Prospectus — Raising Capital from the Public

Section 23 of the Companies Act, 2013 lays down how a company may raise its share capital. A public company may raise capital in either of two ways: a public offer, by issuing a prospectus inviting the general public to subscribe, or private placement under Section 42, by offering securities to a select group of identified persons rather than the public at large. A private company, by contrast, is confined to private placement, rights issues to its existing members, or bonus issues, and is prohibited from making a public offer at all — this restriction is exactly what the Kinds of Companies section above described as a defining feature of a private company.

Meaning of Prospectus [Section 2(70)]. A prospectus is any document described or issued as a prospectus, and includes a red herring prospectus or a shelf prospectus, or any notice, circular, or advertisement inviting the public to subscribe for or purchase a company's securities. In short, it is the formal invitation — and the accompanying disclosure document — through which a public company approaches the investing public.

Contents of a Prospectus [Section 26]. Because a prospectus is what an ordinary investor relies on to decide whether to put money into the company, the Act requires it to state, among other things: particulars of the company's business and objects; the capital structure and the purpose for which the funds being raised will be used; particulars of the directors and key managerial personnel; the auditor's report on the company's assets, liabilities, and profits for the preceding years; and the risk factors specific to the project being funded. (Key managerial personnel disclosed here may include roles such as the Managing Director and the Company Secretary — the Company Secretary's own professional role is studied separately.)

Shelf Prospectus [Section 31]. Certain classes of companies, as specified by SEBI regulations, are permitted to file one single prospectus covering a whole series of tranches of securities to be issued over a period, rather than filing a fresh prospectus every time. A shelf prospectus is valid for not more than one year from the date the first offer of securities under it opens; further offers made within that one year need only an updating information memorandum, not an entirely new prospectus. This saves a frequent issuer repeated compliance cost.

Red Herring Prospectus [Section 32]. A red herring prospectus is filed with the Registrar before the subscription list for a public issue opens, and it deliberately does not contain the complete particulars of the price or the exact quantum of securities offered. It is used in a book-built issue to gauge investor demand at different possible prices before the company finally fixes the issue price. …