Matters to be Stated in Prospectus

Introduction:

A Prospectus is a document issued by the company inviting the public and investors for the subscription or purchase of any securities of a company. The prospectus describes the company’s stocks, bonds, and other types of securities offered by the company. A prospectus is always accompanied by the company’s performance history and financial data. The purpose of include such information with the prospectus is to ensure that investors are adequately informed about the company’s history and general performance and that they do not fall prey to investing in a terrible company.

Definition of Prospectus

Section 2(70) of the Companies Act, 2013 defines prospectus as, “A prospectus means any document described or issued as a prospectus and includes a red herring prospectus referred to in Section 32 or shelf prospectus referred to in Section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”

The prospectus has to be issued after the incorporation of the company. Matters to be stated in the prospectus is explained under Section 26 of the companies act, 2013.

A prospectus is not just an advertisement, it may be circular or even notice.  A document shall be called a prospectus if it meets two of the following criteria:

1. It invites subscription to, or purchase of, shares or debentures or any other security of a body corporate.
2. The invitation is made to the public.

Types of Prospectus Under the Companies Act, 2013

Abridged Prospectus

Section 2(1) of the act deals with the Abridged Prospectus. It is a memorandum, containing all salient features of the prospectus as specified by the Security Exchange Board of India. An abridged prospectus contains all the information in brief, which gives a summary to the investor to make further decisions.

Deemed Prospectus

When a company allows or agrees to allot any securities of the company, the document is considered a deemed prospectus via which the offer is made to investors or the public. Any document that the company offers the sale of any securities to the public is deemed a prospectus by implication of law. Section 25(1) of the act deals with the deemed prospectus.

Shelf Prospectus

A company can issue more than one issue from a single document, that document is known as a shelf prospectus. Moreover, Banks and Financial institutions usually issue it. There is no need to file a new prospectus for each issue if the company has already filed one with the Registrar of Companies. This type of prospectus has a validity of up to one year. Section 31 of the Act deals with the Shelf Prospectus.

Red Herring Prospectus

A prospectus that doesn’t include complete information of the quantum or price of the securities included therein. It is not the final prospectus, the company can update it several times before the final issue. Section 32 of the Act deals with the Red Herring Prospectus.

Contents of a Prospectus

Section 26 of the Companies Act, 2013 deals with the matters to be stated in the prospectus.

Information to be Given and Reports to be Set Out in a Prospectus

According to Section 26 of the Companies Act, 2013, as amended by the Companies (Amendment) Act, 2017 requires a prospectus must be dated and signed and it must include such information and set out reports on financial information as may be prescribed by the Security and Exchange Board in consultation with the Central Government. However, until the Securities and Exchange Board prescribes the information and reports on financial information under Sub-Section (1) of Section 26, the information to be disclosed, in this regard, shall be as per the regulations made by the Securities and Exchange Board under the Security and Exchange Board of India Act, 1992.

Security and Exchange Board of India Regulations Relating to the Prospectus

“Offer document” means prospectus and includes any such document or advertisement whereby the subscription to debt securities are invited by the issuer from the public.[1]The offer document must contain all material information that is true and adequate so as to enable the investors to make an informed decision on the investments. In re M.K. Sreenivasan case,[2] the court held that even if every word in the prospectus is correct, the absence of material facts could make it fraudulent. It should be read in its entirety to assess its impact. It is not sufficient if the prospectus mentions the contracts and invites the prospective shareholder to inquire about their contents. Sometimes half-truths are no better than outright lies.

In Rex v. Kylsant,[3] Court held that every statement made in the company’s prospectus should be true. The rates of dividends paid for a number of years were published in one of the statements. However, dividends were paid out of realised capital earnings rather than trading profits. This crucial information was kept hidden. The prospectus was found to be incorrect in material particulars, and Lord Kylsant, the managing director and chairman, was found guilty of fraud.

The offer document is called a prospectus in case of a public issue and a letter of offer in case of a rights issue.

The offer document shall contain the information and statements specified in Part A of Schedule VI of Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

1. Name of the company, its logo, date and place of incorporation, corporate identity number, telephone number, address of its registered and corporate offices, website address and e-mail address.
2. Nature, number and price of specified securities offered, type of issuance(book built or fixed price) and issue size.
3. Name of the promoter, details of the issuer or any of its promoters or directors being a wilful defaulter.
4. Clause on “General Risk”.
5. Clause on “Issuer’s Absolute Responsibility”.
6. Names, logos and addresses of all the lead manager(s) with their titles who have signed the due diligence certificate and filed the letter of offer with the board, along with their telephone numbers, website address and e-mail address.
7. Name and logo and address of the registrar to the issue, along with its telephone number, website address and e-mail address.
8. Issue schedule (i.e., Date of opening of the issue and closing of the issue).
9. Name(s) of stock exchanges where the specified securities are listed and the details of their in-principle approval for listing obtained from these stock exchange(s).
10. Offer document summary.
11. Risk factors.
12. General information about the company and capital structure of the company.
13. Particulars of the issue: It contains Objects of the issue, Requirements of funds, Funding plan (Means of finance), information about financial partners and strategic partners of the project, Appraisal, Schedule of implementation, Deployment of funds, Sources of financing of funds already deployed, Deployment of balance funds, Interim use of funds, Expenses of the issue, Basis for issue price, Tax benefits.
14. Details of business of the company: It contains Industry overview and Business overview, History and corporate structure of the issuer, Shareholders’ agreements and other agreements, Management (details of Board of directors and senior management), Corporate Governance, Key managerial personnel, Promoters, Dividend policy.  
15. Financial Information of the issuer: It contains the restated financial information of the issuer, other financial information, Management discussion and the analysis of financial condition and result of the operation and capitalisation statement.
16. Financial information of the issuer in further public offers.
17. Legal and other information: It contains Outstanding litigation and material developments, government approvals.
18. Information with respect to group companies.
19. Other regulatory and statutory disclosures.
20. Offering information: It contains terms of the issue and issue procedure.
21. Undertaking by the issuer in connection with the issue.
22. Utilization of issue proceeds.
23. Restrictions on foreign ownership of Indian securities, if any.
24. Description of equity shares and terms of the Articles of Association.
25. Declaration by the issuer.

Declaration

Section 26(1)(c) of the Companies Act, 2013 deals with the declaration. The prospectus includes a declaration regarding compliance with the provisions of the companies act, 2013 and a statement to the effect that nothing in the prospectus is contrary to the provisions of Companies Act, 2013, the Securities Contracts (Regulations) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder.  

Statement of an Expert

Section 26(5) of the Companies Act, 2013 deals with the statement of an expert. A prospectus may contain a statement purporting to be made an expert. The term  “expert” includes an engineer, a company secretary, a valuer, a cost accountant, a charted accountant and any other person who has the authority to issue a certificate in pursuance of law. The reports of an expert included if:

1. Such an expert is a person who is not and has not been involved in the formation or promotion or management of the company. 
2. The expert has to give his written consent to the issue of prospectus and has not withdrawn his consent until the prospectus is delivered to the Registrar for filing.
3. A statement that he has given and not withdrawn his consent thereto is included in the prospectus

Other Matters

The prospectus must also include any other information and reports that may be prescribed. Prospectus issued under Section 26(1), shall contain a statement that a copy has been delivered to the Registrar of Companies and the list of documents submitted to the Registrar of Companies on the face of the prospectus.[4]

Exception

Section 26(2) deals with the exception of Section 26(1). The requirements of Section 26(1) with regard to the contents, do not apply to: 

Rights Issue

The issue to existing members or debenture holders of a company, of a prospectus or form of application relating to shares in or debentures of the company, regardless of an applicant has a right to relinquish the shares in pursuit of any other person or not.

Shares/Debentures Uniform in all Respects

Section 26(1) does not apply to the issuance of a prospectus or form an application relating to shares or debentures that are or are to be, in all respects of previously issued shares or debentures and for the time being, dealt in or quoted on a recognized stock exchange.

Penalty for Non-Compliance

Section 26(9) deals with penalty for non-compliance of Section 26:

-The company shall be punishable with a fine which shall not be less than fifty thousand rupees but which extend to three lakh rupees.
-For every person who is knowingly a party to issue of such prospectus shall be punishable with fine which shall not be less than fifty thousand rupees but may extend to three lakh rupees.

In the matter of Kerala Housing Finance Ltd (KHFL)[5], Section 26 of the Companies Act, 2013 requires that a company’s prospectus state the matters stated therein, and  Section 26 of the Companies Act, 2013 requires that such prospectus be registered with the Registrar of Companies. KHFL has no evidence on record that KHFL complies with Section 26 of the Companies Act, 2013 in respect of the offer and allotment of equity shares, preference shares, and debentures. As a result, Security Appellate Tribunal believes KHFL is in violation of the Companies Act, 2013.

In Pramatha Nath Sanyal v. Kali Kumar Dutt[6], an advertisement was inserted in the newspaper stating “some shares are still available for sale pursuant to the terms of the company’s prospectus, which can be received on application”.This was considered a prospectus because it solicited the public to buy shares. As a result, the directors were penalised for failing to file a copy of the agreement with the Registrar of Companies.

Limitation to Issue Prospectus

Prospectus shall not be valid if it is issued more than 90 days after the date on which a copy thereof is delivered to the Registrar of Companies.[7]

Conclusion

The prospectus is to be issued after the incorporation of the company. The company issue prospectus with the intention of raising share capital by issuing shares or debentures of the company. The prospectus contains information about the company and financial information etc., which is helpful to the investors for making an investment decision. Prospectus plays a pivotal role in the process of floatation.

References:

1. Dr. G.K. Kapoor and Dr. Sanjay Dhamija, Company Law and Practice (Edition 24, 2019).
2. Pratik Saravi, Information to be stated in the Prospectus of a Company(16 July,2021, 01:25 PM )
3. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

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Other Sources:

[1]Regulation 2(j) of Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008.

[2](1944) 14 Comp. Cas. 193 (Mad).

[3][1932] 1 K.B. 422.

[4]Section 26(6) of Companies Act,2013.

[5]SAT Appeal No. 334/2017

[6]AIR 1925 Cal 714.

[7]Section 26(8) of the Companies Act,2013.