Meaning and Definition of Prospectus

A company that wants to raise capital from the general public - rather than from a handful of promoters or private investors - must first make a formal, public invitation explaining what it is offering and why the public should invest. This invitation, in whatever printed or electronic form it takes, is what company law calls a prospectus.

Section 2(70) of the Companies Act, 2013 defines a prospectus as any document described or issued as a prospectus, and includes a red-herring prospectus, a shelf prospectus, or any notice, circular, advertisement, or other document that invites offers from the public for the subscription or purchase of any securities of a company, or that invites deposits from the public.

Three features mark out a document as a prospectus in the eyes of the law:

• it must be an invitation, not a private negotiation between two parties;
• the invitation must be made to the public (or a section of it) - this is what separates a genuine prospectus from an internal offer document used in a private placement;
• the invitation must relate to the subscription or purchase of securities (shares, debentures, or other instruments) or to deposits.

A Gujarat board Std 11 Secretarial Practice student should note that the prospectus is far more than a marketing brochure - once issued, it becomes a binding, legally scrutinised document, and every statement in it exposes the company and its directors to liability if untrue (see the section on mis-statement below).