When companies raise money from the public by offering shares or debentures, they usually issue a formal document called a prospectus. This document contains key information about the company and the securities being offered. But what if the company does not directly issue this document and uses a third party instead? That’s where the term “deemed prospectus” comes into play. Let’s break it down in simple terms.
Introduction to the Concept
A deemed prospectus is not a separate document altogether. Instead, it refers to a situation where a document that isn’t labelled a prospectus is still treated as one under the law. This typically happens when a company issues securities to an intermediary like an issuing house, and then that intermediary offers them to the public.
To prevent companies from bypassing the rules of issuing a prospectus, the Companies Act in many countries, including India, has provisions that treat such documents as “deemed prospectuses.”
Why Is a Deemed Prospectus Needed?
Companies sometimes try to avoid the legal responsibilities of a prospectus by issuing shares through intermediaries. These intermediaries then sell the shares to the public. If such practices were left unchecked, it would be easy for companies to hide important information from investors.
The deemed prospectus rule ensures that all investors receive the same level of transparency and protection, regardless of how the shares are offered.
Legal Definition and Provisions
Under Indian law, specifically Section 25 of the Companies Act, 2013, any offer document issued by someone other than the company (usually an intermediary), when offering shares to the public, is treated as a deemed prospectus. This means:
- It must contain the same disclosures as a regular prospectus.
- The intermediary may be held responsible for misleading information.
- The company can also be liable for the contents of this document.
Example
Let’s say Company A, a private company, plans to raise ₹100 crore by issuing new equity shares. However, it wants to avoid the lengthy and regulated process of issuing a formal prospectus directly to the public. To do this, Company A privately allocates the entire ₹100 crore worth of shares to an intermediary, let’s call it Investment House B, a financial firm that deals in securities.
Now, Investment House B owns a large block of Company A’s shares and decides to sell these shares to the general public through an offer for sale. To market and sell these shares, Investment House B releases a document containing key details like the number of shares, offer price, company background, and risk factors, similar to what you would find in a regular prospectus.
Even though Company A did not directly issue this document or offer the shares to the public, its shares are still being offered to the public through Investment House B. According to the law (like Section 25 of the Companies Act, 2013, in India), this kind of offer document, though issued by someone else, is treated as a deemed prospectus.
Why? Because without this rule, companies could bypass important legal requirements and hide critical information from investors. This way, the deemed prospectus rule closes any loopholes that might otherwise allow companies to raise money from the public without meeting regulatory standards.
Key Features of a Deemed Prospectus
- Issued by Someone Other Than the Company: Usually issued by an intermediary or a third party acting on behalf of the company.
- Public Offering of Securities: The securities must be offered to the general public, not just a select group of investors.
- Legal Treatment as a Prospectus: The document is treated under the law as if it were issued by the company itself.
- Disclosure Requirements Apply: All rules related to disclosures, accuracy of information, and penalties for misinformation apply just as they do for a standard prospectus.
- Investor Protection: This provision is mainly to protect investors and ensure fair practices in the market.
Important Disclosures in a Deemed Prospectus
Just like in a regular prospectus, the deemed prospectus must include:
- Details about the company’s financials
- Purpose of the issue
- Risk factors
- Management structure
- Terms of the offer
- Use of proceeds
These disclosures help investors make informed decisions.
How Is It Different from a Regular Prospectus?
| Feature | Regular Prospectus | Deemed Prospectus |
| Issuer | The company itself | An intermediary or third party |
| Method of Offer | Direct to the public | Through an intermediary to the public |
| Legal Status | Official offer document | Treated as an offer document by law |
| Disclosure Responsibility | Company directly | Both intermediary and company |
Penalties for False Information
In India, the law takes false or misleading statements in a deemed prospectus very seriously. Since a deemed prospectus is treated as a regular prospectus under Section 25 of the Companies Act, 2013, all legal obligations related to truthful disclosure, accuracy of information, and transparency apply equally.
If the deemed prospectus contains any untrue statement or material omission, the parties involved, including the intermediary issuing the offer and the company whose securities are being offered, can face civil, criminal, and regulatory consequences under the following key provisions:
1. Section 34 – Criminal Liability for Misstatements
If a deemed prospectus includes a statement that is false or misleading in any form, any person who authorised its issue may be punished with imprisonment up to 10 years, and also be liable to a fine of not less than ₹1 lakh, which may extend to ₹3 crore. In cases of fraudulent intent, the punishment is more severe and non-compoundable.
2. Section 35 – Civil Liability for Misstatements
Anyone who subscribed to shares or securities based on false statements in the deemed prospectus can claim compensation. The law allows affected investors to file civil suits for damages against:
- The company
- Directors
- Promoters
- Experts who authorised or were involved in the preparation of the document
3. Section 447 – Punishment for Fraud
If the misleading statement is made knowingly or with intent to deceive, the act is treated as fraud under Section 447. Punishment includes imprisonment from 6 months to 10 years, and a fine of up to 3 times the amount involved in the fraud. Where public interest is involved, the minimum imprisonment is 3 years.
4. SEBI (ICDR) Regulations, 2018 – Regulatory Action
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 also impose strict disclosure obligations. If any untrue or misleading information is detected in the deemed prospectus or offer document, SEBI can:
- Impose monetary penalties
- Bar the company and intermediaries from accessing the capital market
- Launch prosecution proceedings
5. Section 26 – Disclosure Requirements
Though primarily for regular prospectuses, Section 26 of the Companies Act, 2013 sets out the mandatory contents that must also be complied with in a deemed prospectus. Failure to include key financial details, risk factors, or use of funds is considered a violation, punishable under relevant sections.
These legal provisions make it clear that any attempt to mislead investors, whether through omission or false representation in a deemed prospectus, carries severe consequences. The law ensures that companies and intermediaries cannot escape responsibility simply by issuing shares through alternate routes.
Conclusion
A deemed prospectus may not look like a traditional prospectus, but it carries the same legal weight and responsibilities. Its purpose is to ensure transparency and fairness in the financial markets, particularly when companies use intermediaries to offer shares to the public.
Understanding the concept helps protect both investors and the integrity of the financial system. Whether you are an investor or just someone learning about how companies raise money, knowing about deemed prospectuses is essential in grasping how modern markets work.
FAQs
What is the main purpose of a deemed prospectus?
The main purpose is to prevent companies from avoiding legal disclosure requirements by using intermediaries. It ensures transparency and investor protection during public offerings.
Who is responsible for the contents of a deemed prospectus?
Both the intermediary issuing the document and the original company are legally responsible. They can face penalties if the document contains false or misleading information.
Is a deemed prospectus legally enforceable?
A deemed prospectus is treated just like a regular prospectus under the law. All legal and disclosure obligations fully apply to it.
How is a deemed prospectus different from a shelf prospectus?
A deemed prospectus involves offering securities through a third party, not directly by the company. A shelf prospectus, on the other hand, allows multiple issues over time using the same base document.
Can investors take legal action based on a deemed prospectus?
Investors can take legal action if they suffer losses due to false or incomplete information. The responsible parties may face civil or even criminal consequences.
Why would a company prefer using a deemed prospectus route?
Some companies use intermediaries to raise funds more quickly or to avoid direct public scrutiny. However, they must still meet all legal obligations under the deemed prospectus rule.
