In general parlance prospectus refers to an information booklet or offer document on the basis of which an investor invests in the securities of an issuer company. It has been defined under section 2(70) so as to mean any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

Matters to be stated in prospectus[Section 26]
(1) Dated: Every prospectus must be dated. The date appearing on the prospectus is deemed to be date of publishing prospectus
(2) Registered: The prospectus must be registered with ROC on or before issue of prospectus to public
(3) Issued: The prospectus must be issued to public within 90 days of registration with ROC. Any issue of securities under the prospectus which is issued beyond 90 days shall be deemed to be an issue without a prospectus.
(4) Contents of the prospectus: Every prospectus issued by or on behalf of a public company either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of
a public company, shall be dated and signed and shall state such information and set out such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government:
General Information ,Financial Information & Statutory Information

Red Herring Prospectus

The Red Herring Prospectus does not include the full particulars of the price of the securities. A company planning to make an offer of securities can issue a red herring prospectus before the issue of the prospectus. The companies file the red herring prospectus with the RoC at least 3 days before the opening the offer. The obligations of this are similar to that of any of the prospectus. The variations in the red herring prospectus from the other prospectus are highlighted. While closing an offer, the companies file the prospectus with the RoC and SEBI . It contains the information of the total capital raised whether, by share capital or debt, the closing price of the offer and the other details left out in the red herring prospectus.

Abridged Prospectus

Abridged Prospectus is a memorandum which has salient features of the prospectus. There shall be no form of application for issuing any securities unless it has the abridged prospectus. It has four exceptions like:

• When the company does not offer the securities to the public
• The offer is to the members or debenture holders of the company with or without the right to renounce
• The company makes an offer concerning the bonafide invitation to a person. This is to enter into an underwriting agreement concerning the securities
• The shares or the debentures offered should be uniform and similar to the shares and debentures that are already issued

If a person requests a copy of the prospectus, he will be given before the closing of the offer and subscription list. If the company does not comply with any of these provisions, then they will be liable to pay an amount of Rs.50,000 for each default.

Shelf Prospectus

A shelf prospectus is a type of prospectus issued by companies making multiple issues of bonds for raising funds. A prospectus is a notice, advertisement or any other document inviting the public to subscribe for securities. It is compulsory for ;Public limited companies to issue a prospectus before issuing securities. A shelf prospectus can be issued by any public limited company raising funds through multiple issues of bonds. Companies which issue a shelf prospectus should file an Information Memorandum in Form PAS-2.

The advantage of a shelf prospectus is that a new prospectus need not be issued every time the company issues securities. A maximum of four issues of securities can be made using a shelf prospectus. A shelf prospectus should be used within a maximum of one year.

A shelf prospectus can be filed only by companies issuing non-convertible debt bonds (these are bonds which cannot later be converted into  share capital). The procedure for raising funds using a shelf prospectus is the same as for raising debt funds. The only additional requirement is to file an Information Memorandum.

A substantial amount of public money is involved when a company goes in for a public issue of bonds. Therefore, any public issue is governed by the rules and regulations developed by the Securities and Exchange Board of India (SEBI).

Applicability

The following kinds of companies are eligible to issue a shelf prospectus:

• Public Financial Institutions (PFIs) (PFIs are companies whose paid-up share capital is held by the Central Government to the extent of more than 51 per cent. Examples are the Life Insurance Corporation of India, Infrastructure Development Finance Company Limited, Industrial Credit and Investment Corporation of India Limited, Industrial Finance Corporation of India, and Industrial Development Bank of India.)
• Public sector banks
• Non-Banking Financial Companies.
• Listed companies [A listed company has its securities listed with the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) or Calcutta Stock Exchange (CSE)]

Conditions

These are the conditions that should be followed by a company opting to issue a shelf prospectus:

• The company’s net-worth should be more than Rs.500 crores.
• The company should have had distributable profit during the preceding three years.
• An arrangement should be made for dematerialisation of securities. The arrangement must be made with a depository registered with the SEBI.
• A merchant banker should be appointed for the issue. The merchant banker must be registered with the SEBI.
• In case debentures are issued, a debenture trustee should be appointed.
• Credit rating should be obtained. The securities issued should have a credit rating of AA- or more (Credit ratings are accepted only from credit rating agencies registered with the SEBI).
• The company’s directors or promoters should not have been faced with any regulatory action.
• The company should not have defaulted in repayment of deposits during the preceding three years.
• The company should have honoured its listing agreement during the preceding three years.

Remedies for Untrue Statement or Mis-statement

If a company issues a prospectus, then it is responsible for the statement in it.The Companies Act, 2013 provides remedies for civil liability and criminal liability.

Civil Liability for Mis-statement

If a subscribed person of the securities suffers any loss or damage because of a misleading statement in the prospectus, then the company is liable to pay for the compensation to every subscribed person of the securities. Every director and promoter of the company is liable to pay for the compensation. The person who authorises the issue of prospectus and the expert who issues the statement is also responsible for paying the compensation. The directors of a company are not liable to the punishment if they have withdrawn from the post before the issuance of the prospectus or if the prospectus was issued without his knowledge and he proves it by public notice. The expert can also escape the liability by proving that after giving consent to the copy, he withdrew before it was delivered to the RoC.

Criminal Liability for Mis-statement

The persons responsible for the issue of such a prospectus that has untrue statements will be liable under Section 447. This section provides that any person who is guilty of fraud will receive imprisonment for 6 months which may extend to 10 years. They shall also pay a fine of an amount not less than that involved in the fraud; this may extend up to three times. If the fraud involves the interest of the public, then the imprisonment period will not be less than 3 years. If the person authorised the issue without prior knowledge and if he proves it, then he is not liable to imprisonment

Conclusion:

A prospectus is an essential disclosure document that a company has to issue at the time of issuing investment securities to the public. These formal documents provide detailed information to prospective investors about mutual funds, bonds, stocks, and other investment offerings to the public. A prospectus is an advertisement or an invitation from a company to the general public to subscribe or purchase shares or debentures issued by the company. This invitation to purchase shares is also known as the initial public offering (IPO), through which a public company can raise the funds it requires.