After getting the company incorporated, promoters will raise finances. The public is invited to purchase shares and debentures of the company through an advertisement. A document containing detailed information about the company and an invitation to the public subscribing to the share capital and debentures is issued. This document is called ‘prospectuses. Private companies cannot issue a prospectus because they are strictly prohibited from inviting the public to subscribe to their shares. Only public companies can issue a prospectus. Section 2 (36) of the Companies Act defines prospectus as, “A prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other documents invent deposits from public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate.”
The prospectus is not an offer in the contractual sense but only an invitation to offer. A document constructed to be a prospectus should be issued to the public. A prospectus should have the following essentials.
- There must be an invitation offering to the public.
- The invitation must be made on behalf of the company or intended company.
- The invitation must to be subscribed or purchase.
- The invitation must relate to shares or debentures.
A prospectus must be field with the Registrar of companies before it is issued to the public. The issue of prospectus is essential when the company wishes the public to purchase its shares or debentures.
If the promoters are confident of obtaining the required capital through private contacts, even a public company may not issue a prospectus. The promoters prepare a draft prospectus containing required information and this document is known as ‘a statement is lieu of prospectus.’ A prospectus duly dated and signed by all the directors should be field with Register of Company before it is issued to the public.
A prospectus brings to the notice of the public that a new company has been formed. The company tries to convince the public that it offers best opportunity for their investment. A prospectus outlines a detail the terms and conditions on which the shares or debentures have been offered to the public. Every prospectus contains an application from on which an intending investor can apply for the purchase of shares or debentures. A company must get minimum subscription within 120 days from the issue of prospectus. If it fails to obtain minimum subscription from the members of the public within the specified period, then the amount already received from public is returned. The company cannot get a certificate of commencement of business because the public is not interested in that company.
The following matters are to be disclosed in a prospectus:
- Name and full address of the company.
- Full particulars about the signatories to the memorandum of association and the number of shares taken up by them.
- The number and classes of shares. The interest of shareholders in the property and profits of the company.
- Name, address and occupations of members of the Board of Directors or proposed Directors.
- The minimum subscription fixed by promoters after taking into account all financial requirements at the beginning.
- If the company acquires any property from vendors, their full particulars are to be given.
- The full address of underwriters, if any, and the opinion of directors that the underwriters have sufficient resources to meet their obligations.
- The time of opening of the subscription list.
- The nature and extent of interest of every promoter in the promotion of the company.
- The amount payable on application, allotment and calls.
- The particulars of preferential treatment given to any person for subscribing shares or debentures.
- Particulars about reserves and surpluses.
- The amount of preliminary expenses.
- The name and address of the auditor.
- Particulars regarding voting rights at the meeting of the company.
- A report by the auditors regarding the profits and losses of the company.
- These are some of the contents which every prospectus must include. The prospectus is an advertisement of the company, so the company may give any information which promotes its interest. Any information given in the prospectus must be true, otherwise the subscribe can beheld guilty for misrepresentation.
Statement in Lieu of Prospectus
A public company raises its capital from the public and it issues prospectus for this purpose. Sometimes, the promoters of a company decide not to approach the public for raising necessary capital. They are hopeful of raising funds from the friends and relations or through underwriters. In that case a prospectus need not be issued but a Statement in Lieu of Prospectus must be field with the registrar at least three days before the first allotment of shares. Such a statement must be singed by every person who is named therein as a director or proposed director of the company. This statement will be drafted strictly in accordance with the particulars set out in a part I of Schedule III of the Act.