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Understanding The Different Forms of Prospectuses

09 Aug 2023

Introduction:

Going public is one of the most critical milestones in a company’s life cycle. It starts with issuing an Initial Public Offering (IPO), receiving subscriptions from investors, and finally, getting listed on the stock markets. But before a company can issue its shares for public sale, it needs to file or release a prospectus.

This prospectus is meant to provide crucial information about the public offering to prospective investors and regulatory bodies. As an investor, you can review the prospectus to gauge whether investing in a newly-launched public issue is right for you. 

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What is a prospectus?

A prospectus is a legal document that an issuing company needs to file with the Securities and Exchange Board of India (SEBI) before issuing securities for public investment. It can be a mutual fund scheme, bond, IPO, etc. A prospectus contains detailed information about the new public investment offering that is being launched.

However, there are different types of prospectuses for different securities issuing, and understanding each one is vital for you to make appropriate investment decisions. Continue reading to learn about the different forms of prospectuses and their importance.

Different types of prospectuses

As per the Companies Act (2013), there are four different types of prospectuses: the red herring prospectus, shelf prospectus, abridged prospectus, and deemed prospectus. Let’s discuss them one by one.

Red herring prospectus

Thanks to the increasing popularity of IPO among investors, the red herring prospectus has become a very familiar term. But for those who don’t know, it is a document that a company needs to file with the SEBI to take approval for launching an IPO. 

Unlike other forms of prospectuses, a red herring prospectus does not contain detailed information about the quantum or price of the securities that will be offered. Instead, it is a part of the book-building process for an IPO. 

As an investor, you must refer to the red herring prospectus before subscribing to an IPO. You will get to know crucial details, such as the issuing company’s financials, past performance, strengths, weaknesses, etc. Knowing these details can help you make an informed investment decision.

Shelf prospectus

Companies use a shelf prospectus to issue bonds. Like an IPO, bonds also allow companies to raise capital from public investors. The only difference is that the issuing company takes a loan from investors at a specific interest rate instead of selling their equities. 

Any company, be it government or private, can file a shelf prospectus to issue bonds. It has to be filed with the registrar before the first offer of the bond is made. 

For investors, investing in bonds allow them to earn secured returns through less risky investment channels. However, they should read the prospectus before investing to know about the issuing company, coupon rate, tenure, face value, etc.

Abridged prospectus

The abridged prospectus is a memorandum containing the salient features or summary of a prospectus. It is drafted as per the regulations specified by the SEBI. As per section 33 of the Companies Act, a company cannot apply for the issue of securities for public investment unless it has filed an abridged prospectus.

An abridged prospectus helps investors, underwriters, and market regulators to have a basic idea of the issue. It is useful for different entities in different ways. 

Deemed prospectus

A company has to follow SEBI regulations for the issue of fresh securities for public sale. However, if it wants to avoid complying with the regulations of the SEBI, it can file a deemed prospectus. A deemed prospectus can be filed for allotting shares or securities through an intermediary, a merchant bank or a stockbroker.

A deemed prospectus is released by an intermediary on behalf of the issuing company. It can be considered a legal document for an offer for sale under specified circumstances.

To conclude

A prospectus is crucial for investors, market regulators, and other participants. Four types of prospectuses exist; each performs differently and is used for different purposes. 

As an investor, you can thoroughly review the prospectus before committing to a newly-launched investment instrument. This allows you to analyse the risk-reward balance and make an informed decision.

 

Related Articles: What is the Roles of IPO In Stock Market | What Happens to Your Money Once You Bid For an IPO | Understanding All that a Prospectus Entails | What Are the Different Types of IPO |  How to Apply for IPO Using UPI ID

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