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Deemed Prospectus: Definition, Components and Examples
Section 2(70) of the Company’s Act defines what a prospectus is. A prospectus of a company is a legal paperwork of a company. It explains securities or shares of a company which a company has offered to public. It is one of the formalities mandated by SEBI to ensure complete transparency in securities trading and protect investors' interests. A deemed prospectus is one such document.
What Is a Deemed Prospectus?
A deemed prospectus, as this name suggests, is deemed to be a company's prospectus. In simple terms, this is a detailed legal document which contains all information regarding stocks, shares or securities that a company offers to public.
As mentioned in Section 25 (1) of the Company's Act, a deemed prospectus is a form of a prospectus. This idea of a deemed document is only relevant when a company intends to sell shares through an intermediary in order to avoid SEBI guideline compliance. These intermediaries can be an issuing agency or merchant bank.
But why is it important? What actually happens when a company tries to sell shares via an intermediary, trying to sell them afterwards?
First, a company should file an offer for sale, known as a prospectus or a deemed prospectus. In this way, that company has to sell its securities to public, being totally transparent.
A deemed prospectus serves as an Offer for Sale for public only if it satisfies either of the following criteria:
An intermediary made Offer for Sale to public within 6 months of allotment of shares or securities to the intermediary.
The company that allotted its shares to the intermediary has not received any consideration for the same until the date on which intermediary made Offer for Sale.
Understanding Deemed Prospectus with the Help of an Illustration
Let's say there is a company named ABC which intends to sell or issue its shares to public without notifying SEBI through an intermediary.
ABC agrees to issue its shares to an issuing agency in January 2021. The issuing agency here was an underwriting company. The agency issues shares of ABC Company through an Offer for Sale. So, now those issues are being shared with public not directly by ABC but via an intermediary agency. Hence, this document by the agency of Offer for Sale is now serving as a prospectus of ABC.
If ABC Company had to issue its shares to public directly, it had to comply with Section 26 of the Company’s Act and SEBI rules. But ABC did it via an agency to avoid such compliances. Now, as per Indian law, if an issuing company takes assistance from another agency or company, the latter will be considered as a representative of the former. Offer for Sale document will be considered as deemed prospectus of ABC, implying either one of the following two criteria is satisfied.
As previously mentioned, ABC allotted its shares to the agency in January 2021; issuing agency has to offer its shares to public within 6 months, i.e., by June 2021. If ABC Company fulfils the condition, its Offer for Sale can be considered as Deemed Prospectus for ABC.
The second criterion was when the issuing agency issued shares of ABC, the company should not have received any consideration or valuation by then.
If either of these above conditions is satisfied, then Offer for Sale will be considered as the Deemed Prospectus.
What Are the Contents of a Deemed Prospectus?
A deemed prospectus must contain the following elements:
- Company information such as name, registered office address, and objective
- Directors’ details
- Memorandum’s participants, including their shareholdings
- Details regarding shares being issued along with their class and voting rights
- Minimum amount for subscription
- Details of underwriters of the issues
- Amount due at the time of application, allotment, and consequent calls
- Issuing company's profit and losses, as reported in the audit reports
What Is the Importance of a Deemed Prospectus?
A deemed prospectus comes into the scene when an issuing company wants to avoid the legal procedure of selling its shares to public. Issuing company has to maintain transparency while selling its shares so that investors can make an informed decision. The issuer of the prospectus has to mention all the material information that has an impact on its financial stability and obligations. This prospectus helps an investor to assess the risk and make the right investment choice.
What Are the Other Types of Prospectuses?
There are three different types of prospectuses under the Companies Act 2013.
Red Herring Prospectus A Red Herring Prospectus is available for companies that are issuing shares for the first time or launching an IPO. It doesn’t mention any detail about the price and quantities of the shares being offered.
When a company issues one or more securities to the public, it has to file a Shelf Prospectus. The maximum validity of this prospectus is of 1 year, and this period begins as soon as the company makes the first offer to the public.
An abridged prospectus contains all the information regarding key features as per the SEBI guidelines. This prospectus contains all the information in a concise manner so that the investor can conveniently make an informed decision.
A deemed prospectus ensures that there are no loopholes when a company issues its shares to the public. Since an issuing agency offers the prospectus, the director of the agency will be the director of the deemed prospectus.