Defining a Prospectus

For those who are unaware, a prospectus is a formal document that is owed to and filed with the Securities and Exchange Board of India (or SEBI). With the aid of this document, it is possible to ascertain relevant information that surrounds a given investment that is made available to the public in the form of an offering.

While there may exist different types of prospectuses, they are each filed for a wide range of investments which include but aren’t limited to stocks, bonds, and mutual funds. Current and potential investors make use of a prospectus in order to make better-informed investment decisions. This is owed to the fact that the prospectus is able to fill them in on details that are relevant to the investment instrument under inspection.

Understanding the Different Stages at Which a Prospectus May Exist

In order to offer an investment security which could be as a bond or stock to the public by selling the same, filing a prospectus with the Securities and Exchange Board of India is a mandatory requirement. Companies are expected to make filings that are both preliminary and final. The contents of each of these forms of prospectuses are made clear and outlined by the Securities and Exchange Board of India. There may exist minor variations in content required under each of these filings and this depends on the security that is considered.

Examining a Preliminary Prospectus

A preliminary prospectus serves as the initial document on offer which is made accessible to the SEBI and the responsibility of handing over the same rests with those responsible for issuing the security. A preliminary prospectus makes clear many details that are relevant to the business operations falling under the company in addition to the transactions which it carries out. Neither is the number of shares that would be made available to the public mentioned in this document and nor is the price of the value of each share. Most often a preliminary prospectus is made use of in order to guess the interest level that exists within the market for the security the company seeks to offer to the public.

Examining a Final Prospectus

A final prospectus is in comparison a more comprehensive formal document that highlights every detail of the investment that the company in question would like to make available via an offering to the public. In addition to making clear the finalized background of the investment instrument, the final prospectus makes clear the number of shares the company would like to issue and indicates what the price of each share would amount to in the market.

Factors That Establish the Status of a Prospectus

A number of factors establish the status of a formal document issued by a company to the status of a prospectus. These include some if not all of the following details.

  • The document in question calls on the public to subscribe to the investment instrument set to be issued by the company in question.
  • Serving as an invitation is issued to members of the public.
  • This invitation is issued by the company in question on its own behalf.
  • The prospectus provides a brief summary that makes clear the company’s background and its financial status.
  • It makes clear the number of shares the company seeks to offer.
  • The kind of security made available by the company is outlined in the prospectus.
  • In the event the offering provided by the company is meant for a private offering, it is indicated in the prospectus.
  • Those who act as the principals within the company are mentioned in the prospectus.
  • The prospectus states the banks and / or financial companies that are tasked with underwriting the security being offered to the public / private entities.

Types of Prospectuses

The types of prospectuses a company might issue have been examined below.

Red Herring Prospectus

A red herring prospectus is one that doesn’t feature everything that is pertinent to the issuance of the securities sought to be provided by a company including the details pertaining to its price. This form of a prospectus is ordinarily issued before prospects have been established. Instead, it is issued when a proposal is made to offer securities in general.

That being said, the red herring prospectus carries out the obligations that are expected within a prospectus. This is the first of the prospectuses sent to the SEBI in addition to a number of drafts that follow in its footsteps and are written along the same lines.

Its eligibility for being released depends upon the SEBIs thorough review of the same, wherein it ensures that the information presented in the document does not make any false statements that violate the laws and regulations in place. Furthermore, the SEBI may point out factors that might be missing from the prospectus and which are required to be disclosed.

The red herring prospectus indicates the closing price of its securities. Those who apply for the same have the legal right to withdraw their application within 7 days of intimating a variation.

Shelf Prospectus

Financial institutions such as banks may seek to issue securities in which case they could issue a prospectus which would be known as a shelf prospectus.

In the case of a shelf prospectus, the issuer responsible for the same is not required to issue another prospectus for the additional offering they wish to make available to the public. This is based on Section 31 of the Company Act of 2013. The period for which this prospectus holds valid amounts to a single year which commences once the first offer of securities is made available to the public.

Abridged Prospectus

An abridged prospectus refers to the summary of the prospectus which has been filed with the registrar. All pertinent features pertaining to a prospectus are covered under this.  That being said, information is provided in a concise manner that is easy for investors to peruse in a short time frame.

Deemed Prospectus

This form of a prospectus is made by a company that seeks to offer securities that aren’t made available to the public, and which highlights the allotment of said securities.

Conclusion

As explored above, it is possible for a company to file a wide variety of prospectuses based on who it seeks to offer its securities to and at what stage it has reached in its filing with the SEBI.