Prospectus (share markets)

A Prospectus in the context of share markets is a formal legal document issued by a company that intends to offer its securities—such as shares, debentures, or bonds—to the public. It provides detailed information about the company’s operations, financial position, management, objectives of the issue, and the terms of the securities being offered.
A prospectus is an essential instrument of transparency and investor protection, enabling potential investors to make informed decisions before subscribing to a public issue of shares. It is a statutory requirement under the Companies Act, 2013, and regulated by the Securities and Exchange Board of India (SEBI).

Meaning and Definition

A prospectus is a notice, circular, advertisement, or other document inviting the public to subscribe or purchase shares, debentures, or other securities of a company.
According to Section 2(70) of the Companies Act, 2013,

“A prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement, or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”

Thus, a prospectus serves as an invitation to invest in a company’s securities, backed by full disclosure of material facts and risk factors.

Objectives of Issuing a Prospectus

• To inform potential investors about the details of the company and the nature of the securities offered.
• To ensure transparency and prevent misleading or fraudulent practices.
• To comply with legal and regulatory requirements under the Companies Act and SEBI guidelines.
• To enable investors to assess the risk and return associated with the investment.

Contents of a Prospectus

As prescribed under Section 26 of the Companies Act, 2013 and SEBI (Issue of Capital and Disclosure Requirements) Regulations, a prospectus must contain comprehensive information, including:
1. General Information

• Name, address, and registration details of the company.
• Names of directors, company secretary, auditors, bankers, and legal advisors.
• Date and authority of issue approval by the Board of Directors.

2. Capital Structure

• Authorised, issued, subscribed, and paid-up share capital.
• Details of the new issue (number and type of shares or debentures).
• Offer price and premium, if any.

3. Terms of the Issue

• Opening and closing dates of the subscription.
• Minimum subscription amount required.
• Allotment procedures and refund policies.

4. Objectives of the Issue

• The purpose for which the funds are being raised (e.g., expansion, modernisation, debt repayment, or working capital).
• Estimated cost of the project and means of finance.

5. Financial Information

• Audited financial statements of the last five years.
• Profit and loss account and balance sheet summaries.
• Cash flow position and dividend record.

6. Management Details

• Background, experience, and remuneration of directors and key managerial personnel.
• Management structure and corporate governance practices.

7. Risk Factors

• Disclosure of all potential risks that may affect the company or investor returns, such as market risks, regulatory changes, or business uncertainties.

8. Underwriting and Brokerage

• Names of underwriters, their commission, and arrangements for underwriting.
• Details of brokers or agents involved in the issue.

9. Declaration

• A statement by the Board of Directors confirming the accuracy and completeness of the information provided.

Types of Prospectus

1. Ordinary Prospectus (Full Prospectus): The standard form of prospectus issued to invite the public to subscribe to a company’s shares or debentures. It contains all mandatory disclosures under the law.
2. Abridged Prospectus: A concise version of the full prospectus, containing key highlights of the offer. It must accompany every application form for purchasing securities. Its purpose is to provide investors with essential information in a simplified format.
3. Shelf Prospectus: Issued by companies raising funds through multiple issues over a period of time (such as public financial institutions or banks). It remains valid for one year from the date of the first offer.

• Once filed with SEBI, the company need not issue a fresh prospectus for each subsequent issue within that period; only an Information Memorandum updating financial details is required.

4. Red Herring Prospectus: Issued before the determination of the final issue price. It contains preliminary information about the company and the issue but omits details such as price and number of shares.

• Commonly used in Book Building processes during Initial Public Offerings (IPOs).
• After price discovery, the final prospectus is filed with SEBI and the Registrar of Companies.

5. Deemed Prospectus: If a company allots or agrees to allot securities to an intermediary (like an issuing house or merchant banker) with the intention that they will be offered to the public, any document by which the offer is made is considered a deemed prospectus under Section 25 of the Companies Act, 2013.

Legal Requirements and Regulations

• Filing: Every prospectus must be filed with the Registrar of Companies (ROC) before its publication.
• SEBI Approval: Public issues must comply with SEBI (ICDR) Regulations, 2018.
• Expert’s Consent: If expert opinions (e.g., valuations or legal opinions) are included, written consent must be obtained.
• Minimum Subscription: The company must receive a minimum subscription amount (usually 90% of the issue) before allotting shares.
• Misstatement Liability: False or misleading statements in a prospectus can lead to civil and criminal liability under Sections 34–36 of the Companies Act, 2013.

Importance of a Prospectus

For Investors:

• Provides vital information for informed investment decisions.
• Discloses potential risks, enabling better risk assessment.
• Enhances investor protection through mandatory legal disclosures.

For the Company:

• Helps attract capital from the public by establishing credibility.
• Fulfils legal compliance and regulatory transparency.
• Builds corporate image and investor trust.

For Regulators:

• Facilitates monitoring of capital market activities.
• Ensures that companies follow fair practices and protect public interest.

Liabilities for Misstatements in a Prospectus

1. Civil Liability (Section 35): Directors, promoters, and experts are liable to compensate investors for any loss resulting from untrue or misleading statements.
2. Criminal Liability (Section 34): Knowingly including false information or omitting material facts constitutes a criminal offence punishable by imprisonment (up to 10 years) and fines.
3. Withdrawal or Rescission: Investors can withdraw their subscription or rescind the contract if material misrepresentation is discovered.

Example

When Life Insurance Corporation of India (LIC) launched its IPO in 2022, it issued a Red Herring Prospectus outlining:

• The objectives of the issue (disinvestment by the government).
• Company’s financial performance and asset base.
• Risk factors related to market volatility and regulatory changes.
• Price band and offer structure after book-building.