Any firm in India seeking to raise capital through the public offering of its stocks must submit a prospectus to the Securities and Exchange Board of India (SEBI), the capital market regulator. The prospectus may take the shape of an advertisement, notice, or circular.
So, let’s explore one such type of prospectus called deemed prospectus in detail.
Section 25(1) of the Companies Act defines deemed prospectus. As the name implies, it is not regarded as a fully legitimate legal document and is only accepted as a prospectus under specific, exceptional conditions.
Typically, when a business wants to offer certain securities via an intermediary and get around SEBI requirements, it has to file a deemed prospectus. An issuing company, brokerage, or merchant bank could be the middleman.
If the intermediary makes the offer to the public on or before the date of the intermediary's allotment of securities, the offer for sale is assumed to be a prospectus. According to SEBI, the issuing company intends to use this offering as a means of directly raising funds from the public.
In this case, the intermediary or issuing business is required to provide investors and SEBI with all relevant information regarding the offer and prepare a prospectus.
Suppose the business that allots shares to the intermediary receives payment for the securities when the intermediary makes the offer for sale. In that case, the sale offer is deemed a prospectus.
According to SEBI, the company is attempting to issue shares to the public through an intermediary before completing a prospectus. As a result, in this situation, the law mandates that the intermediary file an offer for sale or a considered prospectus.
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Assume that either of the two scenarios is true. In that instance, the deemed prospectus of the business that granted the intermediary access to its securities is the document that the intermediary uses to make the offer for sale.
The presumed prospectus is subject to the same laws and guidelines as the company's prospectus. The presumed prospectus extends liability to the original share issuer even though the intermediary issued the offer for sale.
1. Provides information to investors
To ensure transparency for potential investors, deemed prospectuses must include accurate and current information about the business.
2. Allows companies to raise capital quickly
A regular prospectus enables businesses to proceed with the sale of securities even in situations when a traditional prospectus cannot be generated.
3. Saves time and resources
Since deemed prospectuses are not subject to the same procedures as normal prospectuses, businesses can save production time and costs.
4. Required by regulators
In order to safeguard investors, regulators may, in some cases, require a deemed prospectus.
5. Cost-effective
Because deemed prospectuses are exempt from the same stringent requirements as ordinary prospectuses, businesses may find them to be more affordable.
The deemed prospectus should contain the following components:
1.Business info like objective, name, registered address, etc.
2.All the details of the directors.
3.Information about the shares, which is being issued along with the class and voting rights
4.Subscription amount, which has to be minimum
5.All the details of the underwriters of the issues
6.Issuing business profit and loss reports given by audit experts
7.Details of the amount due while filling out the application, consequent calls and allotment
Under the Companies Act 2013, there are around types of prospectuses. Let’s discuss them in detail: -
1.Red Herring Prospectus
Companies who are initiating an IPO or issuing shares for the first time can get a Red Herring Prospectus. There is no mention of the quantity and price of the shares being offered.
2. Shelf Prospectus
A corporation must file a Shelf Prospectus if it issues one or more securities to the general public. This prospectus has a maximum validity of one year, which starts the moment the business makes its initial public offering.
3. Abridged Prospectus
In accordance with SEBI standards, all relevant information about salient characteristics is included in an abridged prospectus. All the information is presented briefly in this prospectus so that the investor can easily make an informed choice.
Deemed prospectuses are vital to the finance industry since they give investors the necessary information and facilitate fast capital raising for businesses. Its goal—ensuring transparency and regulatory compliance—remains the same, even though it might not be as formal as a regular prospectus. Businesses must be very careful about when to use deemed prospectuses and ensure all the information is correct and up-to-date.
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