MEANING

Any company inviting the public to subscribe the securities or arranging for an offer for sale of its existing securities has to issue a “Prospectus” or a “Letter of Offer” relating to the issue.

Section 2 (36) defines a Prospectus as “any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures of , a body corporate.”

REFERENCE TO THE RELEVANT SECTIONS OF THE COMPANY’S ACT :-

The prospectus is the basis of contract between the company and the person who “buys” the shares on the strength of the prospectus. Section 55 to 68A of the companies Act, 1956 deals with the several aspects relating to the prospectus.

There are certain mandatory disclosures which have to be made in the prospectus. The mandatory disclosures which have to be made in the prospectus include in schedule II of the companies Act, 1956 and should fulfill the SEBI guidelines, 2000.

In order to enable the potential investors to take a well informed decision in the matter, the Companies Act 1956 Under section 44; 56; 60 to 65 and 603 to 608 and schedule II, III and IV spells out in some details the Act sets matter to be included in the prospectus/ Letter of offer which covers:

a) The history and the business of the company and its prompters and management

b) Particulars of the projects including its costs and means of financing.

c) Business prospects.

d) Status and profitability.

e) Audited accounts, for a period of five years and the data of issue of prospectus. letter of offer being not than 120 days.

f) Materials contracts.

g) Particulars of the securities to be issued.

h) Information about the issue, etc.

PURPOSE AND IMPORTANCE OF PROSPECTUS :-

1. To bring the notice of public that the new company has been formed.

2. To inform the public about the prospectus of the company, so that the public may subscribe for the shares and debentures of the company.

3. To make sure that the directors of the company accept responsibility of the statements in the prospectus.

4. To preserve an authentic record of term and conditions on which the public have been invited to subscribe for its shares and debentures.

5. To comply with the statutory requirements i.e. filing with the registrar before issuing to the public.

6. To protect the public against any mis-statement by the directors. This gives confidence to the public to subscribe for shares and debentures of the company.

CONTENTS OF PROSPECTUS

I. General Information: 1. Name and address of its registered office.2. History and main objects of the company.3. Subsidiaries of the company, if any.4. Consent of the central Government obtained for present issue, if required.5. Reference to listing of shares on the stock exchange.6. Declaration about the refund of application money if minimum subscription is

not received.7. Opening and closing date of the issue.8. Name and address of the auditors and lead manager.9. Rating obtained from CRISIL or any rating agency in respect of proposed

preference share issue, if necessary.10. Name and address of the Underwriters and the amount underwritten by them.11. Consent of directors, Auditors, Solicitors, bankers, and others to the present

issue.12. Name and address of the company secretary, legal advisors, lead managers,

auditors, bankers to the company, bankers to the issues and brokers to the issue.

II. Capital stricture of the company :-1. Authorised, issued, subscribed called up and paid-up share capital.2. Amount of the present issue giving details as to on reservation for

preferential allotment to employees, promoters, etc.

III. Terms of Present Issue :-1. Terms of payment, i.e. money to be paid on application allotment,

etc.2. Rights of the shareholder.3. How to apply, application form and mode of payment. Any special tax benefits for the company and its shareholders,

IV. Particulars of the Issue :-1. Objects.2. Projects Costs.3. Means of financing.

V. Company Management:1. Promoters and their background.2. Name, address, description and occupation of managers,

managing director and other director and whole time director.3. Details of allotment, remuneration and borrowing powers of

director and whole time directors.

VI. Particulars of the Project:1. Location of the project and details about it.2. Present positions and future prospects.3. Nature of product.

VII. Management perception of Risk Factors:1. Subject to Foreign Exchange rate fluctuations.2. Difficulty in availability of Raw Materials.3. Subject to change in government policies, etc.

VIII. Statutory and other information: 1. Minimum subscription.2. Expense of issue, payable to advisors, managers to the issue, etc.3. Particulars of previous public or right issue, if any during past five years.4. Issue of shares otherwise than for cash.5. Debenture and redeemable Preference shares and other instrument issued by the

company issued within 2 years preceding the date of prospectus.6. Details of purchase of property and the names and address of the vendors from

whom the property is acquired or to be acquired.7. Rights of members regarding voting, dividend on shares, etc.8. Restriction, if any, on transfer of shares.9. Revaluation of assets, if any, during the past five years.10. Reference to inspection of balance sheet, Profit and loss account and other

documents.

Any other required information.

IX. Signature of directors. (Along with place and date)

DISCLAIMER CLAUSE:

A prospectus shall contain the following disclaimer clause in bold capital letters:

"It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. SEBI does not take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. Lead Merchant Banker, ______________ has certified that the disclosures made in the offer document are generally adequate and are in conformity with SEBI (Disclosures and Investor Protection) Guidelines in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue.It should also be clearly understood that while the Issuer Company is primarily responsible for the correctness, adequacy and disclosure of all relevant information in the offer document, the Lead Merchant Banker is expected to exercise Due Diligence to ensure that the Company discharges its responsibility adequately in

this behalf and towards this purpose, the Lead Merchant Banker _______________________ has furnished to SEBI a Due Diligence Certificate dated ________________ in accordance with SEBI (Merchant Bankers) Regulations 1992

VETTING BY SEBI / STOCK EXCHANGE:

1. A company can’t come out with public issue unless draft Prospectus is filed with SEBI.

2. Prospectus has to be filed by the Merchant Banker.3. After receiving Prospectus SEBI Scrutinizes it and may suggest changes

within 21 days.4. The company can come out with Public Issue any time within 365 days from

date of the letter from SEBI or if no letter is received form SEBI, within 365 days from the date of expiry of 21 days of submission of prospectus with SEBI.

5. Filing of prospectus with the regional office of SEBI falling under the jurisdiction in which registered office of the company is situated if issue size is up to Rs.20 crores.

6. Filing of prospectus at SEBI’s Mumbai office if issue size is more than Rs.20 crores.

7. Prospectus to be filed with the concern Stock Exchange along with the application for listing of securities.

MERITS OF SALE OF SECURITIES THROUGH PROSPECTUS:

1.Direct and simple method for marketing securities.2.Economical.3.Wide coverage.4.Brings decentralization of ownership.5.Direct sale to the investors.6.Convenient to stable companies.

DEMERITS OF ISSUE OF SECURITIES THROUGH PROSPECTUS:

1.It lacks certainty.2.Less support from the middle class investors. 3.It is a time consuming process.

TYPES OF PROSPECTUS:

1. Letter of Offer or Prospectus.

2. Letter of Rights.

3. Statement in lieu of Prospectus.

4. Shelf Prospectus.

5. Draft Prospectus.

6. Red Herring Prospectus.