What is Prospectus? Contents, Reports, Declaration

What is Prospectus?

A prospectus is a document, notice, circular, or advertisement issued for inviting public to subscribe to the shares or debentures of a company.

After getting the company incorporated, promoters will raise finances. The public is invited to purchase shares and debentures of the company through an advertisement. A document containing detailed information about the company and an invitation to the public subscribing to the share capital and debentures is issued. This document is called ‘prospectus’.

Private companies cannot issue a prospectus because they are strictly prohibited from inviting the public to subscribe to their shares. Only public companies can issue a prospectus.

A prospectus should have the following essentials:

• There must be an invitation offering to the public.
  
  
• The invitation must be made on behalf of the company or intended company.
  
  
• The invitation must be to subscribe or purchase.
  
  
• The invitation must relate to shares or debentures.

Section 2(70) of the Companies Act, 2013 defines a prospectus as:

“Any document described or issued as a prospectus and includes a red herring prospectus referred to in Sec. 32 or shelf prospectus referred to in Sec. 31 or any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate.”

A prospectus must be filed with the Registrar of Companies before it is issued to the public. The issue of prospectus is essential when the company wishes the public to purchase its shares or debentures.

A prospectus brings to the notice of the public that a new company has been formed. The company tries to convince the public that it offers best opportunity for their investment. A prospectus outlines in detail the terms and conditions on which the shares or debentures have been offered to the public. Every prospectus contains an application form on which an intending investor can apply for the purchase of shares or debentures.

A company must get minimum subscription within 120 days from the issue of prospectus. If it fails to obtain minimum subscription from the members of the public within the specified period, then the amount already received from public is returned. The company cannot get a certificate of commencement of business because the public is not interested in that company.

Legal Requirements in Relation to a Prospectus

Dating of prospectus (Section 26)

A prospectus issued by a company must be dated. Section 26 further provides that the date on the prospectus shall, unless contrary is provide, be taken as the date of the publication of the prospectus. This ensures a prima facie evidence of the date of its publication. However, this evidence may be rebutted by a contrary evidence.

Registration of prospectus (Section 27(7))

• Nature: A prospectus must not be issued unless a copy thereof has been delivered to the Registrar for registration.
  
  
• Time Limit: Registration must be made on or before the publication of the prospectus.
  
  
• Signatures: The copy sent for registration must be signed by every person who is named in the prospectus as a director or a proposed director of the company or by his agent duly authorized in writing.
  
  
• Date of issue of prospectus: The date of issue of prospectus is the date on which the prospectus first appears as a newspaper advertisement.
  
  
• Contents: Prospectus should
  
  
  • (a) State that a Copy thereof has been delivered to ROC for registration,
  • (b) Specify documents endorsed or attached to the copy so delivered, and
  • (c) Contain an endorsement that the consent of Experts has been obtained.
    
    
• Enclosures
  
  • Consent of the Expert to the Issue of Prospectus, where it contains a Report by an Expert,
    
    
  • Copy of every other material contract. However, the following need not be enclosed—
    
    
    • Contract entered into in ordinary course of business, or
    • Contract entered into more than 2 years before the date of Prospectus.
    
    
  • Written statement from Auditors relating to the adjustments to figures of abridged Financial Statements along with reasons there for.
    
    
  • Consent of every person named therein as Auditor, Legal Adviser, Attorney, Solicitor, Banker or Broker of the Company/Intended Company to act in that capacity.
    
    
• Registration: The prospectus must be issued within ninety days of its registration. If it is issued say 91 days after, it shall be deemed to be a prospectus a copy of which has not been delivered for registration.
  
  
• Penalty for non-registration of prospectus: If a prospectus is issued without a copy thereof being delivered to the Registrar for registration or without the required documents or consent attached thereto, the company and every person knowingly party to the issue of the prospectus, shall be punishable with fine which may extend to ₹50000 which may extend to rupees three lakhs.
  
  
• Opening of subscription list: Where a prospectus has been issued, no allotment of any shares shall be made until
  
  
  • The beginning of the 5th day after prospectus is first issued; or
    
    
  • Such later time as may be specified in the prospectus or
    
    
  • The beginning of the 5th day after public notice is given. Such day is referred to as ‘date of opening of subscription list’.

Disclosures to be made (Section 26)

Section 26 of the Companies Act requires every prospectus to disclose the matters specified in Schedule II of the Act. The Schedule is divided into three parts.

When Registrar can Refuse registration (Sec. 26)

The Registrar can refuse to register a prospectus if:

• it is not dated;
  
  
• it does not comply with the requirements of as to the matters and reports to be set out in it;
  
  
• it contains statements or reports of experts engaged or interested in the formation or promotion or management of the company;
  
  
• it includes a statement purported to be made by an expert without a statement that he has given and has not withdrawn his consent to the manner of its inclusion in the prospectus;
  
  
  
• it does not contain the consent in writing of directors and copy of the documents has not been filed or does not comply with the provisions with regard to the fact that a copy of it has been filed with the Registrar;
  
  
• it is not accompanied by the consent in writing of the auditor, legal adviser, solicitor, banker or broker of the company if named in the prospectus to act in that capacity.

Contents of Prospectus

A prospectus is the most important document since the intending investors base their decisions on the facts and figures furnished in the prospectus. It is the window through which a prospective investor can look into the soundness of a company’s venture.

In order to protect the interests of the investing public against the frauds of the promoters, the Companies Act requires every company issuing a prospectus to observe a large number of regulations. Failure to observe them is made punishable with fine or imprisonment or both. Hence, utmost care should be taken in drafting a prospectus.

Section 26 of Companies Act, 2013 read with Rule-3 of Companies (Prospectus and Allotment of Securities) Rules, 2014

Under Section 26 and Rule 3, every prospectus shall be dated and signed and shall contain the following matters:

Matters in Prospectus

• Names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may be prescribed;
  
  
• Dates of the opening and closing of the issue, and declaration about the issue of allotment letters and refunds within the prescribed time;
  
  
• A statement by the Board of Directors about the separate bank account where all monies received out of the issue are to be transferred and disclosure of details of all monies including utilised and unutilised monies out of the previous issue in the prescribed manner;
  
  
• Details about underwriting of the issue;
  
  
• Consent of the directors, auditors, bankers to the issue, expert’s opinion, if any, and of such other persons, as may be prescribed;
  
  
• The authority for the issue and the details of the resolution passed therefore;
  
  
• Procedure and time schedule for allotment and issue of securities;
  
  
• Capital structure of the company in the prescribed manner;
  
  
• Main objects of public offer, terms of the present issue and such other particulars as may be prescribed;
  
  
• Main objects and present business of the company and its location, schedule of implementation of the project;
  
  
• Particulars relating to—
  
  • Management perception of risk factors specific to the project; (b) Gestation period of the project;
    
    
  • Extent of progress made in the project;
    
    
  • Deadlines for completion of the project; and
    
    
  • Any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company;
    
    
• Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash;
  
  
• Details of directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company as may be prescribed; and
  
  
• Disclosures in such manner as may be prescribed about sources of promoter’s contribution;

Reports in Prospectus

The prospectus must set out the following reports for the purposes of the financial information, namely:

• Reports by the auditors of the company with respect to its profits and losses and assets and liabilities and such other matters as may be prescribed;
  
  
• Reports relating to profits and losses for each of the five financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries and in such manner as may be prescribed;
  
  In case of a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall set out the reports relating to profits and losses for each of the financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries;
  
  
• Reports made by the auditors upon the profits and losses of the business of the company for each of the five financial years immediately preceding issue and assets and liabilities of its business on the last date to which the accounts of the business were made up, being a date not more than one hundred and eighty days before the issue of the prospectus:
  
  In case of a company with respect to which a period of five years has not elapsed from the date of incorporation, the prospectus shall set out the reports made by the auditors upon the profits and losses of the business of the company for all financial years from the date of its incorporation, and assets and liabilities of business on the last date before the issue of prospectus; and
  
  
• Reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly.

Declaration

The prospectus shall make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made there under.

The prospectus shall also state such other matters and set out such other reports, as may be prescribed.