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Prospectus

A prospectus is a crucial legal document for market participants and investors. It provides comprehensive information about a financial product, enabling prospective customers to make informed decisions. The content and importance of a prospectus can vary depending on the type of financial product it pertains to, such as initial public offerings (IPOs), insurance products, investment funds, or exchange-traded funds (ETFs).

Importance of Prospectus

The significance of a prospectus lies in its ability to offer transparency and accountability in the financial market:

  1. Informing the Public: A prospectus serves as a means to notify the public about the issuance of securities or financial products. It is a legal requirement to supply this document to potential investors.

  2. Recording Terms: It helps put the company on record with regard to the terms of the issuance and the allotment process, ensuring transparency in the transaction.

  3. Accountability: By providing detailed information about the company's business, financial statements, and other relevant details, a prospectus establishes accountability on the part of the directors and promoters of the company.

Content of Prospectus

A typical prospectus includes the following key details:

  • Company Information: This section contains the company's name, registered office address, and its objectives.

  • Signatories and Shareholding: Details of the individuals who have signed the Memorandum and their shareholding particulars are outlined.

  • Directors: Information about the company's directors, including their backgrounds and qualifications.

  • Shares Offered: The prospectus specifies the type of shares offered, the class of the issue, and voting rights associated with these shares.

  • Financial Details: This section provides information on the minimum subscription amount, amounts payable on application, allotment, and further calls.

  • Underwriters and Auditors: The prospectus mentions the underwriters responsible for the issue and the auditors who have assessed the company's financial reports.

  • Audited Reports: Audited reports regarding the company's profit and loss are included to provide investors with insights into the financial health of the company.

Types of Prospectus

Types of prospectus

  1. Deemed Prospectus: Under the Companies Act, 2013, Section 25(1), any document that allows or agrees to allot securities is considered a deemed prospectus. This implies that any document offering securities to the public is treated as a prospectus by law.

  2. Red Herring Prospectus: A red herring prospectus is filed by a company planning to raise funds through an initial public offering (IPO). Unlike a full prospectus, it does not disclose the final price of securities or the exact number of securities to be issued. It must be submitted to the regulator at least three days before the offer and subscription list opens.

  3. Shelf Prospectus: As per Section 31 of the Companies Act, 2013, a shelf prospectus is issued when a company or public financial institution offers securities to the public. It has a validity period of up to one year from the commencement of the first offer, and no further prospectus is required for subsequent offers. An information memorandum must accompany the shelf prospectus during filing.

  4. Abridged Prospectus: An abridged prospectus is a concise memorandum that contains salient features of the prospectus, as specified by SEBI (Securities and Exchange Board of India). It offers a summary of essential information to aid investors in making decisions and must be provided when distributing application forms for the purchase of securities.

Red Herring Prospectus (RHP)

A Red Herring Prospectus, also known as an offer document, is filed by a company with the Securities and Exchange Board of India (SEBI) when it plans to raise funds by selling shares to the public through an IPO. The RHP provides detailed insights into the company's business operations, financials, objectives for raising funds, and how the raised capital will be utilized. It also outlines potential risks for investors.

Once the RHP is submitted to SEBI, the issuing company must make a public announcement through at least one newspaper, which can be in Hindi, English, or a regional language, to inform the public about the upcoming IPO and its details.

The prospectus, in its various forms, plays a pivotal role in ensuring transparency, accountability, and informed decision-making in the financial markets, benefiting both issuers and investors.

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