A prospectus is defined under section 2 of the Companies Act, 2013. (70) as “any document that is described or issued as a prospectus”. This includes any notice, circular, advertisement, or other documents that serve as an offer to the public for the purchase of any corporate body’s securities.
A document must meet any of the two criteria from among the following to be considered a prospectus.
- The document should either invite deposits or subscriptions to public shares or debentures.
- The public should be invited to such an event.
- The invitation should be issued by or on behalf of the company.
- The invitation should be related to shares, debentures, or other similar financial instruments.
Every publicly traded firm must either issue a prospectus or file a statement in lieu of one. For a private corporation, this is not required. However, when a private company changes to a public corporation, it must either file a prospectus if one was previously released or a statement in lieu of a prospectus. Section 70 of the Companies Act 2013 specifies the provisions governing the statement in lieu of prospectus.
Why is a Prospectus Needed?
The provisions for the advertisement of the prospectus are found in Section 30 of the Companies Act 2013. This section states that when a company is making an offer for sale of its shares in any way, the contents of the company’s memorandum stating the objective, members’ liabilities, the amount of the company’s share capital, signatories, and the number of shares subscribed by them, and the company’s capital structure must be specified. In short, all the information that is important for investors to make an informed decision about the company, its finances, its promoters, and its area of operation are required to be contained in the prospectus.
Types of Prospectus
The following are the different types of prospectuses.
Deemed Prospectus – According to Section 25(1) of the Companies Act of 2013, a document is deemed to be a prospectus if the company approves allot or offers securities to the public.
Red Herring Prospectus – This is the prospectus that must be filed with the registrar before the offer. In particular, the prospectus lacks information such as the specific price or quantum of securities being offered.
Shelf Prospectus – When a company is making an offer of issuing more than one type of securities, the prospectus it issues is called a shelf prospectus.
Abridged prospectus – An abridged prospectus contains all the essential information regarding the company, its financial history, its promoters, and its offer for sale.
What is Abridged Prospectus?
An abridged prospectus is defined as a memorandum comprising such prominent aspects of a prospectus as may be prescribed by the Securities and Exchange Board by establishing regulations in this matter, according to section 2(1) of the Companies Act 2013.
It is therefore a document containing a prospectus summary. Its objective is to summarise the prospectus, which contains the information prescribed by the Securities and Exchange Board of India (SEBI), without leaving out any significant factors.
The Abridged prospectus’s Meaning, Purpose, and Importance:
- Its primary goal is to protect the rights of investors. It has been made mandatory with the application form so that investors are aware of their rights, consequences, and outcomes when investing in a specific company.
- Because it is shorter than a prospectus, it reduces the cost of a public capital issue.
- It saves investors time by allowing them to glean the most important information from the detailed prospectus at a glance.
Elements of Abridged prospectus
There are a few criteria that an abridged prospectus must meet to be attached to an application form. These are the criteria:
Basic details as per SEBI circular CIR/IMD/DF-1/19/2012 dated. July 25, 2012.
- It must be printed on A4 paper and typed in Times New Roman font. The font size must be at least 10 points. Line spacing must be at least 1.00, condensation must be avoided, and typical letter-spacing must be at 100% scale.
- If needed, the font size for headings and subheadings can be modified. The major headings should use capital letters, bold fonts, and boxes. The main subheadings should be bold and enclosed in boxes. Other subheadings should be bolded and underlined.
- Various headings and subheadings should be numbered in a consistent manner or with distinct methods of numbering.
- The order in which the contents are presented must not be changed.
- In the event that the application form is torn, attach it in such a way that none of the information is affected.
- Tables and pointers can be used to make information more accurate and clear.
- It must provide directions for filling out the form, making a payment, and dealing with risk factors. And such data should be presented in pointer style, with each line starting on a new line.
- The following sentence must be in bold at the top of every page. “IN THE NATURE OF FORM 2A – MEMORANDUM CONTAINING SALIENT FEATURES OF THE PROSPECTUS”
- To effectively express any associated risks with the situation, risk factors should be mentioned.
- Wherever needed, a reference to the prospectus can be made.
When is it not necessary to issue it?
In the following situations, an abridged prospectus is not required to be attached to the application form:
- If the shares/debentures are not made available to the general public.
- In the event that a bonafide invitation to enter into an underwriting agreement is received.
To Sum Up
A prospectus is an essential document that allows investors to make informed decisions about a company’s offer of putting its stock for sale to the public. However, since a prospectus can be very detailed and contain a wealth of information, the SEBI has mandated the issuing of an abridged prospectus meaning summary that contains only the most important information contained in a detailed prospectus. This is called the abridged prospectus. An abridged prospectus ensures that investors do not miss the important details of the company’s issue in the sea of information contained in the detailed prospectus.