What is meant by Prospectus of a company? Explain briefly the

What is meant by Prospectus of a company? Explain briefly the contents of a Prospectus issued by a new company under the Companies Act, 2013.

What is a Prospectus ? Write its contents. Is its issue compulsory?

Ans.

This is the third stage (known as capital subscription) of company formation. First two are promotion of the company and incorporation of the company. After obtaining the Certificate of Incorporation from the Registrar, the promoters and directors of public company invite the public to subscribe to its shares or debentures. This is done by issuing of a document which is known as ‘Prospectus’.

MEANING AND DEFINITION OF PROSPECTUS

It is an invitation to the public to buy shares or debentures of a public company or to deposit money with it. Prospectus is like a key-hole through which the investors can have a view of where the company stands, and what it proposes to do in future.

According to Section 2(70) of the Companies Act, 2013, “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 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.”

A prospectus which does not contain complete particulars of the quantum or price of the securities is called red-herring prospectus.

A prospectus in respect of which the securities or class of securities contained therein are issued for subscription over a certain period without issuing further prospectus is called shelf prospectus.

IS ISSUE OF A PROSPECTUS COMPULSORY?

Issue of a prospectus is not necessary for every company. Generally private limited companies are exempted to issue a prospectus. Hence they are not required to issue a prospectus.

Prospectus is necessary when a public limited company makes an invitation to the general public to offer for subscription to shares or debentures. It can be said that where promoters and directors need to collect money from public by issuing shares or debentures of the company, they must issue a prospectus.

According to Section 26 of the Companies Act, 2013, a public company is not required to issue a prospectus in the following cases:

1. When shares or debentures are being issued to the existing shareholders or debenture holders.

2. When the shares and debentures to be allotted are similar to the current shares and debentures that are being traded in a recognized stock exchange.

3. When the allotment of shares and debentures is not permissible.

4. When the invitation is to some person who has a contract for underwriting.

CONTENTS OF A PROSPECTUS

Prospectus is the only window through which the prospective investors can look into the soundness of the company’s project or venture. The Companies Act intends to secure the fullest disclosure of all material and essential particulars in a prospectus.

POINTS TO BE SPECIFIED

A prospectus must contain at least following particulars to disclose matters specified in Part 1 of Chapter III and for private placement, compliance with the provisions of Part II of the Act is required.

1. Company’s name and address of registered office,

2. The main objects of the company,

3. The names, addresses etc. of company promoters and their background,

4. The names addresses and occupation of managers, Managing Director and other directors,

5. The size of present issue giving separately reservation for preferential allotment to promoters and other,

6. The name and address of the company secretary, legal advisor, auditors, lead managers, brokers and brokers to the issue,

7. The name and address of trustee under debenture trust deed,

8. The date of opening and closing of the subscription list and the date of earliest issue,

9. Consent of directors, auditors, solicitors, managers to the issue, brokers to the company, brokers to the issue,

10. Contents of articles or any contract relating to the appointment of managing director, manager, the remuneration payable to them,

11. The amount payable on applications and allotment of each share,

12. The procedure and time schedule for allotment and issue of certificate,

13. The rights, privileges and restriction attained to several classes of shares,

14. The names of Regional Stock Exchange and other stock exchanges, where application has been made for listing of present issue,

15. The names and addresses of the underwriters, underwritten amount, underwriting commission and declaration by Board of Directors that the underwriters have sufficient resources to meet their obligation,

16. The material details about project, its location, plant and machinery, technology, process etc,

17. The nature of product/products,

18. Future prospectus – expected capacity, utilization,

19. Stock exchange quotations,

20. The particulars of previous public issues made during last three years,

21. The particulars of default, if any,

22. The particulars of outstanding litigation,

23. Management perception of risk factors,..

24. The disclosure of credit rating obtained from CRISIL,

25. Expenses of the issue,

26. Particulars of any property to be acquired by the company,

27. Amount of benefit paid or given within two preceding years to any promoter or officer of the company,

28. Particulars of any property acquired within two preceding years in which any director or promoter was interested,

29. Particulars of the length during which the business has been carried on by the company,

30. Particulars of any revaluation of the assets of the company,

31. A reasonable time and place for keeping books of final accounts,

The following are other reports which are required to be set out at appropriate places in a prospectus.

(1) Report by Auditors:

(a) Relating to profits and losses, assets and liabilities of the company,’

(b) Relating to the rates of dividends if any paid by the company,

(2) Report by a Chartered Accountant:

(a) If the company proposes to acquire any business, the profits and losses, assets and liabilities of the business,

(b) If the proceeds of the issue are to be applied in the acquisition of shares in any other company.

The prospectus shall comprise a declaration that all relevant provisions of the Companies Act, 2013 and the guidelines issued by the Government have been complied with and no statement is contrary to the provisions of the Companies Act, 2013.