Procedure for a Public Issue of Shares: SEBI and the Prospectus

Because a public issue draws money from the general investing public, it is the most heavily regulated of all the methods of issue, and SEBI sits at the centre of that regulation. SEBI administers the Issue of Capital and Disclosure Requirements Regulations, requires every intermediary involved in a public issue — merchant bankers, registrars to the issue, bankers to the issue, and underwriters — to be registered with it, and vets the company's disclosure document before it is allowed to reach the public at all, so that an investor's decision to subscribe is always based on full and accurate information rather than the company's own one-sided sales pitch.

That disclosure document is the prospectus, defined under Section 2(70) of the Companies Act, 2013 as any document described or issued as a prospectus, and expressly including a red herring prospectus and a shelf prospectus. A red herring prospectus, dealt with under Section 32, is a prospectus that does not include complete particulars of the quantum or price of the securities offered — filed with SEBI and the stock exchanges ahead of the final prospectus, precisely so that the public and the regulator can scrutinise the issue's other terms before the price itself is finally fixed, commonly through a book-building process within a stated price band. Whatever form it takes, the prospectus must set out the company's general information, its capital structure, the objects of the issue, the terms of the offer, the risk factors an investor should weigh, the company's financial statements, and details of any pending litigation and its management — must be dated and signed by the company's directors — and must be filed with the Registrar of Companies before it is issued to the public. …