Protecting investors' interests is paramount in stock markets and other forms of securities trading. Investors should always be informed and have access to comprehensive information regarding the companies they wish to invest in. This is where the significance of prospectuses comes into play, as they serve as a vital tool in maintaining transparency throughout the sale of securities.
Companies are legally obligated to disclose all pertinent information regarding the sale of securities by filing a prospectus with SEBI. However, there exist possibilities for companies to exploit loopholes, such as engaging intermediaries for the sale of securities. This is where a deemed prospectus assumes importance. Let's dig deep to understand what a deemed prospectus is and its various aspects.
A deemed prospectus is an elaborate document intended for the general public, presenting an offer to sell securities issued by a company. The Companies Act, specifically Section 25(1), establishes the legal basis for this notion. Although the document may not be explicitly labeled as a prospectus, it is treated as one based on its inherent characteristics and content. An alternative term for a deemed prospectus is an abridged prospectus.
The concept of a deemed prospectus proves particularly valuable when a company seeks to issue securities through an intermediary and bypasses the regulatory compliance requirements set by SEBI. A deemed prospectus guarantees that all market participants are adequately informed about the sale, thereby enhancing transparency. Moreover, it improves the efficiency of decision-making for investors, enabling them to make well-informed choices.
A deemed prospectus functions as an Offer for Sale to the public only when it meets one of the two specified criteria:
- Criterion 1: An intermediary offers for sale to the public within six months of the allotment of shares or securities to that intermediary.
- Criterion 2: The company that issued shares or securities to the intermediary has received consideration for those shares on the date the intermediary offers them for sale.
Consider a scenario where a company, ABC, plans to sell or issue its shares to the public without informing SEBI, utilizing the services of an intermediary. In January 2021, ABC Company agreed to issue its shares to an issuing agency, which in this case happened to be an underwriting company.
Subsequently, the issuing agency, acting as an intermediary, offers the shares of ABC Company through an Offer for Sale to the public. As a result, the document produced by the agency for the Offer for Sale now assumes the role of a prospectus for ABC Company, as it serves as the means through which the shares are being shared with the public, albeit indirectly through the intermediary agency.
To issue shares directly to the public, ABC Company would have been required to adhere to Section 26 of the Company's Act and comply with the rules set by SEBI. However, ABC chose to utilize the services of an agency to bypass these compliance obligations.
According to Indian law, if an issuing company seeks assistance from another agency or company, the latter is regarded as a representative of the former. Consequently, the document about the Offer for Sale will be deemed the prospectus of ABC, fulfilling the following two criteria.
Criteria 1: As mentioned earlier, ABC allotted the agency shares in January 2021. The issuing agency must offer these shares to the public within six months, specifically by June 2021. If ABC Company fulfills this condition, the Offer for Sale by the agency can be considered a deemed prospectus for ABC.
Criteria 2: In the second criterion, the issuing agency should have received a different consideration or valuation for the shares of ABC company that were issued.
1. Investor Protection:
A deemed prospectus plays a vital role in safeguarding the interests of investors. By providing holistic information about the issuer, the nature of the securities being offered, associated risks, financial statements, and other relevant details, it helps potential investors assess the investment opportunity and make informed choices.
The prospectus ensures transparency and reduces information asymmetry between issuers and investors, promoting a fair and efficient capital market.
2. Disclosure of Material Information:
A deemed prospectus acts as a disclosure document that makes material information about the issuer and the securities offering available to the public. It includes details such as the issuer's business, financial condition, management, legal and regulatory matters, and other factors that could impact the investment decision.
By mandating the disclosure of such information, a deemed prospectus enhances market integrity, allowing investors to evaluate the risks and rewards associated with the investment.
3. Legal Protection:
A deemed prospectus offers legal protection to investors in case of false or misleading statements, omissions, or other violations of securities laws. If investors suffer losses due to misleading information provided in the prospectus, they may have legal recourse against the issuer, underwriters, and other parties involved in the offering.
This legal protection reinforces the importance of preparing an accurate and comprehensive deemed prospectus and encourages issuers to exercise due diligence in their disclosures.
4. Market Efficiency and Liquidity:
The availability of a deemed prospectus promotes market efficiency and liquidity. It allows investors to evaluate securities offerings based on accurate and reliable information, facilitating capital allocation to its most productive use.
By enhancing investor confidence, the prospectus helps attract a broader base of potential investors, deepening the market and improving liquidity for the securities being offered.
A deemed prospectus clarifies the responsibility for the terms and conditions outlined in the prospectus by pinpointing accountability to the intermediary and the issuing company. It actively protects the interests of investors, emphasizing the need for a comprehensive analysis of the prospectus's terms and conditions and conducting proper research before investing. Moreover, investors should ensure the investment aligns with their objectives and time horizon.
Defined under section 25 (1) of the Company’s Act, a deemed prospectus is not a full-fledged prospectus. This prospectus becomes essential when a company issues shares via an intermediary.
Red Herring Prospectus - This prospectus is available when a company goes for an IPO. It has no details of the price and number of securities offered.
Shelf Prospectus - A company uses this prospectus when it offers one or more securities to the public. This prospectus is valid for 1 year, which begins as soon as the company makes its first offer.
You can evaluate your investment’s risk with a deemed prospectus. It also helps maintain complete transparency.
A deemed prospectus has the following information:
Information related to the company, including its name and registered address
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