Prospectus Definition in Company Law: Understanding the Importance for Public Companies

Introduction

A corporation that receives funding from the general public must also answer to the public because of this. 

Therefore, before raising any money, the Companies Act, 2013 requires that a prospectus be filed with the Registrar to protect the interests of the company’s investors. 

Definition and Significance of a Prospectus

A prospectus is essentially a form that a business (public company) uses to request applications for its debentures or shares.  

According to the Companies Act, a prospectus is any document issued or described as such, including the red herring prospectus mentioned in section 31. 

As well as any notice, circular, advertisement, or other document that invites offers from the general public for the subscription or purchase of any body corporate securities.

Businesses that must provide a prospectus

A publicly traded firm planning can issue a prospectus to offer shares or debentures. A private corporation is not allowed to publish a prospectus since it is against the law to ask the public to subscribe to its shares. 

However, a private business that has decided to become public may publish a prospectus to sell shares to the general public.

Prospectus Contents

The prospectus and its contents should provide the following information:

1. The prospectus needs to be signed and dated.
2. Names and addresses of the company’s registered office, secretary, chief financial officer, auditors, attorneys, bankers, trustees, if any, underwriters, and any other individuals as required should be included in the prospectus.
3. The prospectus ought to include the dates of the issue’s opening and closing, as well as a statement on the timely issuance of allotment letters and refunds;
4. The Board of Directors should indicate in the prospectus that all proceeds from the issue are to be deposited into a separate bank account and that all information regarding funds from the prior issue, both used and unused, must be disclosed in the prescribed way.
5. The prospectus must contain information regarding the issue’s underwriting, the directors’, auditors’, and bankers’ assent to it, as well as any expert opinion that may be required and the opinions of any other individuals.
6. The power to issue, the specifics of the resolution adopted, the process and timeline for the allocation and issuance of securities, and the capital structure of the business by regulations should all be included in the prospectus;
7. The primary goals of the public offer, the terms of the current issuance, and any other information that may be required should all be included in the prospectus.
8. The primary goals of the prospectus should be to outline the company’s operations, location, and project execution timeline.
9. A management assessment of the project’s risk factors, its gestation period, the amount of progress made thus far, the project’s completion deadlines, and any litigation or legal action filed or taken by a government department or statutory body against the company’s promoter during the five years before the prospectus’s release should all be included in the prospectus.
10. A minimum subscription, the amount payable as a premium, the issuance of shares other than in exchange for cash, information on the directors’ appointments and compensation, and specifics about the kind and degree of their interests in the company should all be included in the prospectus.
11. The sources of the promoter’s contribution should be disclosed in the prospectus in the way that may be required.
12. A statement to the effect that nothing in the prospectus violates the provisions of this Act, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, and the rules and regulations made thereunder, as well as any other matters and reports that may be required, should also be made by the company.

Example of a Prospectus

A prospectus in an initial public offering (IPO) informs prospective investors about the company’s goals and business strategy.

A prospectus provides customers of insurance and investment funds with a list of the product’s objectives, features and limitations, fees, and other details.

A prospectus for an ETF provides prospective investors with information on the fund’s objectives, track record, portfolio, expenses, and other financial specifics.

Conclusion

Thus, it is evident that a company’s prospectus is a very important document. Additionally, lawmakers have taken several elements into account to ensure that no person or business can avoid any liability that results from any actions that take place.

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