receipts of previous issues;
• Consent of the directors, auditors, and bankers to the issue, and expert opinions;
• The details of the resolution passed for the issue;
• Procedure and time scheduled for the allotment of securities;
• The capital structure of the company;
• The objective of the issue;
• The objective of the business and its location;
• Particulars related to risk factors of the specific project, gestation period of the project, any pending legal action and other important details related to the project;
• The amount is payable on the premium;
• Details of directors, their remuneration and the extent of their interest in the company;
• Reports for financial information such as auditor’s report, report of profit and loss of the five financial years, business and transaction reports, statement of compliance with the provisions of the Act and any other report.

As per Section 26(4) of the Companies Act, 2013, the company issuing the prospectus has to deliver a copy of the prospectus, signed by every person whose name has been mentioned in the prospectus as a director of the company or the attorney of the director, to the Registrar on or before the date of publication. 

What Constitutes A Prospectus?

Under Indian company law, a document must have the following prerequisites to be classified as a prospectus:

Invitation to the Public: It's crucial to keep in mind that a prospectus is an invitation to make an offer rather than the actual offer. This indicates that a business publicly announces to the general public that certain of its securities are up for subscription. A document may only be considered an invitation to the public if, it is available for subscription by anybody, even while there's a chance that the securities won't be granted to him in the end due to oversubscription or some other reason.

Invitation by the Company: In order to raise money, the company must release its prospectus. It would not meet the requirements for issuing the invitation even if all the necessary disclosures were made public by another entity. Nonetheless, an entity may follow the prescribed procedure to extend an invitation to offer to the public on behalf of the firm or with the company's consent. As a result, an invitation to offer must be issued by the business itself or by another authority that the business has approved.

Characteristics of the Document and Information included therein: A prospectus is an offer to subscribe for the company's securities. A document that just provides information on the securities will not be regarded as a prospectus. It must meet all of the conditions set forth by the Companies Act, which are covered in more detail in the article's later part.

Details about the Company's Securities: All of the information about the securities must be included in the prospectus. The kind of securities—debt or equity-based—must be disclosed in the prospectus. Additionally, the category—such as equity or preference shares, debentures, bonds, warrants, etc.—must be specified. The quantity of securities up for subscription must be specified. In addition, it has to provide any additional information that would be relevant to the type of securities, such as redemption policies and interest rates.

What Is The Golden Rule By VC Kindersley?

Judge VC Kindersley established the "Golden Rule" of the prospectus in the seminal decision of The New Brunswick Railway Company v. Muggeridge (1859). It was decided in this instance that "a prospectus is one of the ways an investor can learn about the viability of the company's endeavour." The fundamental idea of the regulation is that the firm must publish a prospectus, and that prospectus must correctly provide all pertinent facts and information while also making sure that no material is omitted that might influence an investor's choice. The "Golden Legacy" rule is another name for it, which was coined by Judge Pagewood in Henderson v. Lacon (1865). This rule is reflected in several provisions of the Companies Act, 2013, which aims to safeguard investor interests by offering detailed and comprehensive guidelines and mandating pertinent disclosure of material facts to determine a company's financial soundness.

 Types of Prospectus In Company Law

Depending on the kind of offering and legal requirements, prospectuses might be in one of many formats, including a full prospectus, red herring prospectus, shelf prospectus, abridged prospectus, or deemed prospectus. Companies must follow the unique characteristics, applications, and legal requirements of each form of prospectus when drafting and submitting them.

Red Herring Prospectus

A preliminary prospectus or offer document used by businesses to make an initial public offering (IPO) or follow-on public offering (FPO) of securities is called the Red Herring Prospectus (RHP). Except for the final offer price, the RHP includes all pertinent information on the company's shares or debentures. It is sent to possible investors for review after being filed with the ROC. The following are some of the Companies Act of 2013 pertinent RHP provisions:

Section 26: The requirements for a prospectus contents, including the data that must be in the RHP, are described in this section.

Section 32: This part outlines the process for submitting the prospectus to the ROC, along with the necessity of submitting the RHP before the subscription list opening.

Section 31: The inclusion of a statement in the RHP informing investors that the offer is being made through a prospectus and that they should review the prospectus before making an investment decision is required under this section.

Deemed Prospectus

Any document that meets the requirements of a prospectus and requests subscriptions or offers for a company's securities is referred to as a Deemed Prospectus. It covers publications such as brochures, circulars, ads, and any other correspondence that makes securities available to the general public for purchase or subscription. These publications are governed by the same regulations as conventional prospectuses and are considered to be prospectuses. The following clauses of the Companies Act of 2013 are pertinent to a Deemed Prospectus:

Sections 2(70) and 2(71): These sections describe the wide range of materials that may be regarded as presumed prospectuses and define the terms "prospectus" and "deemed prospectus," respectively.

Rules 26 and 32: As previously indicated, these rules also apply to considered prospectuses, necessitating that they adhere to the same filing and content standards as conventional prospectuses.

Shelf Prospectus

A prospectus filed by a business for several securities offerings within a year following the ROC's clearance is known as a shelf prospectus. Throughout the Shelf Prospectus's validity term, the corporation is permitted to make repeated public offerings of its securities without submitting a new prospectus for each offer. The following sections of the Companies Act of 2013 are pertinent to Shelf Prospectuses:

Section 31A: This section describes the prerequisites for filing a shelf prospectus, along with the terms and duration of its validity as well as the revisions that must be made to the prospectus over that time.

Rule 10 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Additional information on a Shelf Prospectus's contents, including what should be included in it and how to file and update it, is provided by this rule.

Abridged Prospectus

An abridged prospectus is a condensed version of the entire prospectus that only includes the most important details. Its goal is to give prospective investors a succinct overview of the most important details of the company's securities and offerings. The following clauses of the Companies Act of 2013 are pertinent to an abridged prospectus:

Rule 3 of the Companies Act (Prospectus and Allotment of Securities) Rules, 2014: This regulation specifies what must be contained in an abridged prospectus, including what information must be disclosed and how the prospectus must be filed and distributed.

Landmark Judgements

Mohandas Shenoy Adige v. Securities and Exchange Board of India (2021)

In this instance, the complaint questioned whether the prospectus's non-compliance with the representations stated in it amounted to a misrepresentation. Among the accusations was that the corporation sought money from the public just to syphon it off to the network of enterprises. The Securities Appellate Board ruled that there was no evidence of misrepresentation since the plaintiff could not prove that the money was being syphoned. Failure to comply with the information in the prospectus cannot be considered a misrepresentation in the absence of a fact-based determination. Furthermore, it was decided that a statement in the prospectus does not constitute a misrepresentation if the company does not follow it. At most, there may have been a violation of the prospectus terms and conditions by the company. 

Vijay Kumar Gupta v. Eagle Paint & Pigment Industries Ltd. (1997)

In this instance, the Company Law Board—which has since been superseded by the National Company Law Tribunal—was asked to rule on the legality of a private company's ads soliciting deposits from the general public. The Board determined that a private firm is not permitted to do so under the Act's requirements. Additionally, the firm must have a statement certifying that the deposits are not owed to it before accepting deposits from its directors or members.

Kiran Mehta v. Universal Luggage Manufacturing Co. Ltd. (1988)

In this instance, the plaintiff accused a corporation of issuing a prospectus that contained fraudulent assertions and filed a PIL against the business. The Plaintiff allegedly had no personal stake in the action, but he filed it anyhow because he thought the remarks would mislead or confuse the public. The lawsuit was dismissed by the Honourable Bombay High Court, which held that the Plaintiff's locus standi was necessary in order to file this kind of complaint. 

Conclusion

In terms of business law, the prospectus is a crucial document that guarantees investors may have all the information they need to make an informed financial decision. Companies provide investors with a clear picture of their operations and financial health by abiding by the strict guidelines outlined by the Companies Act. This transparency empowers investors to make well-informed judgements. Although each prospectus format—such as the Red Herring, Shelf, and Abridged—has a distinct function, they all strive to preserve the value of openness and investor protection. Landmark rulings emphasise the significance of precision and adherence in prospectus issuance, highlighting its pivotal function in upholding confidence in the financial markets.