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Prospectus

Prospectus meaning

  1. The prospectus is a legal document, which outlines the company’s financial securities for sale to the investors.
  2. According to the companies act 2013, there are four types of the prospectus, abridged prospectus, deemed prospectus, red herring prospectus, and shelf prospectus.

Prospectus Definition

The prospectus is a legal document for market participants and investors to pursue, detailing the features, prospects, and promise of a financial product.

It is mandated by the law to be supplied to prospective customers.

Prospectus Example

In an IPO, the prospectus tells potential shareholders about the company’s plans and business model.

For insurance and investment fund customers, a prospectus lists out the objective of the product, inclusions, and exclusions, fees, etc.

For an ETF, a prospectus informs likely investors of the fund’s goals, history, portfolio, fees and costs, and other financial details.

What is a Prospectus and its importance?

The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.

Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.

  1. To notify the public of the issue
  2. To put the company on record with regards to the terms of the issue and allotment process
  3. To establish accountability on the part of the directors and promoters of the company

Types of prospectus

According to Companies Act 2013, there are four types of prospectus.

Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.

Red Herring Prospectus – Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.

Shelf prospectus – Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.

Abridged Prospectus – Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.

What is prospectus and its contents?

The prospectus contents are specified in the Companies Act. The prospectus must touch over the following content points:

  1. Details of the company, such as name, registered office address, and objects
  2. Details of signatories to the Memorandum and their shareholding particulars
  3. Details of the directors
  4. Details of shares offered and the class of the issue as well as voting rights
  5. Minimum subscription amount
  6. The amount payable on application, on allotment, and on further calls
  7. Underwriters of the issue
  8. Auditors of the company
  9. Audited reports regarded profit and losses of the company

How a prospectus is useful for investors

A prospectus is a legal document that must be submitted to the concerned authority that contains information for the public regarding an investment offering. It is very useful for investors as they can learn about the risks associated with buying securities or funds. Normally, risks are briefly mentioned early in the prospectus and described in more detail later. When the company is acquiring funds through the issuance of stocks or bonds, it is the duty of investors to review the company’s financials to make sure it is financially stable enough to uphold its obligations.