As an investor, it is important that you have comprehensive knowledge about security before investing in it. You also have the right to obtain complete information pertaining to the security offering. As per Section 2 of the Companies Act, 2013, public companies are required to file a prospectus that includes information about the stock or debt offering.
A prospectus, in Company Law, plays a vital role as it contains all the information (general, financial, and statutory) of the company. It is a legal document that contains details of prices and shares of the company.
That said, the document can be quite lengthy, which makes it difficult to zero in on the important details. In such situations, an abridged prospectus can be quite helpful. Let us now understand the importance of a prospectus, its types, and the purpose of an abridged prospectus.
Why is a prospectus needed?
A prospectus is a formal document that provides relevant information about the company’s background and finances. It can be an advertisement, a circular, or a notice inviting investors to buy stocks, debentures, or other instruments. Moreover, a company – or an institution acting on behalf of the company – can issue the prospectus, and it must be drafted for the public.
As per Section 2(1) of the Companies Act, 2013, when a company is offering its shares for sale in any way, its memorandum must provide the objective, liabilities of its members, and the company’s share capital. It must also include the signatories’ names and the number of shares subscribed by them. All of these details are crucial for investors to assess and analyse the company and its promoters, finances, and operating field and make an informed decision. Thus, the prospectus must contain all of these details.
Types of prospectus
The various types of prospectuses have been outlined below.
- Deemed prospectus - As per Section 25 (1) of the Companies Act, 2013, a document qualifies as a prospectus if a company agrees to allocate or present securities to the public.
- Red herring prospectus - This is a preliminary prospectus submitted by the company before the offer and should be filed with the registrar. It does not have complete information pertaining to the price or number of securities to be issued.
- Shelf prospectus - If the company proposes to issue more than one class of securities, it issues a shelf prospectus.
- Abridged prospectus - All the important and crucial information about the company, including its financial history, promoters, and offer for sale, is contained in the abridged prospectus.
What is an abridged prospectus?
As per section 2(1) of the Companies Act, 2013, an abridged prospectus’s meaning is given as a memorandum that highlights key elements of a prospectus as prescribed by SEBI. It aims to summarise the full prospectus, ensuring the inclusion of crucial details mandated by SEBI without omitting any important information.
The importance and purpose of an abridged prospectus
The primary objective of an abridged prospectus is to safeguard the rights of the investors. Considering the fact that reading the entire prospectus is not practical, you would need a summarised version that contains all the essential information accurately. This document ensures that you are aware of your rights, consequences, and outcomes before investing in a certain company.
For this purpose, it is mandatory for companies to issue the abridged prospectus with the application forms under Section 33 of the Companies Act, 2013, and these shouldn’t exceed five pages. If the public does not receive the document, it is not possible for them to invest in the company, and the company will be charged Rs. 50,000 for every default.
Elements of abridged prospectus
Coming to the essentials, the document should be printed in Times New Roman size 10 on an A4 size paper with one line spacing. Additionally, the general information document should contain details that are generic in nature, and the abridged prospectus must be submitted to SEBI. As previously mentioned, the document and the application form should not exceed five pages.
The headings and subheadings must be properly numbered, and the order of the contents must remain the same. This document must be legible; even if there is a tear, the information should not be affected. To help the public fill out the form and make the payment, proper directions must be provided, along with the risk factors involved.
Conclusion
A prospectus informs investors about a company's stock offering. To streamline key details, SEBI mandates an abridged prospectus, a concise summary of the essential information present in the detailed prospectus. This ensures crucial details are not lost in the wealth of information and helps the investors in making an informed decision.
