Understanding a Prospectus: Definition, Importance, and Its Types

Introduction to Prospectus

Section 2(7) provides that nay document which shall be referred as prospectus is considered as prospectus. A prospectus is issued by a public company. A public company can issue a prospectus and offer its share and debentures. A prospectus is a kind of document which invites shares and debentures of a corporate body.

The private company being small in size they have few shares and debentures. The prospectus is issued on behalf of the promoter. A promoter Is defined under section 2(69) as a person who is acting solely in a professional capacity and who is:

1. A person who is been recognized by the company in the annual return.
2. A person with the authority over a company’s operation.
3. A person under whose directions the board of directors of the company’s works.

Content of the prospectus

The prospectus should mention following details about the company:

1. Name
2. Address
3. Objectives and propose
4. Purpose of issue of prospectus
5. Nature and capital structure of shares
6. Qualification shares
7. Details of preferential shares
8. Renumeration of directors and promoters
9. Date of closing and opening
10. Name and address of the company’s auditor, secretary, banker, and trustee,

Types of prospectus

Red hearing prospectus

Section 32 of the companies Act,2013 talks about the red hearing prospectus. A red hearing prospectus does not give information about the price. It is registered with the registrar at least three days before the subscription list.it is a preliminary prospectus. It is used for a book building process.

Red hearing prospectus have been given under section 32 of the act.  It is a preliminary prospectus, that informs the investors about the potential offering of the company and indicates that a company has filed for an IPO.  It does not mention the actual price, the securities that are offered. But is should mention the amount of the total capital of the company. the closing price of the securities, and other details, as soon as the offer is closed which is not included in the red herring prospectus.

A company that wants to offer the securities to the public can issue this prospectus.

Shelf Prospectus

Section 31 of the Companies Act,2013 regulates the issue of shelf prospectus. It is basically a prospectus that is issued for raising multiple rounds of funds in the form of bonds.

It is issued by the company when it wants to raise the funds like the bonds. SEBI regulated the issue of this prospectus. It is filed by the company with the registrar and he issues it.

Abridged prospectus

An abridged prospectus is memorandum that has the features of the prospectus and has its authority from the SEBI. Section 33 makes it compulsory to issue this prospectus along with application forms for securities.

Deemed prospectus

Section 25 of the act talks about the deemed prospectus. The company issues it so that it don’t have to be follow with the rules and regulations of the SEBI. It is considered as the offer for sale. This is a measure of publicity and not a single method of private communication is involved.