MEANING:

A prospectus is defined as a legal document describing a

company’s securities that have been put on sale. The prospectus
generally discloses the company’s operations along with the
purpose of the securities being offered.

REQUIREMENTS:
1) Prospectus to be in writing:
Any oral invitation to subscribe for shares in or
debentures of a company or deposits is not a
prospectus. Similarly, an advertisement in television or
film is not treated to be in prospectus
2) Public Invitation
Any document is not considered to be a prospectus
unless and until it is an invitation to the ‘public’ to
subscribe for shares in or debentures of a company. But
if the document satisfies the condition of invitation to
the public, it is a prospectus even though it is issued to a
defined class of the public.
3) Public Issue:
Whether shares have been “offered to the public” is the
matter of fact and will depend on the circumstances of a
particular case.
 TYPES:
1) Deemed Prospectus:
 Deemed prospectus as mentioned under Companies Act,
2013 Section 25 (1). When a company allows or agrees to
allot any securities of the company, the document is
considered as a deemed prospectus via which the offer is
made to investors. Any document which offers the sale of
securities to the public is deemed to be a prospectus by
implication of law.
2) Red Hearing:
Red herring prospectus does not contain all information
about the prices of securities offered and the number of
securities to be issued. According to the act, the firm should
issue this prospectus to the registrar before the opening of
the offer and subscription list
3) Shelf Prospectus:
Shelf prospectus is stated under section 31 of the
Companies Act, 2013. Shelf prospectus is issued when a
company or any public financial institution offers one or
more securities to the public. A company shall provide a
validity period of the prospectus, which should not be more
than one year. The validity period starts with the
commencement of the first offer. There is no need for a
prospectus on further offers. The organization must provide
an information memorandum when filing the shelf
prospectus.
4) Abridged Prospectus:
Abridged prospectus is a memorandum, containing all
salient features of the prospectus as specified by SEBI. This
type of prospectus includes all the information in brief,
which gives a summary to the investor to make further
decisions. A company cannot issue an application form for
the purchase of securities unless an abridged prospectus
accompanies such a form.
COMPONENTS:
1) Overview and history of the company:
The prospectus gives an overview of the company since its
creation. It provides a chronology of events that have occurred
over the years, such as those that have helped the company
experience growth. It also includes information about the
founders, company registration, and initial service offerings. This
section may also include an overview of the
company’s strategy and what management believes is
its competitive advantage.

2) Services/products offered by the company:

The services/products section lists the core economic activities
undertaken by the company. The company provides information
about the services and products provided to customers, and any
additions to its operations over the years

3) Management profile:
A prospectus also includes information about the
company’s executive management. It outlines the management
team’s experience and education qualifications that make them a
good fit for the company. Investors want assurance that the
company’s executives have what it takes to safeguard their
investments.

4) Desired deal structure:

If the issuer is an existing company that has issued securities
before, it may provide an overview of its current capital
structure and how the new issue will affect the structure. For
example, when selling bonds, the investors will be interested in
knowing the level of the company’s debt and its ability to pay.
Equity investors will want to see the current equity ownership
structure and how their investment will influence the structure and
the expected rate of return
5) Use of proceeds:

A company will often offer an issue of securities when it is unable to

raise capital internally to finance a large investment. For example, the
company may want to expand its operations to other geographical
locations, acquire proprietary technology, purchase large machinery,
finance the production of a new line of products, execute mergers and
acquisitions, etc

6) Security offering deals:

The prospectus also provides information on the number of
securities that are being offered to the public and the price for each
security. It should also state the expected rate of return on the
investor’s funds. This section also provides information on the
subscription period when interested investors can purchase the
securities.

7) Financial information:
The prospectus should provide investors with information about
the company’s past financial performance. The information may
include, net profit, stock performance, etc. The security
performance can be compared to a known benchmark.

8) Risks involved:

The prospectus should disclose the risks that investors face when
investing in a mutual fund. For example, an international mutual
fund may include a disclosure detailing the currency risks that
investors face when investing in the fund.

Other risks that a company may reveal include possible capital

restrictions, government regulations, individual investors holding
large numbers of stocks, etc. The disclosures protect the company
from accusations that it withheld vital information that caused the
investors to incur losses.