PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS

This article is written by Kamakshi Lasaria of 5^th Semester of MIT World Peace University, an intern under Legal Vidhiya

ABSTRACT:

These days, a business needs a lot of capital and stability in order to flourish, establish itself, and stay in the market. Typically, the public offering of securities is the method used by all companies to raise capital. What criteria, though, would lead someone to select a specific company security? This is where a ‘prospectus’ comes in, a document that provides comprehensive details about the various types of securities and facilitates the selection process for the buyer. Understanding prospectuses as defined by the Companies Act of 2013 and learning about their legal status are the goals of this study. In contrast, if we consider the concept of a statement in place of a prospectus, we can see that, although it lacks a specific section, it can be studied by gaining clarity on the preceding topic. Chapter III of the Companies Act, 2013 defines a prospectus and the contents that must be mentioned therein. We would also examine the differences between a prospectus and a statement in lieu of a prospectus, as well as any other forms of prospectuses.

KEYWORDS: Prospectus, Capital, Security, Goals, Statement and Lieu.

INTRODUCTION:

In the world of finance and investment, the terms “Prospectus” and “Statement in Lieu of Prospectus” hold paramount importance, acting as vital documents that play a pivotal role in shaping the relationship between companies and their potential investors. These documents serve as informative guides for investors, enabling them to make informed decisions when considering investments in a company’s securities. Understanding the nuances of both the Prospectus and the Statement in Lieu of Prospectus is crucial, as they delineate essential information about the company, its financial health, and the risks involved in investing. A Prospectus is a comprehensive and legally mandated document that a company issues when it intends to raise capital through the issuance of securities, such as stocks or bonds. It is essentially a detailed offering document, providing prospective investors with a wealth of information about the company, its financial performance, and the terms of the offering. The Prospectus serves as a vital tool for potential investors, enabling them to evaluate the investment opportunity. It includes critical data, such as the company’s financial statements, risk factors, management team profiles, and the intended use of the capital raised. Investors rely on the Prospectus to assess the potential return on investment and to make informed decisions that align with their financial goals and risk tolerance.

On the other hand, a Statement in Lieu of Prospectus comes into play in specific situations where a company decides not to issue a Prospectus. Instead, it provides an alternative document that includes essential information to protect the interests of the investors. This statement is usually issued when a company does not need to issue a Prospectus due to exemptions granted by regulatory authorities. The Statement in Lieu of Prospectus includes pertinent details about the company and the securities offered, ensuring that investors are not left in the dark about the investment opportunity, even in the absence of a full-fledged Prospectus. This introduction will delve into the core elements of both the Prospectus and the Statement in Lieu of Prospectus, shedding light on their significance, regulatory requirements, and the key differences between the two. Furthermore, we will explore the circumstances under which companies might opt for the latter, while emphasising the critical role these documents play in maintaining transparency and investor protection in the financial markets. If any of the provisions under this Act are contravened during the issuance of a prospectus, the person responsible shall be subject to a fine ranging from a minimum of 50,00 to a maximum of 3,00,000. Furthermore, if an individual had prior knowledge that the prospectus was in violation of the stated section, the punishment would still be the same^[1].

The world of finance and investment is dynamic and ever-evolving, making it crucial for market participants, whether seasoned investors or newcomers, to have a profound understanding of Prospectuses and Statements in Lieu of Prospectus. This knowledge equips them with the tools necessary to navigate the complex landscape of investment decisions, promoting trust and confidence in the financial markets.

DEFINITION OF PROSPECTUS.

According to section 2(70) of Companies Act 2013, Prospectus can be defined as “any document which is described or issued as a Prospectus” and also any notice, circular, advertisement or any other document acting as an invitation to offers from the public. Such an invitation to offer should be for the purchase of any securities of a corporate body. Shelf Prospectus and red herring Prospectus are also considered as a Prospectus.^[2]

CONTENTS OF PROSPECTUS.

A Prospectus is a comprehensive and legally mandated document that companies issue to potential investors, providing them with detailed information about an upcoming securities offering, such as an initial public offering (IPO) or the issuance of bonds. The purpose of a Prospectus is to enable investors to make informed decisions by offering a transparent and clear overview of the company’s financial health, business operations, and the associated risks. The typical contents of a Prospectus can be categorised into several sections.

• Firstly, the Prospectus begins with a Company Overview, which introduces the issuing company, its history, business model, and key subsidiaries. This section aims to provide investors with a comprehensive understanding of the company’s background and operations.
• Next, the Prospectus includes a section on Risk Factors. Here, potential risks that may impact the investment are outlined, such as market conditions, competition, regulatory changes, and other relevant factors. By disclosing these risks, investors are made aware of the challenges associated with the securities they are considering.
• The Management Team section provides information about the company’s leadership, including key executives and their qualifications. This section aims to instill confidence in investors by highlighting the expertise and experience of the management team.
• The Use of Proceeds section outlines how the company intends to utilise the capital raised through the securities offering. This information helps investors understand the company’s plans for expansion, debt repayment, or other purposes.
• Financial Information is another crucial section of the Prospectus. It includes audited financial statements, such as income statements, balance sheets, and cash flow statements. These statements allow investors to assess the company’s financial performance and stability, enabling them to make informed investment decisions.
• Legal and Regulatory Matters are disclosed in a separate section of the Prospectus. This section provides information about any pending or past legal issues, including lawsuits or regulatory compliance matters. By disclosing these matters, the company ensures transparency and allows investors to evaluate potential legal risks.
• The Dividends and Capitalization section provides information regarding the company’s dividend policies and capital structure. It includes details about the number of outstanding shares and debt obligations, giving investors insights into the company’s financial structure.
• Finally, the Prospectus includes a section on Underwriting and Offering Details. This part outlines the terms of the securities offering, including the offering price and the number of shares available. These details are crucial for investors to understand the terms of the investment opportunity.

In conclusion, a Prospectus is a comprehensive document that provides potential investors with detailed information about an upcoming securities offering. By including sections such as Company Overview, Risk Factors, Management Team.

FORMALITIES FOR ISSUING COMPANY PROSPECTS.

Every prospectus issued by or on behalf of a company must be dated, and the date shall, unless the contrary is proved, be regarded as the date of its publication, this is stated in section 55 of the Companies act. A copy of the prospectors signed by every director or proposed director or by any of his agents must be delivered to the registrar on or before the date of the publication. A prospectus must not be issued more than 90 days after the date on which a copy thereof is delivered for registration^[3]. If a prospectus is so issued, it will be deemed to be a prospectus, a copy of which has not been delivered to the registrar.

REQUIRED DOCUMENTS

It is imperative for a prospectus to clearly state that a copy of the prospectus is submitted to the Registrar, along with any accompanying documents^[4]. Failure to do so may result in the prospectus being deemed invalid if it is not issued within 90 days of submission to the Registrar^[5].

KINDS OF PROSPECTUS.

There are different types of prospectuses that a company may use.

• One is the Red Herring Prospectus, which must be filed with the registrar before offering investments. This document typically does not include specifics like the quantity or price of the security being offered.
• Another type is the Abridged Prospectus, which provides a brief summary of all the important details about the offer that are filed with the registrar. It is important to include all documents related to purchasing the security.
• Then, The Deemed Prospectus is created when a document includes details about the company’s investment offer to the general public.
• Finally, the Shelf Prospectus is a document that banks, companies, or financial institutions distribute to the public, containing information about more than one type of investment.

STATEMENT IN LIEU OF PROSPECTUS.

A public company may  not invite the public to subscribe to its share capital^[6]. A statement in lieu of a prospectus is a substitute for a prospectus. It is issued by a public unlisted company instead of a prospectus. This statement is prepared by public companies that do not issue a prospectus when they are formed. It includes all the information found in a prospectus and is signed by the directors or proposed directors of the company. Failure to file this statement will result in the company being unable to allocate any shares or debentures.

When a public company chooses not to invite the public to subscribe for its shares and instead seeks funding from private sectors, it is not obligated to issue a prospectus to the public. In this scenario, the promoters are required to prepare a draft prospectus referred to as a “statement in lieu of prospectus”.

As per the companies ordinance, if a public company decides not to issue a prospectus upon its formation, it must submit a statement in lieu of prospectus to the registrar of the companies. A statement in lieu of a prospectus is defined as a public document that is prepared in accordance with the second schedule of the company’s ordinance. This document is prepared by every public company that does not issue a prospectus upon its formation and is required to be signed by all individuals mentioned therein before the allotment of shares or debentures.

REQUIRED CONTENTS IN STATEMENT IN LIEU OF PROSPECTUS.

• The name of the business entity.
• Details of the share capital structure, including ordinary shares and their nominal value.
• Information about the planned operations and prospectus.
• Identification of directors, officers, delegated counsel, and company secretaries, along with their roles and responsibilities.
• Provisions for appointing and compensating these corporate representatives.
• Explanation of voting rights during company meetings.
• Agreed upon quantity and value of shares and debentures to be issued.
• Names, occupations, and addresses of vendors who sold or offered goods to the company.
• Payment amounts to be made to real estate sellers in cash, stocks, or bonds.

DIFFERENTIATION BETWEEN PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS.

Basis for Comparison.	Prospectus	Statement in Lieu of Prospectus.
Definition.	The prospectus is a legal document that is published by a company with the intention of inviting the general public to subscribe to its shares and debentures.	On the other hand, the statement in lieu of prospectus is a document that is issued by the company when it does not offer its securities for public subscription.
Objectives.	The objective of the prospectus is to encourage public subscription	while the statement in lieu of prospectus is required to be filed with the registrar.
Uses.	The prospectus is used when capital is raised from the general public	whereas the statement in lieu of prospectus is used when capital is raised from known sources
Content.	In terms of content, the prospectus contains details that are prescribed by the Indian Companies Act.	On the other hand, the statement in lieu of a prospectus contains information that is similar to a prospectus but in a more concise manner.
Minimum Subscription.	The prospectus is required to state the minimum subscription amount.	Whereas the statement in lieu of prospectus is not required to state the minimum subscription amount.

CONCLUSION.

Hence, the Companies Act of 2013 holds significant prominence as it devotes an entire chapter to the subject of prospectus. This chapter serves as a comprehensive guide, enabling us to comprehend the complexities associated with its issuance and the essential elements that must be included within it. Moreover, the Act encompasses both civil and criminal liability provisions, further emphasising its importance. Additionally, it is worth noting that a prospectus can assume various forms, as previously deliberated. Consequently, it becomes imperative for all public companies to prioritise compliance with these regulations.

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^[1] Section 26, (9) of The Companies Act 2013.

^[2] Legal Services India https://www.legalserviceindia.com/legal/article-9698-an-analysis-prospectus.html last visited 09/11/2023.

^[3] The Legal Quotient https://thelegalquotient.com/corporate-laws/companies-act/contents-of-prospectus/2466/ last visited 09/11/2023.

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

^[5] Section 26, (8) of The Companies Act 2013.

^[6] Company Law & Practice https://www.jru.edu.in/wp-content/uploads/moocs/e-books/management/Company_Law_ last visited. On 09/11/2023.