In India, a company that wishes to issue shares or debentures to the public must comply with the provisions of the Companies Act, 2013. One of the key requirements under the Act is the preparation and filing of a prospectus or statement in lieu of prospectus with the Registrar of Companies. In this article, we will discuss the concept of a prospectus and statement in lieu of prospectus, their legal requirements, and the consequences of non-compliance.
What is a Prospectus?
A prospectus is a document that contains information about a company and its securities that are being offered to the public. The purpose of a prospectus is to provide investors with all the relevant information they need to make an informed investment decision. The prospectus typically includes details about the company’s business, financial statements, management, risk factors, and the terms and conditions of the securities being offered.
The Companies Act, 2013 defines a prospectus as “any document described or issued as a prospectus and includes any notice, circular, advertisement, or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any securities of a body corporate”.
Legal Requirements for a Prospectus
Under the Companies Act, 2013, a prospectus must be filed with the Registrar of Companies before the company can make an offer to the public for the subscription or purchase of its securities. The prospectus must comply with the requirements set out in the Act and the rules made thereunder.
The Act requires that the prospectus must contain all the information that a reasonable investor would need to make an informed decision about whether to invest in the company. This includes information about the company’s business, financial statements, management, risk factors, and the terms and conditions of the securities being offered.
The prospectus must also be dated and signed by the directors of the company. In addition, the prospectus must be registered with the Registrar of Companies before it can be circulated to the public. The registration process involves the payment of a fee and the submission of various documents, including a copy of the prospectus, a copy of the memorandum and articles of association of the company, and a statement of the minimum subscription.
Consequences of Non-Compliance with Prospectus Requirements
Non-compliance with the prospectus requirements can have serious consequences for the company and its directors. If a company makes an offer of securities without a validly filed and registered prospectus, the offer is deemed to be an illegal offer and is void ab initio.
In addition, any person who subscribes for securities on the basis of an illegal offer is entitled to rescind the contract and claim damages from the company. The directors of the company may also be held liable for any losses suffered by the investors as a result of the illegal offer.
Statement in Lieu of Prospectus
In certain circumstances, a company may be exempted from the requirement to prepare and file a prospectus. Instead, the company may prepare and file a statement in lieu of prospectus with the Registrar of Companies. A statement in lieu of prospectus is a document that contains the same information as a prospectus, but is not circulated to the public.
Legal Requirements for a Statement in Lieu of Prospectus
Under the Companies Act, 2013, a statement in lieu of prospectus can be filed in the following circumstances:
- When a company issues shares to its existing shareholders without an invitation to the public.
- When a company issues shares to its employees under a scheme of employees’ stock option.
- When a company invites deposits from its members.
- When a company issues securities through a private placement.
The statement in lieu of prospectus must contain the same information as a prospectus, including details about the company’s business, financial statements, management, risk factors, and the terms and conditions of the securities being offered. The statement must be signed by the directors of the company and must be filed with the Registrar of Companies.
Consequences of Non-Compliance with Statement in Lieu of Prospectus Requirements
If a company fails to comply with the requirements for a statement in lieu of prospectus, the offer of securities will be deemed to be an illegal offer and will be void ab initio. As a result, any person who subscribes for securities on the basis of an illegal offer is entitled to rescind the contract and claim damages from the company. The directors of the company may also be held liable for any losses suffered by the investors as a result of the illegal offer.
Conclusion
In conclusion, a prospectus or statement in lieu of prospectus is a crucial document in the process of issuing securities to the public in India. The document is required to provide investors with all the relevant information they need to make an informed investment decision. Non-compliance with the requirements for a prospectus or statement in lieu of prospectus can have serious consequences for the company and its directors, including the possibility of legal action and damages claims.
Therefore, companies must ensure that they comply with the legal requirements for preparing and filing a prospectus or statement in lieu of prospectus with the Registrar of Companies. This includes providing accurate and complete information in the prospectus or statement in lieu of prospectus, as well as registering the document with the Registrar of Companies before it is circulated to the public. By doing so, companies can ensure that they are in compliance with the law and are able to raise capital from the public in a legal and responsible manner.