Prospectus: Introduction, Meaning, Characteristics, Issue, Legal Rules, Contents,
Key Points:
1. Meaning of Prospectus
2. Introduction of Prospectus.
3. Characteristics of Prospectus.
4. Who can issue prospectus?
5. Steps to be taken one by one Issue of Prospectus.
6. Legal Rules Regarding Issue of Prospectus.
7. Contents of Prospectus.
(I) Matters specified under rule 3 of companies
(Prospectus and Allotment of security) rules, 2014.
(II) Matters specified under rule 4, 5 of companies
(Prospectus and Allotment of securities) Rules, 2014.
(III) Other matters and reports specified under rule
5 of companies (Prospectus and Allotment of securities) Rules, 2014.
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1. Meaning of Prospectus:
"Prospectus" means a document issued by a company
through which the public is invited to purchase shares or debentures or for
making deposits in the company. i.e. prospectus is a document obtain capital
form the public.
Under Section 2 (70):
"Prospectus means any document prescribed or issued
as a prospectus and includes a Red Herring Prospectus refund to in section (32)
or shelf prospectus refunded to in section (3) for any notice, circular,
advertisement or other documents inviting offer from public for subjects or
purchase of any security of a body corporate".
2. Introduction of Prospectus:
After obtaining certificate of the incorporation, a
private company and company without share capital may start their business but
a public company having share capital cannot do so. It has to obtain
certificate of Commencement of Business and this certificate is issued after
following the prospectus of section (32). To obtain this certificate, the
company has to make declaration before ROC under section (31) that the prospectus
or the state in lieu of prospectus has been submitted to the office of ROC or Registrar
of Company. Prospectus is issued to arrange capital. A public company having
share capital may arrange the capital through its own sources or may invite the
public to buy its shares and debentures. The company which arranges capital
through own sources, it has to submit state in lieu of prospectus to the office
of ROC or Registrar of Company. While the company which invites public to
purchase its shares and debentures or both, has to submit prospectus by submitting
the one copy of prospectus to the Registrar of Company. Thereafter it can
obtain certificate of Commencement of business.
So, any notice, circular, advertisement or document
through which a company invites common public to make deposits in the company
or to purchase shares or debentures is called a “Prospectus”.
3. Characteristics of Prospectus:
(i) A private company cannot issue prospectus.
(ii) It can be issued by an incorporated
organisation.
(iii) Mention of date is compulsory.
(iv) Prospectus includes offer for sale also.
(v) For every public company having share capital,
it is mandatory to issue prospectus or statement in lieu of prospectus.
(vi) It has many forms - Notice, Circular, Advertisement
or any other documents.
(vii) It must certain signature of each director or
proposed director.
(viii) It can be issued to invite public deposits
from the public.
(ix) Through prospectus, offer from public invited
to subjects or purchase shares or debentures.
4. Who can issue prospectus?
(i) By public company.
(ii) By any person on behalf of public company.
(iii) By any person who is related with formation of
the company or having interest in formation of the company.
(iv) By any person on behalf of the person related
with formation of the company or having interest in the formation of the
company.
(v) By any person or organisation to whom the shares
have been allotted to resell it.
5. Steps to be taken one by one Issue of Prospectus:
(i) Appointment of different experts like Banker, Auditor,
Secretary, Legal Advisor etc.
(ii) Making Underwriting Commission.
(iii) Cannot for brokerage.
(iv) Listing of shares in any recognised stock
exchange.
(v) Determining Capital Structure.
(vi) Ascertaining the all-time date of Commencement
of company.
6. Legal Rules Regarding Issue of Prospectus:
Registration of prospectus is mandatory and it is
possible only when it is legal.
(i) Cannot be issued before Incorporation.
(ii) Compliance of guidelines of SEBI.
(iii) Person having rights of issuing the
prospectus.
(iv) Must be dated.
(v) Must be registered:
Before issuing to public, its copy must be signed by
each director or proposed director. Thereafter, should be sent to ROC or Registrar
of Company with following documents -
(a) Written consent of experts.
(b) Written consent of officers.
(c) Copies of important contracts (according to 16th
rule of the section II of the Act)
(d) Copy of contracts with managerial personnel.
(e) Report of adjustment.
(vi) Issued to public within 90 days.
(vii) Making available the prospectus having
features of prospectus with the application form.
(viii) Penalty on the violation - Minimum ₹50,000 maximum
₹3 lakhs of three years under section (26).
(ix) Expert to be not connected with formation or
management of the company under section (26).
(x) Terms of contracts not to be varied under
section (27).
(xi) Contents as per section II (26).
(xii) Not to apply in fictitious name (38).
(xiii) Refusal by the ROC to register the
prospectus:
(Opposite to legal rules regarding issue of
prospectus)
7. Contents of Prospectus:
(I) Matters specified under rule 3 of companies
(Prospectus and Allotment of security) rules, 2014.
(II) Matters specified under rule 4, 5 of companies
(Prospectus and Allotment of securities) Rules, 2014.
(III) Other matters and reports specified under rule
5 of companies (Prospectus and Allotment of securities) Rules, 2014.
(I) Matters specified under rule 3 of companies
(Prospectus and Allotment of securities) Rules, 2014:
Matter specified in part 1 of scheme II may be
divided into eight parts -
1. General Information:
(i) Name and address of registered office of
company.
(ii) Names of stock exchanges where application has
been submitted to enlist the shares.
(iii) Declaration regarding refund of amount
received if till the closing date minimum 90% of issuance or nor subscribed.
(iv) Declaration of issuing allotment letter/refund
order within 10 weeks and in case of late in refund, declaration to pay
interest.
(v) Opening date of issue.
(vi) Closing date of issue.
(vii) Names and address of auditor and lead managers.
(viii) If proposed debentures /proposed shares have
been valued through any rating Agency and afterwards not valued, it should be mentioned
as 'Not valued'.
(ix) Names and address of underwriters along with
the amount underwritten, in addition,
(x) Permission of central Govt. for proposed issue
along with letter of interest and included licence, on behalf of Central Government
should be earlier given that for truthfulness of statements and financial
soundness, the central government would not be liable.
(xi) Declaration regarding punishment for the
applicant (s) with fictitious name U/S (38).
(xii) Board of director's will submit a declaration
that the amount received from issue shall be deposited into Bank in a separate
account. The amount utilised, amount unutilised shall be shown in the balance
sheet under appropriate head.
2. Capital Structure of Company:
(i) Authorised, issued, subscribed and paid up
capital of company.
(ii) Size of issue. In this, amount referred for or
allotment to promoters and others shall be started separately.
3. Terms of Present Issue:
(i) Terms of payment.
(ii) How to make application.
(iii) Any special tax benefit available to company
and its shareholders.
(iv) Rights of holders of Institution.
4. Details of issue:
(i) Purpose of issue.
(ii) Cost of project.
(iii) Sources of finance.
5. Company Management and Project:
(i) Background and main objective of company.
Present business of company and if it has any subsequent company then the name
and address of that company.
(ii) Background of promoters.
(iii) Place of project.
(iv) In case of any collaboration, detail of
Guarantee of performance or assistance in control (if any).
(v) Nature of product, possibility of export,
guarantee of export,
(vi) Data of capital market related to shares and
debentures of company. It should include minimum and maximum value of each year
for last 3 years and minimum and maximum value of every month for last 6
months.
(vii) Name, address, occupation of MD or Managing
Director, WTD or Whole Time Director, other directors in which Nominee
directors and managements will be included also and number of posts of
directors hold by them each in other companies.
(viii) Details of Plant & Machinery and
Technology.
(ix) Implementation of scheme of project with
progress report. It will include dates of land acquisition, production work, installation
of plant and machinery, dummy production and commercial production.
(x) Proposed marketing strategies.
(xi) Fundamental facilities like Raw Material,
Water, and Electricity etc.
(xii) Future possibilities.
6. Details of Companies listed under same management who have issue any capital in last 3 years:
(i) Name of company.
(ii) Year of issue.
(iii) Type of issue.
(iv) Date of closing issue.
(v) Date of allotment of shares and debentures
certificate.
(vi) Date of completion of project, if the purpose
of the issue is to fulfill the financial needs of any project.
(vii) Amount of issue.
(viii) Rate of dividend paid.
7. Outstanding Litigation:
(i) The cases which can affect the activities and
financial position of the company. It includes all tax disputes.
(ii) Such criminal cases against company or its
directors which come under part I of scheme XIII.
(iii) Default made in case of payment of legal dues,
institutional dues and instrument holders like debentures, FD and accumulated
preference shares.
(iv) Details of important charges happened after the
date of latest balance sheet and their effects on performance of possibilities
of company.
8. Perception of Management regarding risk factors:
Perception of management of company regarding
fluctuation in foreign exchange rates, differentials in availability of raw
materials, differentials in marketing of products, delay in commerce of
business (cost) etc.
(II). Matters specified under rule (4), 5 of
companies (Prospectus and Allotment of securities) Rules, 2014:
1. General information:
(i) Written consents from Directors, Auditors, Legal
Advisors, Issue Managers, Issue Registrar, Bankers of Issue, Bankers of Company
and Experts.
(ii) Advice /suggestion received from experts (if
any).
(iii) If there has been any change in directors and
auditors in previous 3 years, its details with reason.
(iv) Detail of authority of issue and resolution
passed for issue.
(v) Method and duration of allotment and issue of
certificate.
(vi) Names and address of company security,
Technology advisor, Lead Managers, auditors, banker's, issue bankers and
Agents.
2. Financial information:
(a) Report of auditors of company:
(i) Detail of projects, losses, Assets and payables.
(ii) Report regarding dividend distribution on each
type of shares for each year preceding the five years of issue of prospectus.
It should also include details of those shares on which no dividend has been
paid in the previous year.
(iii) If no accounts have been prepared before 3 months
of issue of prospectus preceding five years, then the statement that no such
accounts have been prepared.
(iv) If the company has no subsequent company then
report of auditors of each year preceding five years of prospectus regarding Profit
and Loss and Assets and Liabilities of each year, which should be related to
the financial ending just before issue of prospectus.
(v) If the company has subsidiary company (s),
report of subsidiary companies or the companies may be prepared jointly or
separately.
3. Statutory and Other Information:
(i) Minimum subsequent amount.
(ii) Expenses on issue in which the expert made on
the fees of the following -
(a) Consultant /Advisors.
(b) Issue register.
(c) Issue management.
(d) Trustee of the debenture holders.
(iii) Underwriting commission and brokerage.
(iv) Prior issues for cash.
(v) Detail of any public or right issue in previous
5 years.
(vi) Commission or brokerage paid on previous
issues.
(vii) Shares issued other than cash.
(viii) On the date of issue of prospectus, detail of
issued outstanding debentures, unredeemed preference shares and other
documents.
(ix) Detail of opinion for subscribing/opinion of
exchange of share from depository interest.
(x) Detail of assets to be purchased from the amount
of issues.
(xi) Detail regarding directors, proposed directors,
WTD, their remuneration, appointment and remuneration of MD, interest of
directors, their borrowing powers and qualification shares.
(xii) Rights of members regarding voting, dividend
and lien on share and method of amalgamation and method of forfeiture of share.
(xiii) Restriction on transfer and transmission of
shares. (If any) amalgamation of shares and their division.
(xiv) If assets have been valued in previous 5
years, its detail.
(xv) Inspection of important contents.
(III) Contents of Prospectus and SEBI guidelines:
As per SEBI guidelines, 2000, following information
and statement should be included in prospectus -
Cover page - The front cover page will be of white
colour and without any pattern for picture. It should be sufficient thick.
This page shall contain following particulars -
(i) The word 'Prospectus'.
(ii) Name and address of Registered Office.
(iii) Nature, number, value and amount of proposed
documents.
(iv) Risk regarding first issue.
(v) General risk factors.
(vi) Liabilities clause.
(vii) Names and address of legal merchant bankers.
