Updated: Dec 16, 2021
“A prospectus means any document describe or issue as a prospectus and includes any notice, circular, advertisement or other documents inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares in or debentures of a day corporate.”
From the above definition, it is clear that a prospectus is a document that invites the public to subscribe to the share capital or debentures of a company. If it does not do that, it cannot be called a prospectus. According to the Companies (Amendment) Act, 1971, an invitation to the public inviting deposits is also deemed to be a prospectus. Some companies do not directly to the public themselves, but allot the entire share capital to an intermediary, which then offers the shares to the public by an advertisement of its own. Any document by which such offer for sale to public is made is deemed to be a prospectus.
After getting the company incorporated, promoters will raise finances. The public is invited to purchase shares and debentures of the company through an advertisement. A document containing detailed information about the company and an invitation to the public subscribing to the share capital and debentures is issued. This document is called ‘prospectuses. Private companies cannot issue a prospectus because they are strictly prohibited from inviting the public to subscribe to their shares. Only public companies can issue a prospectus. Section 2 (36) of the Companies Act defines prospectus as, “A prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other documents invent deposits from public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate.”
The prospectus is not an offer in the contractual sense but only an invitation to offer. A document constructed to be a prospectus should be issued to the public. A prospectus should have the following essentials.
• There must be an invitation offering to the public.
• The invitation must be made on behalf of the company or intended company.
• The invitation must to be subscribed or purchase.
• The invitation must relate to shares or debentures.
A prospectus must be filed with the Registrar of companies before it is issued to the public. The issue of prospectus is essential when the company wishes the public to purchase its shares or debentures. If the promoters are confident of obtaining the required capital through private contacts, even a public company may not issue a prospectus.
The promoters prepare a draft prospectus containing required information and this document is known as ‘a statement is lieu of prospectus.’ A prospectus duly dated and signed by all the directors should be field with Register of Company before it is issued to the public.
A prospectus brings to the notice of the public that a new company has been formed.
The company tries to convince the public that it offers best opportunity for their investment. A prospectus outlines a detail the terms and conditions on which the shares or debentures have been offered to the public.
Every prospectus contains an application from on which an intending investor can apply for the purchase of shares or debentures. A company must get minimum subscription within 120 days from the issue of prospectus. If it fails to obtain minimum subscription from the members of the public within the specified period, then the amount already received from public is returned. The company cannot get a certificate of commencement of business because the public is not interested in that company.
Object of a prospectus
The objects of issuing a prospectus are as under:
1. To invite the public to invest in the shares or debenture of a market.
2. To give a bureau of a condition on which the public is invited to invest in shares and debentures.
3. To make a declaration that the directors of the company are liable for the condition stated in the prospectus.
Nature of prospectus:
As said earlier that the prospectus is an invitation to the public to invest in the shares or debentures of a company. But the term public is nowhere defined in the Companies Act. So, far as it is related to prospectus, public is meant to be the ordinary common people. Whether or not the invitation for investment is made to the ‘public’ depends upon some situation, such as:
1. How many copies of the prospectus were printed?
2. To how many members of the public were the copies distributed.
3. How many members of the public accepted the copies?
4. Under what conditions did the member of the public accept the prospectus?
When the prospectus need to be issued
In the following situation, there is no need for a prospectus to be issued.
1.When the shares and debentures are to be allotted to the existing holders of shares and debentures.
2.When the shares and debenture to be allotted are similar to the current (already issued) shares and debentures that are being traded in a recognized stock exchange.
3.When the allotment of shares and debenture is not permissible by law as in the case of a private company.
4.When the invitation is to some such person who has a contract for underwriting the shares and debentures of the company.
Golden rule in prospectus
Prospectus is the basis of the contract between the company and the person’s who incest in the company’s shares or debentures. The officers of the company have knowledge of the company’s present status and its prospects in future or have the means to acquire such knowledge. But the potential investor has no such knowledge, nor the means to acquire it. It, therefore, becomes the duty of those who issue the prospectus that they not only projects the company’s image in the right perspective but also makes sure that no vital information which could be of interest to the potential investors in the company’s shares and debentures is left out from the company’s prospectus. it therefore become important that the prospectus states the basic important facts about the company with utmost honesty and good faith and that no information that is important is twisted or partially presented. That is what is refers to as the ‘golden rule for making a prospectus’.
In short the following must be kept in mind when preparing the prospectus of a company:
1.The prospectus must be an honest statement of the company’s profile; there must be no misleading, ambiguous or erroneous reference to the company in its prospectus.
2.Every important aspect of a contract of the company should be clarified.
3.The contents of the prospectus should conform to the provision of the Companies Act.
4.The restrictions on the appointment of directors must be kept in mind.
5.The conditions of civil liability as laid down must be strictly adhered to issue and registration of prospectus or legal requirement regarding issue of prospectus.
Legal requirement regarding issue of prospectus:
The Companies Act has defined some legal requirements about the issue and registration of a prospectus. The issue of the prospectus would be deemed to be legal only if the requirements are met.
1.Issue after the incorporation: As a rule, the prospectus of a company can only be issued after its incorporation. A prospectus issued by, or on behalf of a company, or in relation to an intended company, shall be dated, and that date shall be taken as the date of publication of the prospectus.
2.Registration of prospectus: it is mandatory to get the prospectus registered with the Registrar of Companies before it is issued to the public.
The procedure of getting the prospectus registered is as under:
a.A copy of the prospectus, duly signed by every person who is named therein as a director or a proposed director of the company must be filed with Registrar of Companies before the prospectus is issued to the public.
b.The following document must be attached thereto:
(i) Consent to the issue of the prospectus required under any person as an expert confirming his written consent to the issue thereof, and that he has not withdrawn his consent as aforesaid appears in the prospectus.
(ii) Copies of all contracts entered into with respect to the appointment of the managing director, directors and other officers of the company must also be filed with Registrar.
(iii) If the auditor or accountant of the company has made any adjustments in the company’s account, the said adjustments and the reasons thereof must be filed with the documents.
(iv) There must be a copy of the application which is to be filled for the issue of the company’s shares and debentures attached with the prospectus.
(v)The prospectus must have the written consent of all the persons who have been named as auditors, solicitors, bankers, brokers, etc.
c. Every prospectus must have, on the face of it, a statement that:
(i) A copy of the prospectus has been delivered to the Registrar for registration.
(ii) Specifies that any documents required to be endorsed by this section have been delivered to the Registrar.
d.A copy of the prospectus must be filed with the Registrar of Companies. The Registrar should register the prospectus only when:
(i) The prospectus is dated. The date shall, unless the contrary is proved, be taken as the date of publication of the prospectus.
(ii) The contents of prospectus conform to Section 56 of the Act.
(iii) The consent of the expert, if it is necessary, has been obtained. But such expert should not be engaged or interested in the formation or promotion of the company.
(iv) The written consent of the expert with respect to the issue of his statement included in the prospectus has been obtained.
If the above provision of law has been fulfilled, or the necessary documents have nit been attached, the Registrar can refuse to register the company’s prospectus.
e. According to the Section 60(4), no prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration. Of the prospectus is so issued. It shall be deemed to be a prospectus a copy of which has not been delivered to the Registrar.
If a prospectus issued in contravention of the above –stated provisions, then the company and every person who knows a party to the issue of the prospectus shall be punishable with a fine.
Contents of prospectus
The main contents of a prospectus are:
1. Main object of the company with the names, addresses, description and occupation of signatories to the memorandum and the number of shares subscribed for by them.
2. Number and classes of shares and the nature and extent of the interest of holders thereof in the property and profits of the company.
3. The number of redeemable preference shares intended to be issued and the date of redemption or where no date is fixed; the period of notice required for redeeming the share s and proposed method of redemption.
4.The number of shares. If any, fixed by the Article as the qualification of a director and the remuneration of the directors for the service.
5.The names, occupation and addresses of directors, managing director and manager together with any provision in the Articles or a contract regarding their appointment remuneration or compensation for loss of office.
6.The time of opening of the subscription list should be given in the prospectus.
7. The amount payable on application and allotment on each share should be stated. If any prospectus is issued within two years, the details of the shares subscribed for any allotted.
8.The particular about any option or preferential right to be given to any person to subscribe for shares or debentures of the company.
9. The number of shares or debentures which within the two preceding year been issued for a considerations other than cash.
10. Particulars about premium received on shares within two preceding years or to be received.
11. The amount or rate of underwriting commission.
12. Preliminary expenses.
13. The names and addresses of auditors, if any, of the company.
14. Where the shares are of more than one class, the rights of voting and rights as to capital and dividend attached to several classes of shares.
15. If nay reserve or profits of the company have been capitalized, particulars of capitalizations and particulars of the surplus arising from any revaluation of the assets of the company.
16. A reasonable time and place at which copies of all accounts on which the report of auditors is based may be inspected.
A public company raises its capital from the public and it issues prospectus for this purpose. Sometimes, the promoters of a company decide not to approach the public for raising necessary capital. They are hopeful of raising funds from the friends and relations or through underwriters. In that case a prospectus need not be issued but a Statement in Lieu of Prospectus must be filed with the registrar at least three days before the first allotment of shares. Such a statement must be signed by every person who is named therein as a director or proposed director of the company. This statement will be drafted strictly in accordance with the particulars set out in a part I of Schedule III of the Act.