A prospectus is a crucial document for companies seeking to raise funds from the public through the issuance of securities such as shares and debentures. It provides important information to potential investors, including the company's financials, management structure, and the details of the securities being offered. The Companies Act of India has specific regulations regarding the content and format of prospectuses. The Act also outlines different types of prospectuses that can be issued, including red-herring prospectuses, shelf prospectuses, and abridged prospectuses. This article will discuss about the different types of prospectus and the rules and regulations governing their issuance under the Companies Act, 2013.
What is Prospectus?
In general sense, Prospectus refers to information booklet
or offer document on the basis of which investor takes decision whether to
invest in the company or not.
It is defined under section 2(70) of companies act,2013
as per which Prospectus mean any document described or issued as prospectus and
includes s red-herring prospectus or a shelf prospectus or any notice,
circular, advertisement or other document inviting offers from the public for
the subscription or purchase of any securities of a body corporate.
Types of Prospectus
Shelf Prospectus:
In simple terms, Shelf prospectus is a single prospectus for
multiple public issue. Issuer is permitted to offer and sell securities without
a separate prospectus for each public offering.
It is required to be submitted at the stage of first public
offer which can be valid for a period of not more than one year. The validity
period shall commence from opening of the first public issue and for subsequent
public offering separate prospectus is not required.
However, company has to file information memorandum which
shall contain material facts relating to:
- new charges created
- changes in the financial position of company between previous offer and succeeding offer of securities.
- such other changes as may be prescribed.
It shall be prepared in Form PAS-2 and submitted to
Registrar of companies along with prescribed fees within one month prior to
subsequent issue.
Red-Herring Prospectus:
In this prospectus complete details about quantum or price
of securities offered are not mentioned. It contains other details about
company like its operations and prospects but does not include price and number
of shares offered.
It shall be filed with Registrar of Companies at least three
days prior to the opening of offer.
After closing of offer, complete prospectus including
details which was not included in red-herring prospectus should be filed to
Registrar of Companies.
Abridged Prospectus:
As per section 2(1) of companies act,2013 Abridged Prospectus means a memorandum containing salient features of a prospectus as may be specified by Securities and Exchange Board of India by making regulations in this behalf. In simple terms, it is summary of prospectus. As per section 33, no application for purchase of securities shall be issued unless such application is accompanied by a abridged prospectus. However, if any applicant demands a full prospectus then company has to provide the same.
Offer for Sale - Deemed Prospectus:
It means giving offer to public by an existing shareholder
through issue of a prospectus. All the consideration received from subscribers
will be paid to selling member after deducting expenses of the issue.
However, the prospectus must contain all relevant
information for investors to make an informed decision. SEBI, the
regulatory body, has guidelines and regulations that must be followed to ensure
a fair and transparent process. This includes disclosing material information
and ensuring fair pricing of the shares.
To determine the offer price, the offeror can either fix the
price or determine it through a book building process. In a book building
process, the offeror determines a floor price, which is the minimum price at
which bids can be made, and a ceiling price, which is the maximum price.
Investors can then place bids within this price range, and the final offer
price is determined based on the demand and supply of shares.
If a company's
prospectus contains false information, there are ways to address it.
Firstly, a person who bought shares based on the false
information can ask for the contract to be cancelled and get their money back.
They must act quickly before the company is being wound up. If they try to sell
the shares, attend meetings, or receive dividends, they lose this right.
Secondly, the person can sue the company for damages for
deceit.
Issue of Securities at a Premium
A company may issue securities at premium i.e., at price
more than face value. It is usually done when company gains some reputation
& trust among public. Amount excess of face value is called Securities
Premium which shall be shown as Securities Premium Account under Liabilities
side in Balance Sheet.
Utilisation of Securities Premium
As per section 52(2) of the Act, the securities premium can be used only
for:
- To
issue fully paid up bonus shares
- Writing
off preliminary expenses of the company
- Writing
off commission paid or discount allowed or expenses incurred on issue of
shares or debentures
- To
pay premium on redemption of preference shares or debentures
- To Buy
back Shares under section 68
For companies which needs to comply with accounting standards under section 133, securities premium can be utilized only for:
- Issuing fully paid up bonus shares
- writing off expenses or commission paid or discount allowed on issue of equity
- buyback of shares
Issue of Shares at Discount
Section 53 prohibits every company to issue shares at
discount. In simple words, company cannot issue equity shares at price less
than face value.
However, company may issue shares at discount to creditors
when their debt is converted into equity.
The directors, promoters, and experts who authorized the
false information may face civil and criminal liability. If the prospectus
includes any untrue or misleading statement, these people can be charged with
fraud and punished with imprisonment and a fine.
Private Placement (Sec 42)
Private Placement is a provision under Section 42 of the
Companies Act that enables a company to issue securities to a select group of
people. The number of people should not exceed 50 in a financial year,
excluding qualified institutional buyers and employees under the ESOP scheme.
The company must get prior approval from shareholders through a special
resolution for each offer.
Private placement offer cannot be made to more than 200
people in a financial year. The offer or invitation made to QIB or employees of
the company under the ESOP scheme shall not be considered while calculating the
limit of 200 people. These restrictions apply individually for each kind of
security, i.e., equity share, preference share or debenture.
The company should issue a private placement offer and
application in Form PAS 4, which is serially numbered and addressed
specifically to the person to whom the offer is made. The application shall not
be allowed for use by any other person. The company shall allot the securities
within 60 days from the date of receipt of the application money. If the
company is not able to allot the securities within that period, it shall repay
the application money to the subscribers within 15 days from the expiry of 60
days. The company shall keep monies received on application in a separate bank
account in a scheduled bank and shall not be utilized for any purpose other than
adjustment against allotment of securities or repayment of monies where the
company is unable to allot securities.
A company cannot release any public advertisements or
utilize any media, marketing or distribution channels or agents to inform the
public at large about such an issue. The company shall file with the Registrar
of Companies (ROC) a return of allotment within 30 days from the date of
allotment in PAS 3 + Fees, including a complete list of all allottees, with
their full names, addresses, number of securities allotted and such other
relevant information as may be prescribed.
If a company defaults in filing the return of allotment within the prescribed period, the company, its promoters and directors shall be liable to a penalty for each default of Rs. 1,000/- for each day during which such default continues but not exceeding Rs. 25 lakhs. If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or Rs. 2 Cr, whichever is lower, and the company shall also refund all monies with interest to subscribers within 30 days of the order imposing the penalty.
In conclusion, Private Placement is a useful tool for companies to raise capital from a select group of people. However, companies must follow the provisions of Section 42 of the Companies Act to avoid penalties and other legal consequences.