Deemed Prospectus: Definition, Components and Examples

A normal prospectus is issued when a company seeks to raise funds from the public through an Initial Public Offering (IPO). It includes company information such as financials, management, plans, and business risks.

In some cases, a company may allot shares to an intermediary, which later sells them to the public through an offer for sale (OFS). In such cases, the document may be treated as the deemed prospectus under the applicable provisions of the Companies Act, 2013.

Under Section 25(1) of the Companies Act, 2013, when a company allots shares or securities to another person with the intention of offering them for sale to the public, the document used for that offer is treated as a deemed prospectus.

What is a Deemed Prospectus?

A deemed prospectus is a legal document that applies when a company allots or agrees to allot shares or securities to an intermediary with the intention of offering them for sale to the public.

In an IPO, a deemed prospectus helps ensure that a company cannot avoid applicable disclosure requirements simply by routing securities through an intermediary. It establishes accountability and provides investors with relevant information about the securities being offered.

Example:

Suppose a company allots 1000 shares to a financial intermediary, which subsequently offers those shares to the public. If the legal conditions under Section 25 of the Companies Act 2013 are satisfied, the offer document is considered a deemed prospectus.

This is particularly relevant in OFS, where existing securities are offered to investors.

Also Read: What is Draft Red Herring Prospectus (DRHP)?

When is the Deemed Prospectus Triggered?

A deemed prospectus is triggered when securities are allotted or agreed to be allotted to an intermediary with a view to their subsequent sale to the public, subject to the conditions specified under Section 25.

The following situations help explain when this provision may apply.

• Securities allotted to an intermediary:

A company allots or agrees to allot securities to another person with the intention of subsequently offering them for sale to the public.

• Public offer through an intermediary:

The intermediary offers the securities for sale to the public through a document that falls within the scope of Section 25.

• Offer for sale arrangement:

The transaction involves transferring the securities to an intermediary, which then sells them to the public, making it fall within the deemed prospectus category.

• Intention to sell to the public:

The arrangement is structured to offer the securities to the public, rather than merely involving an ordinary private transaction.

Note: Not every offer for sale automatically becomes a deemed prospectus. The specific facts, transaction structure, and applicable legal provisions determine whether the document qualifies.

Difference Between Deemed Prospectus and Standard Prospectus

Here are the main differences between a deemed prospectus and a standard prospectus:

What is Included in a Deemed Prospectus?

A deemed prospectus is subject to applicable legal requirements governing prospectuses. Its content depends on the transaction and the relevant regulatory framework.

The following information is included in a deemed prospectus:

• Company details
• Details of securities
• Offer for sale details
• Financial information
• Risk factors
• Use of proceeds
• Management and ownership
• Legal and regulatory disclosures

Why Does a Deemed Prospectus Matter?

A deemed prospectus matters because it strengthens transparency and helps ensure public securities offerings comply with applicable legal requirements.

• Investor protection:

It ensures that investors receive relevant disclosures about securities offered through intermediaries, supporting informed investment decisions and reducing information gaps.

• Regulatory compliance:

It helps prevent companies from avoiding applicable prospectus requirements by structuring public offerings through intermediaries rather than issuing a prospectus directly.

• Transparency in OFS transactions:

It helps investors understand the structure of an offer for sale, including the securities involved and the relevant parties.

• Accountability:

It establishes legal responsibility for applicable disclosures and representations, helping address misleading statements or omissions in qualifying public offerings.

FAQs

What is the difference between a deemed prospectus and a red herring prospectus?

A deemed prospectus relates to how securities are offered for sale to the public, whereas a red herring prospectus is a preliminary offer document that contains company information but lacks IPO price and quantity details.

Who issues a deemed prospectus?

Technically, the intermediary issues the deemed prospectus, but the company is bound to share the prospectus's legal status.

Does SEBI regulate the format of a deemed prospectus?

Yes, SEBI’s ICDR regulations and relevant circulars prescribe the same format, vetting process, and public domain filing as a standard prospectus.