PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS

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This article is written by Jyoti Yadav of Army Institute of Law, an intern in Legal Vidhiya.

ABSTRACT

“If ‘capital’ is the strength of a company then ‘prospectus’ is the manifestation to provide for that strength.”

In today’s world in order to succeed or to build and to maintain its existence in the market, a company needs huge capital and stability. Prevailing procedure to raise capital for every company is to issue securities which the general public would buy. But on what basis a person would choose to opt for a particular security of a company?

Here comes the role of a ‘prospectus’, a document which gives us a detailed information regarding different kinds of securities and makes it easier for the purchaser to choose or to select. This research aims at understanding the concept of prospectus which is provided under the Companies Act, 2013 and to know its status under the law. Chapter III of the Companies Act, 2013 provides for the idea of prospectus and the contents to be mentioned therein whereas if we look at the notion of statement in lieu of prospectus then we would able to realize that as such no specific section is devoted to it but it can be studied by getting a clarity under the former topic. Further, we would see what other kinds of prospectus are there and what is the difference between prospectus and statement in lieu of prospectus.

KEYWORDS: Prospectus, securities, capital, abridge prospectus, shelf prospectus, red herring prospectus, statement in lieu of prospectus.

INTRODUCTION

When a company chooses to offer its securities for the general public, it is quite a difficult task for the future subscribers to just blindly trust them and subscribe to it. So for a clarity and to make this process easier, a company issues a document prior to or at the time of issue of securities. This document is therefore known as prospectus. On the other hand, statement in lieu of prospectus is a less detailed document than prospectus and is issued when the prospectus cannot be issued. For a better understanding of both the concept let us study them differently so that we will able make out the difference and uses of both the documents.

PROSPECTUS

DEFINITION OF PROSPECTUS

The definition of Prospectus is provided under Section 2(70) of the Companies Act, 2013. It 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.”[1]

CONTENTS OF PROSPECTUS

Section 26 of the Companies Act, 2013 provides for the contents which a prospectus should contain. Following are the matters which should be stated in the prospectus:

DATED AND SIGNED
a prospectus which a public company or any person issues shall bear the date and the signature
shall contain information and reports related to financial information provided by Securities and Exchange Board after consulting State Government.
A declaration that the provisions of this Act has been complied with.[2]
Issuance of prospectus for shares or bonds

The issuance of a prospectus or an application form for shares or bonds to current shareholders or bondholders of the company is pursuant to Section 26(1)(a)(ii). The issuance of prospectus or application forms for transferable securities previously issued, traded or listed on recognized exchange are also exempt from their application. [3]

FILING TO REGISTRAR

Before the date of publication a prospectus shall not be issued unless a copy of the same is filed to the Registrar bearing the signatures of directors or proposed director or Attorney which was duly authorized in this behalf.[4]

STATEMENT BY EXPERT: NOT INCLUDED

A statement allegedly made by an expert cannot be included in in a prospectus prepared in pursuance to Section 26(1) unless the expert person is or was not involved in any kind of management of the company. Along with it the expert has also provided with its written consent without withdrawing it till it reaches to the Registrar.[5]

DOCUMENTS ATTACHED AND VALIDITY OF PROSPECTUS

A prospectus should specify that a prospectus copy is delivered to the Registrar and along with it, it should be specified that any other document was attached which such copy or not.[6] After delivering the copy to the Registrar if within 90 days the prospectus was not issued then it should be considered as invalid.[7]

PUNISHMENT

Where the issuance of prospectus is done by contravening any of the provisions under this Act then the person shall be punished with fine of minimum amount of 50,00 with a maximum limit of 3,00,000 and where someone had the knowledge before issuing such prospectus that it is contravening the provisions of the stated section then also the punishment would remain same.[8]

KINDS OF PROSPECTUS

Under the Companies Act, 2013 basically four types of prospectus are mentioned which are as follows:

DEEMED PROSPECTUS

The Companies Act, 2013 provides for the deemed prospectus under Section 25. A document containing offer for sale of securities which the company allots or agrees for its allotment keeping in mind that such securities shall be offered to the public for sale, such document is known as Deemed prospectus. Also such document shall be signed by at least one half of the partners of the firm and two directors.

If the following conditions are fulfilled it is assumed that the securities wer offered for sale only:

When the allotment by the company is made or they agree for the allotment, the offer for sale of securities shall be made within 6 months,
The whole consideration with regards to those securities have not been received on the date when offer is made.

SHELF PROSPECTUS

Shelf prospectus refers to a prospectus in which securities are not issued at one time but in parts and which does not require any further prospectus with such securities. It is filed with the Registrar during the first offer of the securities. This prospectus shall be valid for a maximum period of one year. Several prospectus is not required for further issuance of securities. When such prospectus is filed, a information memorandum with the following information should be provided with it and that too before the issuance of further offer:

Information regarding any charge created,
Any modification in the financial position, etc.[9]

The above information memorandum along with the shelf prospectus will be deemed to b a prospectus.[10]

RED HERRING PROSPECTUS

Red Herring Prospectus refers to a prospectus which does not provide for the quantum and the price of securities. It is issued before a prospectus is issued and that too before 3 days of the offer and the opening of subscription list.[11]

ABRIDGED PROSPECTUS

It is a kind of prospectus defined under the Companies Act, 2013. It refers to a memorandum mentioning the prominent features of such prospectus which the Securities and Exchange Board can state in any of its regulations.[12]

STATEMENT IN LIEU OF PROSPECTUS

If a public company does not invite the public to subscribe to its stock, but instead seeks to raise funds from the private sector, it does not need to publish a prospectus. In this case, promoters are required to create a draft prospectus, a “statement in lieu of prospectus”. Under the Companies Ordinance, if a public company does not issue a prospectus of incorporation, it must file a statement in lieu of the prospectus with the company register. The Prospectus Replacement Statement is defined as a public document prepared in Schedule Two of the Corporate Regulations by such a corporation that does not issue a prospectus to the Registrar of its preparation prior to the allotment of shares of the Bonds, and be signed by each of the persons named therein”.[13]

This is a statement that the company with a registered capital of makes to the Registrar for registration at least three days before the first allotment of shares or bonds under the following conditions:

if the company does not issue a prospectus; or
When a company publishes a prospectus but has not allotted any of its shares offered for public subscription

The Declaration must be signed in lieu of a prospectus by each person appointed therein as a director or proposed director of the Company. According to Section 69 (1), if the company that is required to publish a prospectus does not comply with this obligation, it cannot allocate any shares. [14]

MATTERS CONTAINED IN THE STATEMENT IN LIEU OF PROSPECTUS

Company Name.
The company’s share capital is divided into ordinary shares and the nominal value of one share.
Description of the proposed activity and prospectus.
Name, address, description and duties of proposed or appointed directors, officers, delegated counsel and company secretaries.
Provisions for the appointment and remuneration of the foregoing corporate representatives.
Voting rights at company meetings.
Number and amount of shares and debentures agreed to be issued.
Names, occupations and addresses of sellers of goods purchased or offered for sale by the company.
Amount to be paid in cash, stocks or bonds to each real estate seller.[15]

DIFFERENCE BETWEEN PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS

BASIS	PROSPECTUS	STATEMENT IN LIEU OF PROSPECTUS
Object	A prospectus provides for the information regarding the securities of a company.	It is used in some particular situation when the other prospectus cannot be used.
Matters contained	A prospectus provides with a detailed information related to the company.	It contains less detailed information as compared to the prospectus.
Issue	A prospectus is generally issued by a company which is newly going public or offering new securities.	It is issued by a company which is already trading in the market.
Approval	It requires approval from securities commission.	No such approval is required here to issue statement in lieu of prospectus.
Distribution	It is generally distributed to the potential investors.	It is not distributed very widely.
Time	Usually it is prepared at the time or before the offering of securities.	It can be prepared or distributed any time.
Use	It is used to gather investment through securities.	It is used for purposes which are not so formal.[16]

CONCLUSION

Therefore, the Companies Act, 2013 is the prominent Act which dedicates an entire Chapter to prospectus which helps us to understand its intricacies, how it is issued and what all matters to be contained in it with civil and criminal liability provisions provided under it. Also a prospectus can be of many types as discussed above. Thus it is of prime importance for all the public companies.

[1] S. 2(70), The Companies Act, 2013.

[2] S. 26(1), The Companies Act, 2013.

[3] S. 26(2), The Companies Act, 2013.

[4] S. 26(4), The Companies Act, 2013.

[5] S. 26(5), The Companies Act, 2013.

[6] S. 26(6), The Companies Act, 2013.

[7] S. 26(8), The Companies Act, 2013.

[8] S. 26(9), The Companies Act, 2013.

[9] S. 31, The Companies Act, 2013.

[10] S. 31(3), The Companies Act, 2013.

[11] S. 32, The Companies Act, 2013.

[12] S. 2(1), The Companies Act, 2013.