Prospectus under the Companies Act, 2013
1. Introduction
A prospectus is a formal document issued by a company inviting the public to
subscribe to its shares, debentures, or other securities. It acts as an advertisement
and an offer document. It provides necessary financial and non-financial information
about the company to help investors make informed decisions.
2. Meaning
Prospectus is an invitation to the public to invest in a company.
It is not merely an advertisement but a legal document containing disclosures
required by law.
3. Definition under Sec. 2(70), Companies Act, 2013
> "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 subscription or purchase of any securities of a body corporate.
Thus, even advertisements can be treated as a prospectus if they invite investment.
4. Purpose of Prospectus
1. To inform the public about the company’s financial position.
2. To attract investors for raising capital.
3. To ensure transparency in public issues.
4. To prevent fraudulent practices by compelling disclosure.
5. Contents of Prospectus (Sec. 26)
Every prospectus must contain:
Company’s name, registered office & objectives.
Details of directors, managers, and secretaries.
Capital structure (authorized, issued, subscribed).
Terms of present issue (shares/debentures).
Details of past issues, if any.
Reports of auditors and experts.
Minimum subscription amount.
Risk factors.
Declaration of compliance with the Companies Act.
6. Essentials of a Document to be called as Prospectus
1. Invitation to Public – must invite the public to subscribe.
2. Issued by or on behalf of a Company.
3. Nature of Document – must be a formal offer, not just an internal circular.
4. Information regarding Securities – should provide details of shares/debentures.
7. Advertisement of Prospectus (Sec. 30)
Any advertisement of a prospectus must state that a copy of the prospectus has
been filed with the Registrar of Companies (ROC).
It should include only the contents of the memorandum and essential particulars, not
misleading statements.
8. Types of Prospectus
(1) Shelf Prospectus (Sec. 31)
Meaning: A single prospectus for multiple issues over a period of time.
Definition: Issued by a company for more than one issue of securities.
Condition: Valid for 1 year from the date of opening of the first offer; company must
file an Information Memorandum before every subsequent offer.
(2) Red Herring Prospectus (Sec. 32)
Meaning: A prospectus which does not include details of price or quantum of
securities being offered.
Purpose: Allows companies to test the market before deciding final pricing.
Legal Provision: Must be filed with ROC at least 3 days before opening of the
subscription.
Requirement: Final price and quantity to be included later.
Contents: Same as a prospectus except for price and number of securities.
(3) Deemed Prospectus (Sec. 25)
Meaning: If a company allots securities to an intermediary (like an issuing house)
which then offers them to the public, such offer is deemed to be a prospectus issued
by the company.
(4) Abridged Prospectus
Meaning: A summary of the prospectus in a prescribed format.
Legal Provision: Sec. 2(1) & Sec. 33.
Purpose: To provide essential information in a concise form to investors.
Condition: Every application form for shares/debentures must be accompanied by
an abridged prospectus.
9. Process of Filing Prospectus
1. Draft Prospectus prepared.
2. Approval by Board of Directors.
3. Filing with SEBI (for listed companies).
4. Filing with ROC under Sec. 26.
5. Publication and invitation to the public.
10. Golden Rule of Prospectus
> Laid down in New Brunswick & Canada Railway Co. v. Muggeridge (1860).
Essence of Rule:
A company must disclose all material facts honestly and not mislead investors.
"Tell the truth, the whole truth, and nothing but the truth."
11. Liability for Mis-statement in Prospectus
(1) Civil Liability (Sec. 35)
Liability: Persons responsible must compensate for losses.
Persons Liable: Directors, promoters, experts, persons authorizing the issue.
Defences (Sec. 35(1)):
Statement was immaterial.
Believed it to be true.
Withdrawn consent before issue.
(2) Criminal Liability (Sec. 34)
Meaning: If a prospectus contains untrue or misleading statements, it is punishable.
Punishment: Imprisonment 6 months to 10 years and fine up to the amount raised.
Defences:
Statement was immaterial.
Believed on reasonable grounds it was true.
Case Law:
Rex v. Kylsant (1932) → Company director convicted for issuing a misleading
prospectus, though statements were technically true.
13. Conclusion
A prospectus is a powerful tool for raising funds but also a dangerous weapon if
misused. To protect investors, the Companies Act imposes strict rules regarding its
contents, advertisement, filing, and liability for misstatements. Companies must
follow the golden rule of full and honest disclosure to maintain transparency and
trust.
