Understanding Prospectus | Meaning | Objectives | Contents

What is a Prospectus?

Prospectus is an invitation issued to the public to offer for purchase/subscribe shares or debentures of the company. In other words, any advertisement offering shares or debentures of the company for sale to the public is a prospectus. A company secures capital by the issue of prospectus inviting deposits or offers for shares and debentures from the public.

Prospectus - Meaning, Objectives, Contents
Prospectus – Meaning, Objectives, Contents

Meaning of Prospectus

It is a document containing detailed information about the company. It is an invitation to the public for subscribing to the shares or debentures of the company.

Private limited companies are strictly prohibited from issuing prospectus and they cannot invite public to subscribe to their shares. Only public limited companies can issue prospectus. Thus, it is an open invitation extended to the public at large.

Objectives of Issuing Prospectus

1. To bring to the notice of the public that a new company has been formed.

2. To preserve authentic record of the terms and allotment on which the public have been invited to buy its shares or debentures.

3. To secure that the directors of the company accept responsibility for the statements in the prospectus.

Requirements of a Correct Prospectus:

The correct prospectus must have the following.

1. It must not be exaggerated

2. It must contain full and honest disclosures

3. Material facts must be disclosed and should not to be concealed.

4. There must not be false details and untrue statements.

Contents of Prospectus

The contents of the prospectus have been specified in Schedule II of the Companies Act. The important contents in the prospectus include the following.

1. Name and address of the company

2. Objects of the company

3. Full particulars of the signatories to the Memorandum and number of shares taken by them.

4. The names, addresses and occupations of the directors, managing directors or managers etc.

5. The number and classes of shares.

6. The minimum subscription.

7. The qualification shares of a director and the remuneration of the directors.

8. The amount payable on application, on allotment and on calls.

9. The names of the underwriters.

10. The estimated amount of preliminary expenses.

11. The names and addresses of the auditors of the company.

12. Particulars about reserves and surpluses.

13. Voting rights of the different classes of shares.

14. Reports of the auditors regarding profits and losses of the company.

15. A similar report by the Chartered Accountant regarding the Profits and Losses and Assets and Liabilities of the Company.

Consequences of misstatements in Prospectus

The persons, responsible for preparing false and misleading prospectus will face civil and criminal liabilities.

1. Civil liability

In case, misleading prospectus amounts to misrepresentation, the aggrieved persons can repudiate the contract. They can claim refund of their money. Damages can also be claimed from the persons found guilty.

2. Criminal liability

In case any deliberate concealment is made, directors will be punished with a fine of Rs. 5,000 or imprisonment up to two years or both. If it is fraud the fine will extend to Rs. 10,000 or 5 years imprisonment or both.

Statement in Lieu of Prospectus

When the prospectus is not issued by the company a statement in lieu of prospectus, must be filed with the Registrar at least three days before the allotment of shares. The contents of the statement in lieu of prospectus are very much similar to the prospectus. The statement must be signed by all the directors or their agents authorized in writing. These provisions do not apply to a private company.