Prospectus is a formal legal document issued by a company to invite the public to subscribe to its shares, debentures, or other securities. It is a disclosure document required by the Companies Act, 2013 in India, aimed at providing potential investors with adequate information to make an informed investment decision. The prospectus serves as a public invitation to raise capital from the public, and it contains comprehensive details about the company’s business, financial status, risks, and management.
A company must issue a prospectus when offering its shares to the public, particularly when going public through an initial public offering (IPO). For private companies, which do not invite public subscription, the issuance of a prospectus is not mandatory. A company cannot issue securities without filing a prospectus with the Registrar of Companies (RoC).
Contents of Prospectus:
A prospectus must include specific information as required by the Companies Act, 2013, ensuring that the document provides full disclosure of material facts. Some key contents are:
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Name and Registered Office:
The prospectus must provide the name of the company and the location of its registered office.
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Objective of the issue:
It should clearly state the purpose for raising capital, such as expanding operations, launching new projects, or paying off existing debts.
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Details of Securities Offered:
Information regarding the types of shares or debentures offered, such as equity shares, preference shares, or convertible debentures. It should also specify the face value and issue price.
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Risk Factors:
A detailed section on the potential risks involved in the business, sector-specific risks, and financial uncertainties that investors should be aware of before investing.
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Financial Statements:
The company’s financial statements, including profit and loss statements, balance sheets, and cash flow statements from recent years, along with audit reports, must be provided.
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Company’s History and Business Overview:
A brief history of the company, its business model, current operations, and market presence must be included.
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Promoters and Management:
The prospectus should disclose the details of the company’s promoters, directors, and key managerial personnel, including their qualifications, experience, and remuneration.
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Capital Structure:
It must describe the company’s authorized, issued, and paid-up capital. It should also explain the structure of the post-issue shareholding pattern, highlighting promoter holdings and public participation.
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Legal Matters and Litigation:
Any material legal proceedings or litigation against the company or its directors/promoters must be disclosed.
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Dividend Policy:
The company should mention its past dividend record and future policies regarding profit distribution.
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Underwriting and Subscription:
Details of underwriters, if any, and the minimum subscription amount required for the issue to be successful.
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Terms and Conditions of the issue:
This section covers application procedures, the allotment process, the mode of payment for shares, and the timeline for allotment and refunds in case of non-allotment.
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Declaration by Directors:
A declaration from the company’s directors confirming that all material facts have been disclosed and that the information provided is true to the best of their knowledge.
Types of Prospectus:
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Red Herring Prospectus
Red Herring Prospectus is a preliminary version of the prospectus filed with the Registrar of Companies before a public issue. It includes most of the information about the company, except for the issue price. The term “red herring” refers to the bold disclaimer printed in red on the cover page, indicating that the document is not a final offering. This type is often used during the book-building process, allowing companies to gauge investor interest and gather feedback before finalizing the details of the offering.
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Final Prospectus
Final Prospectus is the definitive document issued by a company after the Red Herring Prospectus. It contains comprehensive information about the company, including the final issue price, terms and conditions of the offer, and complete financial details. The final prospectus must be filed with the Registrar of Companies and is provided to all investors before they subscribe to shares. This document serves as a binding agreement between the company and the investors.
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Shelf Prospectus
Shelf Prospectus allows a company to offer securities in multiple tranches over a specified period without needing to issue a separate prospectus for each offering. It is particularly useful for companies planning to raise capital in stages. The shelf prospectus includes general information about the company and its offerings but does not specify the price or the number of securities being issued at the time of filing. Companies can then issue a Tranche Prospectus for each specific offering under the shelf prospectus.
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Abridged Prospectus
Abridged Prospectus is a concise version of the full prospectus that includes key information and highlights about the company and the offering. It is typically issued to facilitate easy understanding for potential investors. The abridged prospectus must contain essential details like the company’s objectives, financial statements, and risk factors but omits extensive data found in the full prospectus. This type is often used in conjunction with a full prospectus to ensure investors can quickly grasp the essential information.
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Statement in Lieu of Prospectus
While not a traditional prospectus, the Statement in Lieu of Prospectus is used when a company does not issue a formal prospectus, typically in private placements. It serves as an alternative document to disclose essential information about the company, ensuring compliance with legal requirements.
Statement in Lieu of Prospectus
Statement in Lieu of Prospectus is a document required when a company does not issue a formal prospectus for inviting public subscription, but still needs to file certain disclosures with the Registrar of Companies. This typically applies to private placements or when a public limited company decides to raise capital without issuing a prospectus, such as through a private subscription or from existing shareholders.
This document must be filed under Section 70 of the Companies Act, 2013, and acts as an alternative to the prospectus. It ensures that the company complies with basic disclosure requirements even when it is not raising capital through a public offering.
Contents of Statement in Lieu of Prospectus:
The contents of a Statement in Lieu of Prospectus are similar to those of a prospectus, though not as comprehensive. Some of the key contents:
- Company’s Name and Registered Office: Basic information about the company, including its name, address, and registration details.
- Directors and Promoters: A declaration about the company’s directors and promoters, including their personal details, qualifications, experience, and any interest in the company’s affairs.
- Authorized Capital: Information about the company’s capital structure, including authorized, issued, and subscribed capital.
- Business Description: A description of the company’s business activities, its purpose, and any key projects or expansions planned.
- Financial Information: Basic financial statements, including the company’s balance sheet, profit and loss account, and any recent financial performance highlights.
- Shares and Debentures: Details of the shares or debentures being issued, including the price, terms of payment, and rights attached to the securities.
- Directors’ Contracts: Information about any contracts involving the directors, particularly those related to management services or business agreements.
- Minimum Subscription: Details on the minimum amount required to be subscribed for the issue to proceed.
- Legal Matters: Any material legal proceedings or potential liabilities the company may be facing.
- Declaration: A formal statement from the directors, affirming that the statement contains true and fair disclosure of the company’s financial position and that all material facts have been presented.
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