What is Prospectus in share markets?
Whenever shares are to be issued to the public, a company must issue a prospectus. The Prospectus contains relevant information like names of directors, terms of issue, etc. It also states the opening date of subscription list, amount payable on application, on allotment & the earliest closing date of the subscription list.
Many companies float public issues in market every day. They also advertise the IPO and often when we read such advertisements we come across such lines printed in small font.
Please read the prospectus carefully prior to investing.
What is the need of Prospectus?
While most of the companies are genuine, there are also few who may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue to judge and identify the future potential of a company. SEBI guidelines stipulate that the company must provide “disclosure of information to the public”. This disclosure would include the information such as what is the reason for raising money, how this money will be spent, what are possible returns on expected money. All this contained in a document which is called “Prospectus”.
Apart from the above, the Prospectus would also cover information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. The sole objective of the Prospectus is to provide investors an opportunity to evaluate short term and long term prospects of the company.
Do private limited companies also release prospectus?
Prospectus is open invitation to the public to take up the shares of the company. Thus, a private company need not issue prospectus. Even a Public Company issuing its shares privately need not issue a prospectus. However in this case, it is required to file a “Statement in lieu of Prospectus” with the register of companies.
But what if the company shows the people a rosy picture in its prospectus?
It is not possible, because before a prospectus is available to the general public, the company has to make a “Offer document’ , which is a “Prospectus” in case of a public issue or offer for sale and “Letter of Offer” in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs). An offer document is thus a “Draft Prospectus”, which covers all the relevant information to help an investor to make his/her investment decision.
The draft offer documents are filed with Securities and Exchange Board of India (SEBI), at least 30 days prior to the registration of Red Herring Prospectus. Since it’s a draft, SEBI may specify changes, if any, in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC. The Draft Offer Document is made available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.
