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.

 

Link : https://smckk14.blogspot.com/2023/08/promotion-and-incorporation-of-companies.html

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.