Prospectus: Concept, kinds, contents, private placement

Prospectuses are legal documents that provide descriptions of the securities of a company that are available for purchase. In general, the prospectus provides information regarding the company’s activities and the justification behind the securities offering.

The prospectus can help investors make more educated investment decisions because it offers a wealth of information about the investment or security. In fields other than investment, a prospectus is a printed document that advertises or discusses an offering such as a school, business enterprise, upcoming book, etc. Prospectuses come in a variety of formats to attract or inform clients, members, purchasers, and investors.

Kinds of Prospectuses 

1. Deemed Prospectus

In accordance with subsection (1) of section 25 of the Companies Act, 2013, if a company consents to offer or allocate securities to the public, a document shall be considered a prospectus.

2. The abridged (shortened) prospectus

It is defined as defined by the registrar, is a concise overview of the prospectus that encompasses all pertinent and practical information. In accordance with subsection (1) of section 33 of the Companies Act of 2013, when purchasing securities issued by a company, the documents for the transaction must include an abridged prospectus.

3. Red Herring Prospectus

Prior to the offer, the registrar requires the submission of the prospectus. In general, the prospectus is devoid of details such as the exact price or quantity of the securities being offered.

4. Shelf prospectus

It refers to the prospectus that a financial institution, bank, or corporation issues for securities comprising multiple classes.

Content of prospectus

The contents of the prospectus are regulated in the Companies Act. The prospectus must cover the following content items.

1. Details about the firm, including its name, registered office address, and objects.
2. Details of the Memorandum’s signatories and their shareholdings
3. Details about the directors
4. Details of the shares offered, the class of the issue, and voting rights.
5. Minimum subscription amount.
6. The amount payable on application, allocation, and subsequent calls.
7. Underwriters for the issue
8. Auditors for the company
9. Audited reports regarded the company’s profits and losses.
10. Private placement

Private Placement Meaning

According to Section 42 of the Companies Act, 2013, a private placement is any offer or invitation to subscribe to or issue securities to a selected group of persons by a company (other than through a public offer) via a private placement offer-cum-application form that meets the conditions specified in Section 42 of the Companies Act, 2013.

Section 42 of the Companies Act of 2013 says that the maximum allotment that can be made in a year is 200, after which the issue is considered public and the firm must follow the procedure for a public issue.

There is no prospectus issued during a private placement.

Types of Private Placements

There are two types of private placement that are used:

1. Preferential Allotment
2. Qualified institutional placement.

Preferential allotment: Preferential allotment is the process of offering stocks to a certain group of firms, such as mutual fund companies, financial institutions, or promoters, at a set price.

The instructions for such an allotment are outlined in Chapter XIII of the SEBI (DIP) rules. Investors may also be subject to a lock-in term for securities issued by the corporation.

Qualified Institutional Placement: Under this type of private placement, a listed firm can only issue shares or other securities to institutional buyers. It is a method of encouraging listed companies to raise cash in the home market. The rules governing such placements are outlined in Chapter XIIIA of the SEBI (DIP) Guidelines.