Meaning of Prospectus
All companies or organizations provide a prospectus to its clients, which includes
all the information like company promoters, fund’s strategy, managers
background, financial statements, previous achievements, etc.
It’s a notice, document, circular, advertisement by which a company appeals for
an investment. Only public company use a prospectus in order to show the details
of the company to its investors.
Statutory Definition:-
Sec. 2(36) of the Companies Act describes a prospectus as “any document
issued as a prospectus and includes any notice, circular, advertisement or
other document inviting deposits from the public or inviting offers from the
public for the subscription or purchase of any share in, or debentures of a
body corporate.”
In other words, it is a document which invites deposits from the public or invites
offers from the public for the subscription of shares in, or debentures of, a
company.
Characteristics of Prospectus
The essential characteristic of the prospectus are:-
1. It is a document described or issued as a prospectus.
2. It includes any notice, circular, advertise-ment, inviting deposits from the
public or other document.
3. It is an invitation to the members of the pub-lic.
4. The public is invited to subscribe the shares or debentures of the company.
5. The term public does not mean an invita-tion of very large number of people.
It is enough if the invitation is to a section of the public.
6. Prospectus is the document through which the company secures the capital
needed for carry-ing on its business. Any document having this ob-ject comes
within the definition of prospectus. But an advertisement for securing business or
trade is not a prospectus.
Different types of Prospectus
Red Herring Prospectus
A prospectus for stocks and bonds are issued in different stages – the first stage
is the preliminary prospectus, which contains the details of the business and
proposed financial action which is nicknamed as Red Herring prospectus.
Abridged Prospectus
Abridged Prospectus is the actual summary of a prospectus. It contains all the
salient features of a prospectus. The original prospectus that a company files to
the exchange regulator is too large. The abridged prospectus contains the
summary of the same prospectus.
Shelf Prospectus
Shelf means ‘life’ or ‘validity’ of a prospectus. Only selected companies bring
their shelf prospectus. All companies are not eligible for designing a shelf
prospectus. Normally finance-based companies are eligible for bringing out their
shelf prospectus.
Deemed Prospectus
Deemed means to presume something. When a company agrees to allot shares to
an issuing house( which is a different company) which they will later sell to the
public, then the document by which offer is made is deemed to be a prospectus.
Definition of Statement of Lieu of Prospectus
The Statement in Lieu of Prospectus is a document filed with the Registrar of the
Companies (ROC) when the company has not issued prospectus to the public for
inviting them to subscribe for shares. The statement must contain the signatures
of all the directors or their agents authorized in writing. It is similar to a
prospectus but contains brief information.
The Statement in Lieu of Prospectus needs to be filed with the registr ar if the
company does not issues prospectus or the company issued prospectus but
because minimum subscription has not been received the company has not
proceeded for the allotment of shares.
Importance and Significance of Prospectus
A prospectus is a regulatory document that gives you a bird's-eye view into the
investment you're thinking of making. It's designed to offer shareholders
transparency into the companies that issue stocks and bonds into the financial
markets. Whether you're thinking of investing in the stock or bond markets, or
are mulling a mutual fund investment that can help you save to buy a home or
prepare for future retirement, a regulatory document known as a prospectus offers
details surrounding your options.
The Prospectus is a highly important document. For an investor, the Prospectus
serves as a means for the investor to evaluate the level of profitability and the
potential of the company before he or she decides to invest in the company or not.
A decision that lacks necessary information may cost a lot.
As a result, it is advisable to read the Prospectus carefully and to investigate the
practical risks of the company before reaching a final decision. Investors should
cautiously evaluate the basic elements of the listing company through the
information in the Prospectus. Even though the first offers are usually good
opportunities to invest because they will bring about high initial profit thanks to
the stock ballooning; still, there are risks remaining.
Contents of a prospectus
The contents of a Prospectus are given below:
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the
prescribed time.
5. A statement by the board of directors about the separate bank account where
all monies received out of shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert’s opinion if any.
8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13.Minimum subscription, amount payable by way of premium, issue of shares
otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter’s contribution.
16. Particulars relation to management perception of risk factors specific to the
project, gestation period of the project, extent of progress made in the project and
deadlines for completion of the project.
Misstatement in Prospectus
Since prospectus is relied on by the members of the public to subscribe or
purchase the securities of a company, any misstatements on it invite penal
consequences. Misstatement may occur when a statement which is untrue or
misleading in form or context is included in the prospectus. Also, any inclusion
or omission of any matter which is likely to mislead will also be considered as a
misstatement (sec. 34). For e.g., a statement on the purpose of offering shares
which is untrue, or statement on the locations of offices for a company which is
misleading will amount to misstatement in the prospectus.
REMEDIES FOR MISSTATEMENT IN PROSPECTUS
If the prospectus contains a misleading statement, the liability of the company,
the directors, promoters and others who authorized the issue can be classified into
three kinds:-
1. Civil Liability,
2. Criminal Liability, and
3. Liability under the Law of Contract.
4.
1. Civil Liability
An aggrieved shareholder who purchased shares by placing reliance on the
misleading prospectus has:-
a. Remedies Against the Company
The aggrieved shareholder has two remedies against the company. They are
i. Rescission of the Contract, and
ii. Damages for fraud.
1. Rescission of the Contract
The person who purchased shares on the basis of the prospectus containing
misstatements can rescind the contract (cancel the contract). He is eligible for
rescission whether the misstatement is made intentionally or unintentionally. He
has to surrender his shares to the company. Then his name will be removed from
the register of the members.
The money paid by him will be refunded by the company. The following are the
conditions to be satisfied for claiming rescission:
1. There must be an untrue statement.
2. The misstatement must be material to the contract of issuing shares. It should
not be a mere expression.
3. The shareholders must have relied on the untrue statement.
4. The statement must have induced the shareholder to purchase the shares.
5. The shareholder must apply for rescission within a reasonable time and before
the liquidation of the company.
6. The shareholder should not have affirmed the contract for purchase of shares.
2. Damages for Fraud
After rescinding the contract, the aggrieved shareholder can claim damages from
the company by filing a suit in the Court. He has to prove that the misstatement
was made fraudulently.
b. Remedies against the Promoters, Directors, Experts, and Persons
authorized the issue of the Prospectus
1. Damages for Misstatement
The directors, promoters, experts, and others who have authorized the issue of the
prospectus are liable to compensate the aggrieved shareholder for the loss or
damages he may have to incur because of the untrue statement.
2. Damages for Non-disclosure of Material Facts:
If a material fact has been omitted from the prospectus, (a) the person responsible
for the issue shall be fined up to Rs.50,000 and (b) the aggrieved can recover
damages from the persons responsible for the issue.
2. Criminal Liability
1. If a prospectus contains any untrue statement, every person who authorized the
issue are punishable with fine up to tk.50,000 or with imprisonment up to 2 years
or with both.
2. Anyone who fraudulently (knowingly) makes any misstatement in the
prospectus to induce persons to invest money in the company is punishable with
imprisonment up to 5 years or with fine up to tk.1,00,000 or with both.
3. Liability under General Law of Contract
Under the general law, the aggrieved shareholder can recover damages from all
or any of the persons responsible for the issue of the prospectus. The necessary
thing is to prove that there is a fraudulent misstatement or non-disclosure.
Conclusion
The Prospectus is a highly important document. For an investor, the Prospectus
serves as a means for the investor to evaluate the level of profitability and the
potential of the company before he or she decides to invest in the company or not.
A decision that lacks necessary information may cost a lot.
