Prospectus and Capital Raising
Introduction to Prospectus
A prospectus is a crucial document for any business, especially for companies seeking to raise
capital. It serves as the primary tool for a company to invite the public to invest in its shares and
other securities.
Driving Force of Business
Capital is the driving force of any business. Without sufficient capital, a business cannot
operate or expand.
Purpose of a Prospectus
A prospectus is issued by a public company to gather capital from the public, typically in the
form of shares and other securities.
It acts as an invitation to potential investors, providing them with the necessary information
to make an informed decision about investing in the company.
Investor's Decision-Making Tool
Investors rely on the prospectus to decide whether or not to invest in a company. Therefore,
the information presented must be accurate and reliable.
Meaning, Definition, and Characteristics of a
Prospectus
Meaning
A prospectus is a document that extends an invitation from a public company to the general
public (public at large) to purchase its shares and debentures.
In simple terms, it can be considered an advertisement.
Definition
A prospectus is a public document that invites the public at large to purchase the securities
(shares and debentures) of a company.
It can also be referred to as a circular or notice issued by promoters to attract the public.
Types of Prospectus
Red Herring Prospectus: Issued when the final price of an Initial Public Offering (IPO) is not
yet determined or when the final prospectus is not yet ready.
Shelf Prospectus: Issued by a company that intends to issue securities multiple times over a
period. It contains information about various types of securities (equity shares, preference
shares, debentures) that the company plans to issue.
Characteristics of a Prospectus
Invitation to the Public: It is an invitation extended by a company to the public to subscribe to
its securities.
Nature of Document: It is in the form of a notice, circular, or public advertisement.
Written Form: A prospectus must be in written form.
Issued During IPOs: Generally issued during an Initial Public Offering (IPO) when a company
first offers its shares to the public.
Importance of a Prospectus
The prospectus is a vital document for several reasons:
Investor Decision-Making: It is the primary document upon which investors base their
decision to invest in a company.
Creation of Fiduciary Relationship: It helps establish a relationship of trust between the
company and its investors. Investors place their faith in the information provided.
Information Dissemination:
It provides essential information about the company, including:
Company Name
Nature of Business (Working Area)
Future Plans
Details of Main Officers
Capital Structure (Debt and Ownership)
Purpose of Public Subscription
Conditions for Investment
Project Implementation Schedule
Transparency and Accuracy: The information contained in the prospectus must be correct,
real, clear, and transparent to avoid misleading investors.
Legal Compliance: It ensures that companies comply with legal provisions related to capital
raising.
Risk Disclosure: It informs investors about the potential risks associated with the company's
projects.
Liability for Misrepresentation: The importance of accuracy is underscored by the fact that
misrepresentation or misleading information can lead to civil and criminal liabilities for the
company and its officers.
True Financial Picture: It presents the true financial situation of the company, giving investors
a realistic idea of its performance and prospects.
Matters to be Stated in a Prospectus
According to the Companies Act, 2013, a prospectus must include specific information. While
there are 19 points in total, key areas include:
Company Details:
Name of the Company
Address of the Registered Office (including the state)
Names and Addresses of the Company Secretary, Chief Financial Officer, and other key
managerial personnel.
Names and Addresses of Auditors, Legal Advisors, Bankers, Trustees, Guarantors, and
Brokers.
Subscription and Allotment Details:
Date of Opening and Closing of Subscription.
Details of Allotment of Shares and the timeline for it.
Statement from promoters regarding the opening of a separate bank account for funds
and their segregation.
Consent and Authorizations:
Consent of Promoters, Directors, Auditors, Bankers, Experts, and other concerned officers.
Information about the authorized officer for subscription and the relevant board
resolution.
Underwriting and Distribution:
Details of Underwriters, if the shares are underwritten.
Information about the underwriting commission.
The schedule for the distribution of securities.
Company's Financials and Operations:
Capital Structure of the company.
Purpose of Public Subscription.
Conditions and relevant matters related to investment.
Main Objects of the Company.
Present Business activities of the company.
Schedule for the implementation of the project.
Project-Specific Information:
Idea of the promoters and the risk factors involved in the project.
Waiting period of the project.
Development and time for completion of the project.
Information about any pending legal proceedings against promoters or the company in
the past five years.
Financial Details and Other Disclosures:
Information regarding minimum subscription.
Details about premium on shares.
Information about shares issued for consideration other than cash.
Details about the Board of Directors and their interests.
Contribution of the promoters to the company's capital.
Additional Information (for Existing Companies):
Profit and Loss Statement, Balance Sheet, and Auditor's Report.
Profit and Loss Information for the past five years.
Reports of subsidiary branches, if any.
Information regarding the business where funds obtained will be used.
Compliance Statement: A statement confirming that the prospectus content does not violate
the Companies Act, Securities Contracts Act, or SEBI Act.
Date of Publication: The date written on the prospectus is considered the date of its
publication.
Provisions in the Companies Act Regarding
Issuance of Prospectus
The Companies Act, 2013, lays down specific provisions for the issuance of a prospectus:
Registration with Registrar of Companies (ROC): A prospectus must be registered with the
ROC. All provisions related to registration must be complied with before it can be issued.
No Issue Before Registration: A prospectus cannot be published on behalf of the company
before it is presented to the ROC.
Signatures: Every person named in the prospectus as a director or proposed director must
sign it.
Information Provision to ROC: If the ROC requires further details regarding any information
stated in the prospectus, such details must be provided.
Written Consent: The written consent of experts whose opinions or statements are included
in the prospectus is required.
Expert's Declaration: Experts must provide a written declaration stating they have no
undisclosed interest in the company.
Printed Copy: A printed copy of the prospectus must be submitted to the ROC.
Timeliness of Publication: The prospectus must be published within 90 days from the date of
its registration. If published later, it is considered illegal.
Statement of Compliance: A statement confirming compliance with all provisions of the
Companies Act and other relevant acts (like SEBI Act, Securities Contracts Act) must be given
to the ROC.
Application Form: An application form for securities cannot be published without a "mini
prospectus" (a summary of the main prospectus).
Liability for Misrepresentation in a Prospectus
Misrepresentation in a prospectus can lead to significant liabilities for the company and its
officials.
What Constitutes Misrepresentation?
Misleading Statements: Statements made in the prospectus that are factually incorrect or
misleading.
Exaggeration: Overstating profits, assets, or future prospects.
Omission of Necessary Information: Failing to provide crucial information that, if known,
would alter an investor's decision. For example, hiding debts or pending lawsuits.
Ambiguous Language: Using vague or unclear terms that are intended to deceive readers.
Failure to Disclose: Not providing information that is essential for investors to understand the
true nature of the investment.
Types of Liability
1. Civil Liability:
Purpose: To compensate investors for losses suffered due to misrepresentation.
Process: An investor who has invested based on a misleading prospectus and incurred a
loss can file civil proceedings against the company for damages.
Liable Parties: Directors (who consented to their names being in the prospectus),
promoters, authorized officers who published the prospectus, and experts whose opinions
were included and found to be misleading or based on undisclosed interests.
2. Criminal Liability:
Purpose: To punish offenders and deter future misconduct, preventing recurrence of fraud.
Consequences: Imprisonment, fines, or both.
Offences:
Deliberately making false or misleading statements.
Fraudulent misrepresentation or cheating.
Failure to comply with legal requirements regarding registration, signatures, or
necessary information.
Breach of trust.
Not following expert advice when required.
Knowingly making misleading or careless statements.
Minimum Subscription
Definition
Minimum subscription is the minimum amount of share capital that a company must raise
through public issue to be legally allowed to allot shares.
According to SEBI guidelines, this is generally fixed at 90% of the total issued capital.
Importance of Minimum Subscription
Investor Protection: It ensures that the company has raised sufficient capital to commence
its business operations, thereby protecting investors from investing in companies with
inadequate funds.
Financial Credibility: It demonstrates the company's financial credibility and public
confidence.
Preventing Inefficient Operations: It prevents inexperienced directors from starting a
business with insufficient capital, which could lead to failure and losses for investors.
Distribution of Securities: Allotment of securities cannot be done until the minimum
subscription is received.
Consequences of Not Receiving Minimum Subscription
No Allotment: If the minimum subscription is not received by the closing date of the
subscription list, the company cannot allot any shares.
Refund of Money: The amount received from applicants must be refunded within 30 days of
the closure of the subscription list (or a shorter period as specified by SEBI, e.g., 20 days).
Interest on Refund: If the refund is not made within the stipulated time, the directors are liable
to pay interest at a rate of 12% per annum on the amount to be refunded, starting from the
expiry of the 30-day period.
Penalties: Failure to comply with these provisions can lead to penalties for the company and
its directors.
Private Placement
Definition
Private placement is a method where a company offers and allots its securities to a select
group of persons or institutions, rather than offering them to the general public.
This group is typically limited in number, as specified by SEBI regulations (e.g., maximum 50
persons, excluding institutional investors and employees).
Provisions of Companies Act Regarding Private
Placement
Mode of Payment: Payments must be made through cheques or drafts, not in cash.
Allotment Period: Allotment of securities must be made within 60 days of receiving the
application.
Refund on Failure: If allotment is not made within 60 days, the amount received must be
refunded within 15 days after the expiry of the 60-day period. Failure to do so makes directors
liable to repay the amount with 12% interest.
Separate Account: Funds received through private placement should be kept in a separate
bank account.
Intimation to ROC: Complete details of the private placement must be filed with the Registrar
of Companies within 30 days of allotment.
No Advertisement: Companies cannot advertise private placements to the general public.
Information Disclosure: The name and address of the investors in private placements must
be maintained.