Prospectus

Prospectus is a document containing detailed information about the company and an invitation to the public subscribing to the shares capital and debentures. It is a document that invites the public to subscribe to the securities of a body corporate. In private companies, it is called private placement from its relatives and friends, because a private company by definition is not allowed to invite subscriptions from the public. Prospectus is not an offer in itself, but an invitation to make an offer.

Section 2(70) of the Companies Act, 2013 defines Prospectus as “Any document described or issued as a prospectus and includes a red herring prospectus referred to in Section 32 or shelf prospectus referred to in Section  31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”

By this definition it can concluded that, any document inviting offers from the public for the subscription of shares or debentures of a company is a prospectus, it must be in writing and invitation to public.

Importance of a Prospectus

Informs the public

The prospectus informs the public about the formation of a new company. It will serve as a document which gives the basic information to the prospective investor for taking decision.

Provide complete  information

The prospectus provides complete, accurate and reliable information about the comapany.

Helps the public to make decision

The prospectus provides the public with information about the investment  and helps the public to make an educated decision as investors.

Induces the public to subscribe

The prospectus induces the public to subscribe for the shares and debentures of the company.

It creates the confidence in the public

The prospectus creates confidence in the public by making the directors, promoters and experts responsible for the information given in the prospectus.

It serves as authentic record

The prospectus serves as an authentic record of the terms and conditions on which the shares and debentures of the company are issued by the company to the public.

Contents of Prospectus

Golden Rule as to framing prospectus

The ‘Golden Rule’ for framing of a prospectus was laid down by Justice Kindersley in New Brunswick & Canada Rly.

A company issues prospectus to attract the general public to purchase its shares, interested people rely on the information presented in the prospectus and on the basis of which they desire to make an investment in the shares of the issuing company. The public is invited to take shares on the faith of the representations contained in the prospectus. The public is at the mercy of company promoters.

According to the ‘Golden Rule’ "Those who issue prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature or extent and quality of the privileges and advantages which the prospectus holds as inducement to take shares".

Section 26 of the Companies Act, 2013, deals with the matters to be stated in prospectus of a company. According to this section, "Every prospectus issued by or on behalf of a public company either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall state such information and set such reports on financial information as may be specified by the SEBI in consultation with the Central Government"

According to this Section, every prospectus may contain General Information of the company, Financial Reports, Declaration of compliance Matters and Reports as prescribed by Companies Act, Securities Exchange Board of India.