The Securities and Exchange Board of India (SEBI) plays a crucial role in ensuring that stock markets and various securities trading platforms adhere to regulatory standards and maintain transparency.
The primary goal is to furnish investors with essential information, empowering them with knowledge before making investment decisions in recently launched securities or those about to be introduced.
In pursuit of this objective, SEBI mandates that every company or institution intending to initiate a public investment offering must submit a prospectus. A prospectus, in simple terms, is a legal document that contains crucial details about the shares or securities offered by a company for public sale.
Under the Companies Act of 2013, there are four distinct types of prospectuses in India. These encompass the red herring prospectus, shelf prospectus, abridged prospectus, and deemed prospectus. In this article, goes into the details of the deemed prospectus.
Among the four types of prospectuses outlined in the Companies Act of 2013, the deemed prospectus holds significance in scenarios where companies seek to bypass SEBI regulations and sell securities through intermediaries.
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What is a Deemed Prospectus?
A deemed prospectus, governed by Section 25(1) of the Companies Act, is a detailed document addressed to the public, offering the sale of securities by a company.
It is not a standalone prospectus but is deemed as one under specific conditions. Also known as an abridged prospectus, its relevance arises when a company intends to issue securities through an intermediary to avoid SEBI compliance requirements.
In essence, a deemed prospectus is a detailed document that is treated as if it were a prospectus of a company.
This designation is particularly relevant in situations where a company intends to sell securities through an intermediary to bypass regulatory compliance requirements set by organizations like the Securities and Exchange Board of India (SEBI).
Conditions for Deemed Prospectus:
For a document to be considered a deemed prospectus, it must satisfy one of the following conditions:
Condition 1 – Sale within six months: The document becomes a deemed prospectus if the intermediary offers the securities to the public within six months of receiving them from the issuing company. This implies the company’s intent to raise capital directly from the public.
Condition 2 – No consideration for the sale: It becomes a deemed prospectus if the company, having allotted shares to the intermediary, receives no consideration until the intermediary makes the offer for sale. This is viewed as an attempt by the company to issue shares without filing a prospectus, requiring the intermediary to submit a deemed prospectus.
Understanding Deemed Prospectus with an Example:
Consider XYZ Ltd, aiming to raise capital through a public issue but wishing to bypass SEBI regulations. It opts to issue shares through an intermediary, ABC Ltd, a merchant bank.
If ABC Ltd offers the shares to the public within six months of the initial sale or if XYZ Ltd receives no consideration until the offer for sale, the document is deemed a prospectus for XYZ Ltd.
Lets understand by breaking it up:
Company’s Objective:
- XYZ Ltd. aims to raise capital by offering its shares to the public.
Utilizing an Intermediary:
- Rather than directly issuing shares, XYZ Ltd. decides to involve an intermediary, in this instance, ABC Securities, a merchant bank.
Allocation of Shares:
- In January 2022, XYZ Ltd. allocates a substantial number of its shares to ABC Securities.
Offer for Sale by ABC Securities:
- Within a few months, let’s say in April 2022, ABC Securities initiates an Offer for Sale (OFS) of XYZ Ltd.’s shares to the general public. This OFS serves as a mechanism for XYZ Ltd. to indirectly raise capital through the intermediary.
Conditions for Deemed Prospectus:
- Condition 1: If ABC Securities presents the offer to the public within six months of receiving the shares from XYZ Ltd.
- Condition 2: If XYZ Ltd. has not received any consideration for the shares until the date of ABC Securities’ offer to the public.
Evaluation of Conditions:
- If either of these conditions is fulfilled, the document utilized by ABC Securities for the Offer for Sale is deemed to be the prospectus of XYZ Ltd.
Example Outcome:
- If ABC Securities offers the shares to the public by June 2022 (within six months), meeting Condition 1, the document transforms into the deemed prospectus for XYZ Ltd.
- Alternatively, if XYZ Ltd. has not received any consideration for the shares until ABC Securities’ offer in April 2022, satisfying Condition 2, the document assumes the status of the deemed prospectus.
Importance of Deemed Prospectus:
A deemed prospectus ensures market participants are fully aware of a securities sale, improving efficiency in investor decision-making. It legally binds issuers to submit relevant details, allowing investors to evaluate associated risks and maintain complete transparency.
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Other Types of Prospectuses:
Apart from the deemed prospectus, there are three other types:
- Red Herring Prospectus: Applicable for the first public issue or an IPO, it lacks details about the price and quantity of securities offered.
- Shelf Prospectus: Used when issuing one or more securities to the public, with a validity period of up to one year.
- Abridged Prospectus: Contains key information per SEBI guidelines in a concise manner.
Conclusion:
In conclusion, the deemed prospectus emerges as a vital component in the regulatory framework overseen by the Securities and Exchange Board of India (SEBI). As a part of SEBI’s commitment to ensuring transparency and safeguarding investor interests, the prospectus requirement mandates companies to disclose essential details before launching public investment offerings.
The Companies Act of 2013 outlines four types of prospectuses, and our focus has been on the deemed prospectus. This unique category comes into play when companies choose to issue securities through intermediaries, allowing them to navigate SEBI compliance regulations.
By understanding the conditions under which a document is considered a deemed prospectus, investors can appreciate the regulatory mechanisms in place. This knowledge empowers them to make informed decisions, aligning with SEBI’s broader goal of fostering a fair and transparent securities market.
FAQs on Deemed Prospectus in IPO
Q1. What is a deemed prospectus in the context of an IPO?
Answer: A deemed prospectus is a document that is considered as a prospectus for a company even though it may not be labeled as one. It typically arises when a company issues securities through intermediaries, such as merchant banks, to bypass certain regulatory compliances.
Q2. When does a document qualify as a deemed prospectus?
Answer: A document is considered a deemed prospectus when a company, intending to raise capital, allots its securities to an intermediary. The document becomes a deemed prospectus if the intermediary makes an offer for the sale of those securities to the public within six months of receiving them or if the company receives no consideration until the offer for sale is made by the intermediary.
Q3. How does a deemed prospectus enhance transparency in an IPO?
Answer: A deemed prospectus ensures transparency by making it clear that even though an intermediary issues the document, it is deemed to be a prospectus of the original company. This helps in holding the issuing company accountable for the information provided in the offer for sale.
Q4. What is the significance of a deemed prospectus for investors?
Answer: For investors, a deemed prospectus is crucial as it provides complete information about the offer for sale of securities. It allows investors to understand the terms and conditions of the investment, promoting an informed decision-making process.
Q5. Are the rules and regulations applicable to a deemed prospectus the same as a regular prospectus?
Answer: Yes, the rules and regulations that apply to a regular prospectus also extend to a deemed prospectus. This ensures that the same standards of disclosure and accountability are maintained, regardless of whether the document is issued by the company or an intermediary.
Q6. Can you provide an example illustrating the concept of a deemed prospectus?
Answer: Certainly. Suppose Company A allots its shares to an issuing agency, and this agency offers the shares to the public through an offer for sale within six months. In this case, the document issued by the agency becomes a deemed prospectus for Company A.
Q7. How does a deemed prospectus contribute to investor protection?
Answer: A deemed prospectus contributes to investor protection by ensuring that relevant information about the securities is disclosed, even when an intermediary is involved. This helps prevent misinformation and promotes fair dealings in the securities market.
Q8. Are there other types of prospectuses apart from a deemed prospectus?
Answer: Yes, there are several types of prospectuses, including red herring prospectus, shelf prospectus, and abridged prospectus. Each type serves specific purposes in the context of an initial public offering (IPO) or securities issuance.
Q9. How should investors approach a deemed prospectus when considering an investment?
Answer: Investors should carefully review the information provided in the deemed prospectus, understand the terms and conditions of the offer for sale, and assess the associated risks. Seeking advice from financial professionals can also aid in making well-informed investment decisions.
Q10. Does SEBI regulate the content of a deemed prospectus?
Answer: Yes, SEBI regulates the content of a deemed prospectus to ensure compliance with disclosure norms and investor protection. The regulatory authority oversees the securities market, including the information provided in prospectuses, to maintain transparency and fairness.
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