Meaning and Contents of Prospectus, Statement in lieu of Prospectus and Book Building

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:

• Name and Registered Office of the Company

The prospectus must clearly mention the legal name of the company and the address of its registered office. This ensures transparency and helps potential investors identify the issuing company. The registered office is the official communication address of the company and indicates its legal jurisdiction. It is also important for verifying the company’s legitimacy. Including this information gives investors confidence and a clear point of reference for communication and legal correspondence.

• Details of the Directors and Promoters

The prospectus must disclose the names, addresses, DINs (Director Identification Numbers), and professional backgrounds of all directors and promoters involved in the company. It should also mention their experience, shareholding, and any legal proceedings against them. This information helps investors evaluate the credibility and reliability of the management. Transparency regarding the promoters and directors is essential to building trust among potential investors and providing insight into who will manage and control the company.

• Capital Structure of the Company

A detailed breakdown of the company’s capital structure is mandatory. It must include information on authorized, issued, subscribed, and paid-up capital, as well as the face value and types of shares (equity or preference). Any existing or proposed debt instruments must also be disclosed. This section gives investors a clear view of the company’s financial foundation and how much of the capital has already been raised or will be raised through the offer.

• Purpose of the Issue (Objects Clause)

The prospectus must state the purpose or objects of the public issue, i.e., why the company is raising funds. It could be for expansion, debt repayment, working capital, or acquiring assets. This clause ensures that investors understand how their money will be used. It enhances accountability, and funds raised must be strictly used for the stated purpose. Misutilization of funds can lead to legal consequences and loss of investor confidence.

• Terms of the Issue

The prospectus must include all terms and conditions related to the securities being offered, such as the price of shares, minimum subscription, mode of payment, opening and closing dates, allotment procedures, and refund policies. These terms help potential investors make informed decisions about participation. The clarity in issue terms also ensures fair dealings, reduces misunderstandings, and helps in smooth and transparent execution of the public offer process under regulatory norms.

• Financial Information and Auditor’s Report

A company must present audited financial statements, including the profit and loss account, balance sheet, cash flow statement, and significant accounting policies. Additionally, the auditor’s report must be attached to ensure credibility. These financial disclosures help investors assess the company’s past performance, profitability, and financial stability. Accurate financial reporting is crucial for risk assessment and aids in predicting future growth and sustainability. It also fulfills statutory requirements under the Companies Act and SEBI guidelines.

• Risk Factors

Every prospectus must include a comprehensive list of risk factors associated with the investment. These may include industry-specific risks, regulatory risks, competition, technological changes, and internal management issues. Listing these risks helps investors make well-informed decisions. This section is essential to fulfill legal obligations of full and fair disclosure and protects the company from future liabilities by informing investors about potential uncertainties and threats before they commit to the investment.

• Dividend Policy

The company must disclose its past dividend record (if any) and its future dividend policy. This helps investors assess the company’s profitability and potential return on investment. Companies that consistently declare dividends are often viewed as financially stable. The dividend policy also provides insights into management’s approach toward profit distribution versus reinvestment, which can significantly influence investment decisions based on an investor’s preference for income versus capital gains.

• Underwriting and Subscription Details

A prospectus must mention whether the issue is underwritten and provide details of the underwriters involved. Underwriting assures investors that the issue will be subscribed even if the public does not fully participate. It also builds confidence in the offer. The names, addresses, and liability of underwriters must be disclosed. Information on minimum subscription and oversubscription handling should also be included to provide clarity on how the issue is supported and safeguarded.

Types of Prospectus:

• 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.

• 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.

• 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.

• 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.

• 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.

Statement in Book Building

A “Statement in Book Building” is a mandatory disclosure made in the Red Herring Prospectus (RHP) when a company raises capital through the book building process for a public issue. It clarifies that the price of the securities is not fixed at the time of filing the RHP and will be determined through investor bidding.

Standard Statement Format (as per SEBI guidelines):

“This issue is being made through the Book Building Process wherein not more than 50% of the Net Issue shall be allocated on a proportionate basis to Qualified Institutional Buyers (QIBs), not less than 15% to Non-Institutional Bidders and not less than 35% to Retail Individual Bidders, subject to valid bids being received at or above the Issue Price. The price band and the minimum bid lot will be decided by the company and the lead managers and advertised at least two working days prior to the bid opening date.”

Key Points Covered in the Statement:

• Issue is being made via Book Building.

• Price band and final price will be determined after bidding.

• Allocation percentages to QIBs, NIIs, and RIIs.

• Subject to valid bids received at or above the Issue Price.

• Price band and lot size will be advertised before bidding starts.