What is a Prospectus?
For the uninitiated, who might wonder what a prospectus is, it may be defined as a formal document that is expected by and is filed with the Securities and Exchange Board of India (or SEBI). This document provides pertinent details that highlight information relevant to an investment made available to and on offer to the public.
Prospectuses may be filed for a number of investments ranging from stocks and bonds to mutual funds. With the aid of a prospectus, investors can make more well-informed investment decisions. This is because this document provides them with ample information that is relevant to the investment security under scrutiny.
Understanding What a Prospectus Is –
As a part of the registration process involved in offering investment security like a bond or stock for sale to members of the public, companies are legally required to file a prospectus with the Securities and Exchange Board of India. These companies must file both, a preliminary (or red herring) prospectus in addition to a final prospectus. The SEBI clearly stipulates as to what ought to be listed under a prospectus which may vary based on the security under consideration.
Understanding What a Preliminary Prospectus Is –
A preliminary prospectus is the primary offering document made available to the SEBI and provided by those responsible for issuing the security. It highlights several details pertaining to the business in question along with the transactions that fall under its domain. This preliminary prospectus does not make clear or indicate the number of shares the company seeks to issue or the price at which these would each be made available. Ordinarily, preliminary prospectuses are used in order to ascertain the interest that exists within the market for the security in question.
Understanding What a Final Prospectus Is –
In contrast, a final prospectus outlines all the details of an investment that a company seeks to offer to the public. This final prospectus makes clear any and all information pertaining to the finalized background in addition to the number of shares or certificates which would be issued along with the price at which these would be made available for sale.
Information Available Under a Prospectus
A prospectus ordinarily contains some or all of the information presented below.
- A concise summary that outlines the company in question’s background and financial information
- The name of the company responsible for issuing the stock
- The number of shares on offer
- The kind of securities made available
- Specifies whether the offering provided would be public or private
- Outlines names of those who serve as the company’s principals
- Specifies the banks and / or financial companies responsible for carrying out the task of the underwriting of the security’s issuance to the public (or private entities)
On occasion, some companies may be entitled to file an abridged prospectus that features only some of the same information which might appear in a final prospectus.
Advertisement of a Prospectus
As per Section 30 of the Company Act of 2013, when a prospectus is advertised, it must highlight the contents of the memorandum. This means that the object, the existing members’ liabilities in place, the amount of the company in question’s share capital, and the number of shares that have been subscribed to by subscribers must be made apparent. In addition, the capital structure that prevails within the company must be made clear.
Additional Reasons as to Why a Prospectus is Issued
In addition to the aforementioned reasons, a prospectus is issued such that investors are made aware of the potential risks associated with investing in a company’s security or fund. While a company might be able to raise capital by issuing stock or bond options, investors are advised to closely examine the financials of the company they choose to invest in. This is because by doing so they can truly understand whether or not a company is sufficiently financially viable such that it can honor the commitments it seeks to follow through with.
Ordinarily, a prospectus makes clear the risks associated with the investment in the beginning itself however these are more thoroughly outlined in the later pages of the prospectus.
A prospectus will also highlight how old the company in question is, the management involved and their experience levels, and the level of involvement by management in the business enterprise in addition to the capitalization of the stock issuer.
With the aid of a prospectus, a company may safeguard itself against claims that it did not highlight or disclose relevant information.
Procedure Involved in Applying for and Filing a Prospectus
In order to apply for and file a prospectus with the Securities and Exchange Board of India, companies are expected to partake in the following.
- Fill out and submit application forms outlines in Section 33 of the Company Act of 2013.
The application form for a security is only issued provided it is submitted in addition to a memorandum that highlights all the features that are specified under an abridged prospectus.
Exceptions that prevail here include the following –
In the event that an application is issued in the form of an invitation to an individual to serve as an underwriter with reference to the securities under consideration.
The application is issued in relation to the securities and is not made available to the public.
- The prospectus is expected to be registered.
As per Section 26 (7) of the Company Act of 2013, a registrar may register a prospectus in the event that –
The prospectus fulfills the requirements stipulated under Section 26 of the Company Act mentioned above.
The prospectus showcases consent which is provided by all those involved in and mentioned in the prospectus, in writing.
Serving as a formal, legal document, a prospectus is issued by a corporate entity seeking to avail of subscribers via the public and gain investors who purchase the securities mentioned within it. In order for the prospectus of a company to be recognized as valid, it must be registered with the SEBI and contain pertinent information.