Deemed Prospectus: All you need to know about | Espresso

What is a Deemed Prospectus?

When a company wants to raise funds from the public by allowing subscription to its securities, it has to draft and file a prospectus. A prospectus is a legal document that details the company’s financial securities – stocks or equities – available to the public. All companies issuing shares to the public are required to file a prospectus with the regulator for prospective customers, enabling them to make informed investment decisions.

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An IPO prospectus tells the public about the company’s fundamentals, business model and growth plan. A prospectus can be a circular, manuscript, notification or advertisement that explicitly details the company shares being sold to the public.

According to the Companies Act 2013, there are four types of prospectus in India. These include Deemed Prospectus, Shelf Prospectus, Red Herring Prospectus and Abridged Prospectus. Of the different types of a prospectus, the deemed prospectus is the most common.

Here is everything you should know about a deemed prospectus:

What is a Deemed Prospectus? What Are its Contents?

According to Section 25(1) of the Companies Act, 2013, a deemed prospectus is a document through which a company offers its securities for sale to the investors. In general, any document issued by a company that explicitly details the sale offer for its securities to the public is a deemed prospectus.

A deemed prospectus is used when a company wants to issue shares to the public through an intermediary to bypass the SEBI (Securities Exchange Board of India) regulations and compliance standards. First, the company allows or agrees to allot its securities to a third party for sale to the public. Then, the intermediary, such as a merchant bank, issuing house or another company, files an ‘Offer for Sale’ for the securities received. This offer for sale is referred to as a deemed prospectus when it fulfils these criteria:

  • The Offer for Sale is made to the public within six months of the share allotment to the intermediary.
  • The company allotting the shares to the intermediary has not received any consideration or compensation until the issuing house files the Offer for Sale.

If any of these conditions are fulfilled by the Offer of Sale document, the document is a deemed prospectus of the company allotting its shares to the intermediary. All provisions and regulations of a prospectus also apply to the deemed prospectus. The accountability of the share issue is on the company issuing the shares to the intermediary. However, the director of the prospectus is the director of the issuing house.

Elements of Deemed Prospectus

  • Company details, such as name, address, business, etc.
  • Memorandum signatories including details of their shareholdings
  • Details about the company directors
  • Financial information as per the audited reports
  • Details like the share issue, issue class, voting rights, etc.
  • The minimum subscription amount
  • The sum due at share application, allotment and subsequent calls
  • Auditors of the company
  • Underwriters of the share issue

Example of Deemed prospectus

Assume ABC Ltd. wants to raise funds by issuing its shares to the public. However, it does not want to comply with the SEBI regulations. In this case, ABC Ltd. contacts a merchant bank in May 2021 and asks them to issue the shares to the public on its behalf. The merchant bank is the intermediary or the issuing house in this case.

To make the shares available to the public, the issuing house creates an Offer for Sale. The document contains all information regarding ABC Ltd, its financials, directors, auditors, memorandum signatories, and the share issue (issue class, voting rights, the sum due at application, allotment, etc.). This Offer for Sale is deemed to be a prospectus for ABC Ltd. if the issuing house offers the shares to the public by October 2021 (within six months of receipt of shares) or the company does not take any compensation from the issuing house until the Offer for Sale.

Conclusion

As an investor, a deemed prospectus is of crucial significance for you. You can make an informed investment decision by understanding details about the company and its shares. In addition, a careful analysis of the deemed prospectus can potentially help you avoid selection risks when investing. You can also seek help from professional investment brokers to comprehensively understand a prospectus and its implications.

Share Market Knowledge Centre

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Frequently Asked Questions

The prospectus gives you exclusive information about a potential investment opportunity as an investor. Once you have an in-depth understanding of the offer, you can make a wise investment decision and avoid pitfalls.

A minimum subscription is a minimum sum that a company should raise at the time of capital issue.

Yes, all companies aiming to raise capital by issuing their shares or securities to the company have to file a prospectus. However, private companies not looking to raise any funds from the public do not have to file a prospectus.

Intermediaries, including underwriting firms, merchant banks or other companies, can make an Offer for Sale to the public on behalf of another firm. However, this Offer for Sale is a deemed prospectus if it is made available to the public within six months of the share allotment to the intermediary and if the original firm does not take any compensation for allotting shares to the intermediary.