Prospectus Varieties and Deemed Prospectuses

In one line

Beyond the ordinary prospectus the Act recognises three variants, a shelf prospectus valid for a year of successive issues, a red herring issued before the price is fixed, and a members' offer for sale which is deemed to be the company's own prospectus; and it forbids the company to change what it promised in the prospectus without the members and an exit for dissentients.

In exam wording: under section 31(1) a class of companies which SEBI provides by regulations may file a shelf prospectus at the stage of the first offer, indicating a period not exceeding one year as its validity, during which no further prospectus is required for a second or subsequent offer; and under section 32(1) a company proposing an offer of securities may issue a red herring prospectus prior to the issue of a prospectus, being, by the Explanation, a prospectus which does not include complete particulars of the quantum or price of the securities.

Why the law has this at all

A prospectus is expensive to prepare and quickly stale, and the ordinary rule, one document for one issue with ninety days' validity, fits an issuer raising money once. It fits badly two common situations, and each variant answers one.

A frequent issuer, typically a financial institution issuing debt in tranches through the year, would have to repeat the whole exercise every time. The shelf prospectus lets it file once and update by an information memorandum, and s.31's discipline is that the updates must disclose new charges, changes in financial position and any other material change.

A book-built issue cannot state the price in advance, because the price is what the process discovers. The red herring prospectus solves that by permitting an incomplete document, provided the missing particulars are supplied when the offer closes and any variation is highlighted.

Section 28 answers a third situation which is not a variant at all but a deeming rule: existing members selling into the market are, economically, doing what an issuer does, and the buyer needs the same protection. So the document by which they offer is deemed to be a prospectus issued by the company.

And section 27 answers a problem that arises after the money is raised: an issuer who told the market it would build a factory and then does something else has, in substance, sold a different investment. The section requires the members' special resolution, newspaper publication with a justification, and an exit offer to dissentients.

Section 27: changing what was promised

27(1): a company shall not, at any time, vary the terms of a contract referred to in the prospectus or the objects for which the prospectus was issued, except subject to the approval of, or authority given by, the company in general meeting by way of a special resolution.