What is a Deemed Prospectus?

A deemed prospectus arises when a company allots or agrees to allot securities with a view to having those securities offered for sale to the public through another person or intermediary. The offer-for-sale document is then treated as the company's prospectus.

• A deemed prospectus is covered under Section 25 of the Companies Act, 2013.
• If the securities are offered to the public within six months of their allotment or agreement to allot, it may indicate that they were originally allotted with the intention of being sold to the public.
• The provision may also apply if the company has not received the full payment for the securities when they are offered to the public.
• If the conditions under Section 25 are met, the offer document is treated as the company’s prospectus.
• The relevant prospectus rules and liabilities then apply to the document.
• A deemed prospectus is mainly relevant when a company offers securities to the public indirectly through another person or intermediary.
• This ensures that important information about the company and the securities is disclosed to investors before they make an investment decision.
   

A deemed prospectus is important because it brings certain indirect public offers of securities within the legal framework that applies to prospectuses.
For example, a company may first allot securities to an intermediary rather than offering them directly to the public. If that intermediary subsequently offers the securities to the public under the conditions specified in Section 25, the offer document is treated as a prospectus.
This allows potential investors to review relevant information before deciding whether to invest. It also means that rules dealing with prospectus contents, misstatements, and omissions can apply to the document.
 

Suppose XYZ Ltd. plans to have some of its securities offered to the public through an intermediary.

XYZ Ltd. allots or agrees to allot the securities to the intermediary. The intermediary then makes an offer for sale to the public. If the conditions under Section 25 are met, the document used for this offer is treated as a deemed prospectus of XYZ Ltd.

Two conditions are especially relevant.

Criteria 1

An offer of the securities to the public is made within six months after the company allotted or agreed to allot those securities.

When this happens, it can be treated as evidence that the original allotment or agreement to allot was made with a view to offering the securities for sale to the public, unless the contrary is proved.

Example: If XYZ Ltd. allots securities to an intermediary and the intermediary offers them to the public three months later, the six-month condition is met.

Criteria 2

At the date of the public offer, the company has not received the whole consideration it is supposed to receive for the securities.

This can also be evidence that the securities were allotted or agreed to be allotted with a view to their subsequent sale to the public.

If either condition is established, unless the contrary is proved, the offer-for-sale document may be treated as a deemed prospectus. The prospectus-related rules and liabilities specified under the Companies Act then apply.

Also read: Know everything about share trading

A deemed prospectus contains information relevant to people considering the public offer. Based on the requirements applicable to a prospectus, the document may cover details such as:

The exact disclosures must follow the prospectus requirements applicable under the Companies Act and securities regulations.

Apart from a deemed prospectus, there are three other types of prospectuses.

• Shelf prospectus: A shelf prospectus can be used for more than one issue of securities during its period of validity. Its validity cannot exceed one year, beginning from the opening date of the first offer covered by it.
• Abridged prospectus: An abridged prospectus is a shorter document containing the key features of a prospectus in the form specified by SEBI. It gives investors important information about the offer without reproducing the complete prospectus.

• Red herring prospectus: A red herring prospectus is commonly used during a public issue before the final prospectus. It may not contain complete particulars of the price or quantity of securities being offered. Current SEBI public-issue filings continue to include red herring and abridged prospectuses.

  
  
  

A deemed prospectus applies when securities are offered to the public indirectly through another person, and the conditions under Section 25 of the Companies Act, 2013 are met. The offer-for-sale document is then legally treated as a prospectus issued by the company.
This means an indirect route does not remove prospectus-related legal requirements. Rules concerning disclosures, misstatements, omissions, and related liabilities can still apply, helping investors receive relevant information before making an investment decision.