Kinds of Prospectus

Section 31(2): the information memorandum. A company filing a shelf prospectus shall file an information memorandum containing all material facts relating to new charges created, changes in the financial position between the first or previous offer and the succeeding offer, and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer.

The proviso protects applicants who are already in. Where the company or any other person has received applications for allotment along with advance payments of subscription before the change, it shall intimate the changes to those applicants, and if they express a desire to withdraw, shall refund all the monies received as subscription within fifteen days.

Section 31(3). Where an information memorandum is filed, every time an offer is made under sub-section (2), the memorandum together with the shelf prospectus shall be deemed to be a prospectus. So the full weight of prospectus liability attaches to the pair.

The Explanation defines it: a shelf prospectus is a prospectus in respect of which the securities or class of securities included in it are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

Red herring prospectus: section 32

Section 32(1). A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.

Section 32(2). It shall be filed with the Registrar at least three days prior to the opening of the subscription list and the offer.

Section 32(3). It shall carry the same obligations as are applicable to a prospectus, and any variation between the red herring prospectus and the prospectus shall be highlighted as variations in the prospectus.

Section 32(4). Upon the closing of the offer, the prospectus stating the total capital raised, whether by way of debt or share capital, the closing price of the securities, and any other details not included in the red herring prospectus, shall be filed with the Registrar and with SEBI.

The Explanation defines it: a red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

Notice the shape of the process. A red herring goes out first, without quantum or price; three days later the subscription list opens; the offer closes; and only then is the final prospectus filed, with the money raised and the closing price. The name comes from the practice of printing a warning in red on the cover.

Abridged prospectus

Defined in section 2(1) as a memorandum containing such salient features of a prospectus as may be specified by SEBI, and made compulsory by section 33(1): no form of application for the purchase of securities may be issued unless accompanied by an abridged prospectus, save for a bona fide underwriting invitation or securities not offered to the public. Any person may demand the full prospectus before the subscription list closes, and default costs fifty thousand rupees for each default. The full treatment is in [What a Prospectus Is, and What It Must Say].

Deemed prospectus: section 25

This is the one students find hardest, so take it slowly.

The mischief. A company that wants to reach the public without issuing a prospectus can allot its whole issue to an intermediary, an issuing house, which then offers the shares on to the public. The company has issued no prospectus; the intermediary is not the company. Without section 25 the public would get no disclosure and no remedy.

Section 25(1). Where a company allots or agrees to allot any securities with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale is made shall for all purposes be deemed to be a prospectus issued by the company. All enactments and rules of law as to the contents of a prospectus and as to liability for mis-statements in and omissions from a prospectus apply, with the modifications in sub-sections (3) and (4), as if the securities had been offered to the public for subscription and as if persons accepting the offer were subscribers, but without prejudice to the liability of the persons by whom the offer is made for mis-statements in the document.

Read the two "as if" clauses. They convert a sale into a subscription and a buyer into a subscriber, which is what makes the whole prospectus machinery fit a transaction it was not designed for. And the closing words preserve the intermediary's own liability, so the deeming adds a defendant rather than substituting one.

Offer for sale by members: section 28

Section 28(1). Where certain members of a company propose, in consultation with the Board of Directors, to offer the whole or part of their holding of shares to the public, in accordance with any law for the time being in force, they may do so in accordance with such procedure as may be prescribed.

Section 28(2). Any document by which the offer of sale to the public is made shall for all purposes be deemed to be a prospectus issued by the company, and all laws and rules as to the contents of a prospectus and as to liability for mis-statements in and omissions from it apply as if it were a prospectus issued by the company.

Section 28(3): who pays and who authorises. The members whose shares are offered, whether individuals or bodies corporate or both, shall collectively authorise the company to take all actions in respect of the offer for sale for and on their behalf, and shall reimburse the company all expenses incurred by it on the matter.

That last provision is fair and is often asked: the company does the work, the selling shareholders take the money, so the selling shareholders bear the cost.

How section 28 differs from section 25. In section 25 the company allots to an intermediary who then sells on. In section 28 existing members sell their own shares directly to the public, in consultation with the Board. Both documents are deemed prospectuses; the routes are different.

A worked example

Godavari Infra Limited plans to raise money four times over the next year.

Shelf prospectus. If it belongs to a class SEBI has provided for, it may file a shelf prospectus at the first offer, valid for up to one year from the opening of that first offer. Before the second and each later offer it files an information memorandum with the new charges created and the changes in its financial position. Because two hundred applicants had already applied with advance payments before a change, the company must intimate them and refund within fifteen days any who ask to withdraw. Each time, the information memorandum and the shelf prospectus together are deemed to be a prospectus.

Red herring prospectus. For its main equity issue it uses book building, so it issues a red herring prospectus without the quantum or price, files it with the Registrar at least three days before the subscription list opens, and carries the same obligations as a full prospectus. When the offer closes it files the prospectus with the Registrar and SEBI, stating the total capital raised, the closing price and everything the red herring omitted, with any variations highlighted.

Application forms. Every form carries an abridged prospectus, and anybody who asks before closing gets the full document.

Deemed prospectus. Suppose instead the company allots its entire issue to Konkan Issuing House Limited, which then offers the shares to the public. The company has issued no prospectus. Section 25 deems the issuing house's offer document to be a prospectus issued by the company, buyers are treated as subscribers, and the company and its directors carry prospectus liability, without prejudice to the issuing house's own liability.

Offer for sale by members. Two years later the founders wish to sell thirty per cent of their own shares to the public. In consultation with the Board, they do so under section 28. Their offer document is deemed a prospectus issued by the company, they must collectively authorise the company to act for them, and they must reimburse the company its expenses.

Distinctions that carry marks

What this does NOT mean

It does not mean a red herring prospectus is a draft. By section 32(3) it carries the same obligations as a prospectus, so liability attaches to it fully.

It does not mean a shelf prospectus lasts a year from filing. The year runs from the date of opening of the first offer under it.

It does not mean an abridged prospectus limits what the applicant can see. Section 33(2) gives any person the full prospectus on request before closing.

It does not mean a deemed prospectus lets the intermediary off. Section 25(1) preserves the liability of the persons by whom the offer is made, without prejudice.

Quick revision

• Shelf, section 31: classes SEBI provides for; filed at the first offer; validity up to one year from the opening of the first offer; information memorandum before each later offer with new charges and financial changes; applicants who paid in advance must be intimated and refunded within fifteen days if they withdraw; memorandum plus shelf prospectus deemed a prospectus.
• Red herring, section 32: issued before the prospectus; filed at least three days before the subscription list opens; same obligations as a prospectus; variations highlighted; after closing, the prospectus with total capital raised and closing price filed with the Registrar and SEBI; lacks quantum or price.
• Abridged, section 2(1) and section 33: must accompany every application form; exceptions for bona fide underwriting and securities not offered to the public; full prospectus on request; fifty thousand rupees per default.
• Deemed, section 25: company allots with a view to onward sale to the public; the offer for sale document is deemed a prospectus issued by the company; buyers deemed subscribers; the offerors' own liability preserved.
• Offer for sale by members, section 28: members offer their own holding in consultation with the Board; document deemed a prospectus issued by the company; members must collectively authorise the company and reimburse its expenses.

Test yourself

1. What is a shelf prospectus and how long is it valid? A prospectus in respect of which the securities included in it are issued for subscription in one or more issues over a certain period without a further prospectus. It indicates a period not exceeding one year as its validity, commencing from the date of opening of the first offer under it: section 31(1) and its Explanation.

2. What must a company do before a second offer under a shelf prospectus? File an information memorandum with the Registrar containing all material facts about new charges created and changes in the financial position since the first or previous offer, within the prescribed time and prior to the issue: section 31(2).

3. What is a red herring prospectus and when must it be filed? A prospectus that does not include complete particulars of the quantum or price of the securities. It must be filed with the Registrar at least three days prior to the opening of the subscription list and the offer: section 32(2) and the Explanation.

4. What must be filed after a red herring issue closes? The prospectus stating the total capital raised, whether by debt or share capital, the closing price of the securities and any other details not in the red herring prospectus, filed with the Registrar and with SEBI: section 32(4).

5. What is a deemed prospectus? Where a company allots or agrees to allot securities with a view to their being offered for sale to the public, the document by which that offer for sale is made is deemed for all purposes to be a prospectus issued by the company, buyers being treated as subscribers, without prejudice to the liability of the persons making the offer: section 25(1).

6. Who bears the cost of an offer for sale by members under section 28? The members whose shares are offered. They must collectively authorise the company to act for them and shall reimburse the company all expenses incurred by it on the matter: section 28(3).