The primary role of the Securities and Exchange Board of India (SEBI) is to ensure regulatory compliance and transparency in the stock markets and other forms of securities trading. It strives to provide all necessary information to investors so that they are well informed before investing their hard-earned money in newly launched securities or about to launch shortly.
For this, it mandates every company or institution willing to issue a public investment offering to file a prospectus. A prospectus can be defined as a legal document containing necessary details about the shares or securities being offered by a company for public sale.
As per the Companies Act of 2013, there are four different types of prospectuses in India. These include the red herring prospectus, shelf prospectus, abridged prospectus, and deemed prospectus. In this article, we will discuss in detail the deemed prospectus. Keep on reading.
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A deemed prospectus is defined under section 25(1) of the Companies Act. As the name suggests, it is only deemed a prospectus and is not considered a fully valid legal document except in certain special circumstances.
Usually, a company needs to file a deemed prospectus when it intends to bypass SEBI regulations and sell specific securities through an intermediary. This intermediary can be a merchant bank, issuing agency, or stockbroker.
A deemed prospectus can be considered a valid legal document for the sale of securities only under the following two conditions:
Condition 1 – The securities are being sold through an intermediary. And the intermediary has made the offer for sale to the public within six months of receiving the shares from the issuing company. Here, the issuing company is assumed to sell its securities to raise capital from public investors.
Condition 2 – If the company, that has allotted the shares to an intermediary, has not received any consideration for the stocks and the intermediary has issued an offer for sale. The SEBI considers such a situation an attempt by the issuing company to sell stocks to public investors without filing a prospectus itself. Subsequently, a deemed prospectus is filed by an intermediary.
If any of these conditions are met, a deemed prospectus is considered valid for an offer to sell securities. However, all the provisions that apply to a general prospectus are also applicable in the case of a deemed prospectus.
Either the issuing company or the intermediary can draft a deemed prospectus. All details about issuing the respective shares must be mentioned while drafting the prospectus.
Suppose ABC company intends to sell its shares through an intermediary without following the usual guidelines laid down by the SEBI.
For this, ABC agreed to allot a certain quantity of securities to an issuing agency on January 2022. This issuing agency will also act as an underwriter for the public offer for sale. Now, the issuing agency floats an offer for the sale of the respective quantity of the shares of ABC company within a few days. For this, it releases a deemed prospectus as a circular.
It means the securities are not sold to the public directly by the issuing company (ABC) but through an intermediary (issuing agency). So, in this case, the circular or deemed prospectus released by the intermediary agency will be considered the official prospectus of the ABC company.
For the ABC company to sell its shares directly to the public, it must follow the rules mentioned under section 26 of the Companies Act and the SEBI guidelines. However, opting to sell them through an intermediary with a deemed prospectus meant it could bypass SEBI guidelines and the Companies Act rules.
The idea behind a deemed prospectus here is to clarify that even if an intermediary files the document, it is still considered a valid legal prospectus of the issuing company. It also ensures that investors have access to complete information about particular shares or securities before investing in them so that the issuing company does not mislead them.
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