A deemed prospectus, defined in Section 25(1) of the Companies Act, serves as a prospectus without being a full, formal one. It lets a company seek investments without submitting a complete prospectus to the Securities and Exchange Board of India (SEBI). Instead, a document with similar details can be used. The term 'deemed' means it has the same status as a prospectus but isn’t fully formal.
When a company or business wishes to sell its shares, it is required to make this document public for all shareholders and investors. It is an indirect way to sell your shares without complying with the Securities and Exchange Board of India (SEBI) guidelines. However, SEBI has mandated that the deemed prospectus be made public. The term deemed prospectus has been defined and included in the Companies Act under section 25(1).
In simple terms, if a company doesn't want to go public directly but prefers to offer its shares indirectly through an intermediary, a deemed prospectus is mandated. This ensures that the company is transparent about its securities so that investors are protected against any wrongdoing.
What is the importance of a deemed prospectus?
When a company wishes to raise funds and allow the public to purchase its securities, it is required to issue a deemed prospectus. It is not a complete prospectus, but it allows investors to assess the company's details and decide accordingly. Any information bound to affect the company's financials and future must be included here. Considering this is a legal document, the companies also ensure that all communication is valid and authentic. Hence, a deemed prospectus is extremely important for potential investors and shareholders.
Understanding the meaning of deemed prospectus with example
Let us assume the company XYZ Ltd. is ready to go public. It wishes to do so without complying with the SEBI guidelines. For this reason, it will take the intermediary route.
Thus, XYZ Ltd. will issue its shares to another agency. Through an 'offer for sale', the agency, as an intermediary, will issue the shares of this company to the public. XYZ Ltd. shall not be directly involved in this trade. This offer for sale would now serve as a 'deemed prospectus' for XYZ Ltd., and the agency will be considered the representative of the company.
For this offer for sale to be considered a deemed prospectus, one of the following criteria must be applicable.
Criteria 1
The intermediary must make the offer to the general public within six months from the allotment date of the securities (by the intermediary). If this time frame is followed and conditions are met, the 'offer for sale' shall be considered the deemed prospectus. In such a scenario, SEBI will assume that the issuing company intends to raise capital directly from the public, and the company or the intermediary must release all the information to the investors and SEBI by issuing a prospectus.
Criteria 2
If the company does not receive any consideration for its securities until its intermediary makes the offer for sale, it is considered a deemed prospectus. In the eyes of SEBI, it will be regarded as an attempt by the company to issue shares to the public via the intermediary without issuing a prospectus. As per the law, the intermediary must issue an offer for sale (deemed prospectus) to the investors.
If either of the criteria is met, the offer for sale by the intermediary is automatically regarded as a deemed prospectus from the issuing company. As such, it must comply with the rules and regulations that generally apply to a company’s prospectus. Furthermore, it should be noted that while the intermediary issues the offer for sale, the issuing company (XYZ Ltd.) assumes responsibility for the deemed prospectus.
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What are the contents of a deemed prospectus?
A deemed prospectus contains the company details pertinent to investors and shareholders. The information includes:
- Basic information about the company, such as its name, objective, and documented office address
- Details about the director
- Underwriters' details
- All information about the company's profit and loss, based on its audit reports
- Minimum subscription amount
- Payments owed at the time of allotment, application, and consequent calls
- Components of the stocks to be issued, with the voting rights and class
- Participant details of the memorandum, inclusive of their shareholdings
What are the other types of prospectuses?
There are three other types of prospectuses: shelf, abridged, and red herring prospectus. Each features different information.
- Shelf prospectus: A shelf prospectus has a one-year validity period, and a company can issue multiple securities to the public when it files for one. As soon as the company makes its first offer, its timeline begins.
- Abridged prospectus: All key features and information are included in this prospectus. As mandated by SEBI, the company should not miss any details that might be relevant to an investor.
- Red herring prospectus: Companies launching an IPO or offering shares for the first time opt for this prospectus. It does not specify the purchase value or quantity of the shares being issued.
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Closing thoughts
When a company decides to go public and encourage investors to buy shares, it is required to provide a prospectus to potential investors. This document is intended to ensure that all relevant information is readily available and that utmost transparency is maintained for the sake of all interested parties. In some cases, a deemed prospectus may be utilised, whereby an intermediary (issuing agency) provides the 'offer on sale', and the agency's director is considered the director of the deemed prospectus. This approach helps ensure all the necessary information is included and potential loopholes or gaps are minimised.
