Types of Prospectus under Company Law
Types of Prospectus Under Company Law
What is a Prospectus?
A prospectus is a formal legal document issued by a company inviting the public to subscribe to its shares or debentures. It contains detailed information about the company’s business, financials, risks, and terms of the offer, enabling investors to make informed decisions.
Under the Companies Act, 2013, and earlier under the Companies Act, 1956, a prospectus must comply with statutory requirements.
Types of Prospectus
Broadly, prospectuses can be categorized as follows:
1. Standard Prospectus (Statutory Prospectus)
This is the most common type.
Issued by companies inviting the public to subscribe for shares or debentures.
Contains all prescribed information, disclosures, and statements as required by law.
Must be filed with the Registrar of Companies and made available to the public.
Usually accompanies Initial Public Offerings (IPOs) or further issues.
2. Deemed Prospectus
Arises when shares are allotted without issuing a formal prospectus.
For example, when shares are allotted on basis of an application form, pamphlet, circular, or other documents that contain an invitation or offer to subscribe.
Section 2(70) of the Companies Act defines "prospectus" to include any such document deemed to be a prospectus.
Courts have held such documents to have the same legal consequences as a formal prospectus.
Example:
A pamphlet circulated to the public that invites subscription to shares, even if not labeled “prospectus,” can be treated as a deemed prospectus.
3. Red Herring Prospectus
A preliminary prospectus issued before the final terms of the issue are settled.
Contains most details about the company and the issue but excludes details of price or number of shares.
It is called "Red Herring" because the cover page usually has a red statement highlighting the omission of price details.
Used to generate investor interest and for regulatory approvals.
4. Shelf Prospectus
Issued by companies that intend to make multiple issues of securities over a period.
It contains information about the company and securities offered but does not specify all details about the issue.
After filing a shelf prospectus, companies can issue prospectuses for subsequent issues referencing the shelf prospectus without filing the full details each time.
Helps reduce regulatory compliance and expedite capital raising.
5. Deemed Prospectus (also called "Statement in lieu of Prospectus")
Issued when a company does not issue a formal prospectus but accepts deposits or subscribes shares.
The statement in lieu of prospectus is a document containing information about the company, offered to shareholders.
Typically used in private placements or small issues exempt from issuing a formal prospectus.
Has legal consequences similar to a prospectus.
6. Abridged Prospectus
A summary of the main prospectus.
It contains key information necessary for investors, such as company details, objects of the issue, risks, financial summary.
Required to be issued along with or before the full prospectus to provide investors with a quick overview.
Relevant Case Laws
1. R.M.D. Chamarbaugwala v. Union of India, AIR 1957 SC 628
The Supreme Court held that the prospectus must disclose all material facts to prevent misrepresentation.
Even statements made outside a formal prospectus but forming part of invitation to the public can be treated as prospectus (Deemed Prospectus).
2. K.K. Verma v. Union of India, AIR 1959 SC 126
Clarified that any document inviting subscription to shares, whether or not labeled prospectus, can be treated as a prospectus if it satisfies the statutory definition.
This protects investors from misrepresentation in all forms of invitations.
3. New India Publicity Syndicate v. Kedar Nath Bhattacharya, AIR 1968 SC 183
Emphasized that the contents of a prospectus must be true and not misleading.
Liability arises for false statements even in promotional materials considered deemed prospectus.
4. Sekhon Bros. (P) Ltd. v. Union of India, AIR 1962 SC 474
Discussed the legal consequences and liabilities attached to a prospectus and deemed prospectus under the Companies Act.
Summary Table
| Type of Prospectus | Key Features | When Used |
|---|---|---|
| Standard Prospectus | Formal document with full details; filed with RoC | Public issues of shares/debentures |
| Deemed Prospectus | Any document inviting subscription treated as prospectus | Pamphlets, circulars, application forms |
| Red Herring Prospectus | Preliminary; price and quantity details excluded | IPOs before finalizing issue details |
| Shelf Prospectus | Covers multiple issues over time | Companies issuing securities multiple times |
| Statement in lieu of Prospectus | Used in private placements, contains company info | Small issues or exemptions |
| Abridged Prospectus | Summary of main prospectus | Issued with/preceding full prospectus |
Conclusion
The prospectus is a critical document in securities issuance, aimed at protecting investors.
Its different types serve various practical and regulatory purposes.
The law recognizes that any document inviting investment can be treated as a prospectus or deemed prospectus to ensure investor protection.
The judiciary consistently upholds the principle of full disclosure and truthfulness in all such documents.
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