The term prospectus in company law refers to a formal legal document that a company issues when it invites the public to purchase its shares or debentures.
It contains detailed information about the company’s business model, financial performance, management and objectives.
The Companies Act, 2013, governs the issue and content of a prospectus to ensure transparency and protect investor interests.
A prospectus acts as a bridge between the company and potential investors, providing them with all the necessary facts to make an informed decision.
Types of Prospectus in Company Law
There are several types of prospectus in company law, including:
- Deemed Prospectus: Issued when securities are offered to the public through intermediaries.
- Red Herring Prospectus: Issued before the final prospectus, it contains preliminary information about the company.
- Shelf Prospectus: Used by financial institutions or banks for multiple public issues over a certain period.
- Abridged Prospectus: A shorter version containing essential details for quick investor understanding.
Contents of Prospectus in Company Law
The contents of prospectus in company law include:
- Company name and registered office details
- Purpose of raising funds
- Capital structure
- Financial statements
- Risk factors
- Details of directors and underwriters
These details help investors assess the company’s credibility and future potential.
Importance of Prospectus in Company Law
The importance of prospectus in company law lies in ensuring investor protection and corporate transparency.
It reduces the risk of misinformation by making it mandatory for companies to disclose accurate and verified data before collecting funds from the public.
Prospectus Rules and Example
According to prospectus rules under the Companies Act, any misleading or false statement in the prospectus can lead to civil and criminal liability for company officials.
If a new tech company plans to go public, it must issue a prospectus disclosing its revenue sources, product pipeline and potential risks, helping investors to make informed investment decisions.
