Section 2(70) of the Companies Act, 2013 defines a prospectus. A prospectus is any notification, circular, advertisement, or another document that invites public offers for the subscription or purchase of any securities issued by a corporation.
In this law note, we will discuss the three types of prospectus in detail covered under sections 31, 32, and 33 of the Companies Act, 2013.
Types of Prospectus
There are three types of prospectus under the Companies Act, 2013. They are:
Let’s study them one by one.
1. Shelf Prospectus
The term “shelf prospectus” refers to a prospectus in which the securities or classes of securities described in it are offered for subscription to the public without the need for a new prospectus.
(i) Filing of Shelf Prospectus With the Registrar
Section 31 of the Companies Act, 2013 states that any class or classes of company or corporation may submit a shelf prospectus with the Registrar in Form PAS 1, as the Securities and Exchange Board of India (SEBI) may specify by regulations in this regard.
Shelf prospectus is passed with the registrar is Form PAS 1 at the stage:
- Of the initial offer of securities included therein, this shall specify a period of validity of not more than one year, beginning on the date of the first offer of securities under such prospectus.
- No further prospectus is necessary for a second or subsequent offer of such securities made during the validity term of that prospectus.
(ii) Filing of Information Memorandum With the Shelf Prospectus
In case any company is filing a shelf prospectus, it is also required to submit an information memorandum which shall contain all the material facts, new charges created, variation in the company’s financial position that took place between the first or previous offer of securities, and such other changes as may be prescribed.
All these things shall be filed with the Registrar in Form PAS 2 before the issuance of a second or subsequent sale of securities under the shelf prospectus within the prescribed period.
(iii) Memorandum Together With the Shelf Prospectus Shall Be Deemed to Be a Prospectus
Whenever an offer of securities is made, an information memorandum has to be filed with such memorandum along with the shelf prospectus, which will be deemed to be a prospectus.
2. Red Herring Prospectus
The term “red herring prospectus” refers to a prospectus that does not disclose complete details about the quantity or price of the securities it contains. The issuing of a red herring prospectus by a company is dealt with in section 32 of the Companies Act.
(i) Issue a Red Herring Prospectus Before Issuing a Prospectus
Before issuing a prospectus, a corporation planning to make an offer of securities may issue a red herring prospectus.
(ii) Filing With the Registrar
A company that intends to release a red herring prospectus must file it with the Registrar for at least three days before the subscription list and open offer.
(iii) Same Obligation
The same requirements apply to a red herring prospectus as that of a prospectus, and any differences between the red herring prospectus and a prospectus must be highlighted as differences in the prospectus.
(iv) After the Offer Is Closed, the Registrar and Sebi Must File a Red Herring Prospectus
The prospectus indicating the entire capital raised, whether by debtor share capital or other means, as well as the closing price of securities, or any other details not included in the red herring prospectus, shall be filed with the Registrar and the Securities and Exchange Board of India upon the closing of the offer of securities under this section.
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3. Abridged Prospectus
It refers to a memorandum that contains the main elements of a prospectus as required by the Securities and Exchange Board of India through its rules.
Section 33 deals with “abridged” prospectuses, which are defined as “brief or edited prospectus in the prescribed manner that includes the securities application form.”
The majority of you have probably seen the physical application form for securities applications with fine print and thought that who cares to read small text. You are correct to the extent, but the high-net-worth individuals (HNIs) and institutional investors read the whole prospectus in detail. However, to fill any information gaps for small investors, the Act includes provisions for an abbreviated prospectus, even though they are not required.
Abridged Prospectus – Issue of Application Forms for Securities
As per section 33(1) of the Companies Act, 2013, no form of application for purchasing any of a company’s stocks shall be issued unless it is accompanied by an abridged prospectus.
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