It contains all the material information as to the price and number of shares/convertible shares being offered for sale to the public, which helps the investors to take a rational decision regarding the investment of his/her funds.
The prospectus is a legally mandated document and so it needs to be registered with the Registrar of Companies (RoC) prior to the opening of an issue when there is a fixed price issue and after the closure of issue when there is a book built issue.
Fixed Price Issue and Book Built Issue
Fixed Price issue is one such issue wherein the company decides the issue price in the first place and discloses the same in the prospectus (offer document).
On the Contrary, Book built issue is the type of issue in which the price of the issue is decided as per the securities demanded by the potential investors at different price levels.
Types of Prospectus
- Abridged Prospectus: An abridged prospectus as the name signifies is the summarized offer document containing salient features of an ordinary prospectus. It is issued together with the company’s application form of pubic issue.
- Red herring Prospectus: A red herring prospectus is a prospectus used when there is a book built public issue. It contains all the material facts and information excluding the price or quantum of the securities offered for sale.
Basically, it contains information concerning the company’s operations and future prospects, but the relevant details about the offering are not mentioned.
- Shelf Prospectus: Shelf Prospectus refers to an offer document that lets the company make a number of issues of the securities or the class of securities mentioned in the document within a period of one year. Meaning that there is no requirement of issuing a fresh prospectus each time when the issue has to be made.
The facility to issue shelf prospectus is available to specific banks and financial institutions only.
Disclosures to be made in a Prospectus
- General Information: The general information contained in a prospectus will be related to the name and address of the company’s head office, officers, company secretary, directors, bankers, legal advisers. It accounts for the primary objective and business operated by the company. It describes the company’s capital structure in a specified manner.
Further, it contains information about the issue opening and closing date, procedure and terms for allotment. It lists out the objective of the public offer and terms and conditions of the issue. It also contains the consent of all the officers.
- Financial Information: The financial information includes reports provided by company’s auditors in connection to the profitability, liquidity, assets and liabilities, etc. as well as the report relating to the business in which the capital raised from the public will be utilized.
- Statutory Information: The prospectus should include an official declaration concerning the compliance of the Companies Act and also that the prospectus does not contain anything which violates the provisions of the law.
In a nutshell, securities can be offered for sale, by inviting applications from the public at large through the issue of prospectus. The prospectus needs to be filed with RoC and must adhere to the minimum information requirements, as it is the only genuine source of information to the investors to know the soundness of the Company.
The primary aim of the issuance of the prospectus is to save the investors from being cheated or deceived. The regulatory body also makes it compulsory for the issuer to make a complete disclosure of the relevant particulars and present it to the prospective investors. If any company violates the rules concerning the disclosures, then it has to pay a penalty for the same.