In today’s times of IPOs, SME listings, and startup fundraising, understanding a prospectus is more important than ever. It’s a document issued by a company before offering its shares or debentures to the public, so that investors can clearly understand what they’re investing in. In this blog, we’ll explain in simple terms what a prospectus is, its role in corporate law, and why it’s so important to investors.
What is Prospectus?
A prospectus is a legal document issued by a company when it intends to offer its shares, debentures, or other securities to the public. It provides clear and detailed information about its business, financial position, risk factors, and the reason for raising funds. It can also be considered a public investment brochure, but it is completely legally binding, and the company is responsible for every line.
Legal Definition of Prospectus (According to Company Law + SEBI) :
According to the Companies Act, 2013, a prospectus is a document in which a company publicly invites the public to purchase its shares, debentures, or any investment-related security. This definition has been deliberately broadened to cover any new fundraising methods such as OFS, SME IPOs, Infrastructure Bonds, etc.
Legally, a prospectus requires three things:
- Invitation to the public to invest
- Open disclosure of all financial and operational information
- Filing with the Reserve Bank of India (ROC) and adherence to SEBI guidelines
Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, a company is required to provide all updated information related to risk, valuation, promoters, litigations, financials, etc. in its prospectus.
Prospectus in Company Law: Scope & Importance
According to the Companies Act, 2013, any company offering its shares or debentures publicly is required to issue an accurate, complete, and updated prospectus. The law aims to ensure that investors have access to all important information in advance so they can make informed decisions.
The law requires a company to
- File a prospectus with the ROC (Registrar of Companies).
- All information must be accurate, fact-based, and verified.
- Directors, promoters, and experts are held legally responsible for any false or misleading information.
Furthermore, the SEBI ICDR Regulations (2018) ensure that a company shares all necessary information regarding its financials, risks, litigation, and valuation with transparency.
Mandatory information to be included in the prospectus
The format and content of the prospectus are prescribed by SEBI. It includes only the information most important for an investor to understand the company.
Mandatory elements :
- Capital Structure: Share distribution, promoters’ holdings, and post-issue structure.
- Financial Information: Audited financials for the last three years, cash flow, debt position, and valuation details.
- Risk Factors: Business, market, regulatory, and financial risks which the company discloses in detail for legal protection.
- Business Overview : Company model, revenue sources, competition, and industry outlook.
- Objects of the Issue : Where the funds raised from the IPO will be used for expansion, debt repayment, working capital, etc.
- Legal & Regulatory Cases : Any ongoing lawsuits, notices, or inquiries against the company or promoters.
| Category | What is included? | Why is it necessary? |
|---|---|---|
| Capital Structure | Shareholding details | To understand ownership and control |
| Financials | Profit, loss, cash flow | To know the financial health of the company |
| Risk Factors | Internal and external risks | To warn investors |
| Objects of Issue | Use of funds raised | To understand the true purpose of money |
| Legal Matters | Cases, notices | To know compliance and reputation |
Read Also: What is a Deemed Prospectus?
Types of Prospectus
There are five major types of prospectuses in India under the Companies Act, 2013 and the SEBI ICDR Regulations, 2018. Each type has a different purpose, use, and level of disclosure.
1. General Prospectus
A General Prospectus is a document issued publicly by a company during an IPO or FPO. It provides all the necessary details related to its business model, financials, risk factors, promoters, valuation, and issue. It is considered the most comprehensive and legally binding type.
Example: All recent IPOs, such as physics wallah, Lenskart, issued this detailed prospectus.
2. Shelf Prospectus
A Shelf Prospectus is a document that, once issued, remains valid for one year. Its advantage is that a company can issue securities more than once during this period without creating a new prospectus.
Who can issue it?
- Banks
- Public Financial Institutions
- PSUs
- Select NBFCs
Why is it useful?
This makes fundraising faster, cheaper, and flexible, as new filings are not required each time.
3. Red Herring Prospectus (RHP)
The RHP is a document that a company files with SEBI and ROC before an IPO launch. It contains the company’s complete business, financials, and risk factors, but details such as the issue price, number of shares, or price band are not finalized. This is why it is called a “red herring.”
4. Abridged Prospectus
The Abridged Prospectus is a condensed version of the General Prospectus. SEBI has made it mandatory to provide investors with the most important information about the IPO in a concise and clear form. It accompanies the application form and includes essential information such as risks, financial highlights, promoters, and objects of issue.
5. Deemed Prospectus
A deemed prospectus is issued when a company does not offer its securities directly to the public, but sells them through an intermediary or issuing house.
Example : In an Offer for Sale (OFS), when shares are first allotted to an intermediary and then sold to the public the document is considered a deemed prospectus.
| Type | Key Features | Where is it used | Importance to the investor |
|---|---|---|---|
| General Prospectus | Complete, detailed and final information | IPO / FPO | Complete facts before investing |
| RHP | Some details like the price band will be decided later. | Just before the IPO | The basis for understanding the company |
| Abridged Prospectus | Short version, essential highlights | With IPO application | Fast and easy understanding |
The Inside Structure of a Modern Prospectus
1. Risk Factors (Section to Read First) : Risk Factors is the section where a company details all potential risks associated with its business. According to SEBI regulations, a company is required to disclose every risk, big or small, to prevent investors from later alleging misleading information.
Why is it important?
- It provides an idea of the company’s vulnerabilities.
- Disclosing worst-case scenarios demonstrates the company’s transparency.
- Dependency risk, regulatory risk, market risk, and debt-related risks alert investors in advance.
2. Financial Statements (Company’s Actual Financial Health) : This is the most analytical section of the prospectus. SEBI guidelines require audited financial statements for the last three years.
What to Look for?
- Revenue and Profit Trends: Consistent growth, decline, or inconsistency.
- Debt Position: The company’s existing loans, interest burden, and repayment capacity.
- Cash Flow: Strong operating cash flow is an indicator of a company’s actual earnings.
A simple example : If a company’s profits are increasing but cash flow is consistently negative, it indicates unsustainable growth.
3. Promoter Background (Who’s Behind the Company?) : Promoters are the biggest pillar of a company’s credibility. Therefore, SEBI requires companies to publicly disclose every relevant detail related to promoters such as their experience, past business history, shareholdings, and ongoing litigation.
Why is it important?
- A clean promoter history increases trust in the company.
- Strong promoters provide long-term stability.
- A low promoter stake may indicate low commitment.
4. Objects of the Issue (Where will the money be spent?) : Prospectus mandates companies to clearly state where and how the funds raised from the IPO will be used.
Main Uses:
- Business Expansion
- Loan Repayment
- New Projects or Capacity Building
- Working Capital Strengthening
Caution for Investors : If a company uses vague terms like “General Corporate Purpose” excessively, it may indicate that the use of the funds is not clearly planned. Clear objectives always indicate better governance.
Read Also: What is DRHP (Draft Red Herring Prospectus)?
Prospectus vs Information Memorandum vs Company Presentation
| Point | Prospectus | Information Memorandum (IM) | Company Pitch Deck |
| What happens? | A detailed legal document issued for public investment purposes; it contains complete information about risks, financials, business, and fundraising purposes. | A detailed document of the company which is prepared for private placement or qualified investors. | A short presentation in which the company visually presents its story, vision, business model, and growth plan. |
| Where is it used? | IPO, FPO, Bonds, Public Issue | Private Placement / QIB Offers | Investors Meeting, Startups Fundraising, VC Pitches |
| Legal status | Fully legally binding under the Companies Act 2013 and SEBI ICDR Regulations. | Not as strict a legal compliance as a prospectus, but still a regulated document. | Not a legal document, just a business presentation. |
| Significance for the investor/reader | The most reliable source to understand the actual financial health, risks and valuation of a company before investing. | Helps understand business models and strategies for high-net-worth and institutional investors. | A high-level overview of the company’s vision and growth potential, but no verified data. |
Common Misconceptions About Prospectus
“ Reading a prospectus guarantees returns ” Misconception :
A prospectus is meant only to provide information and transparency, not to guarantee returns.
The company discloses its risks, financials, and assumptions, but future performance depends on many external factors such as market conditions, competition, cost pressures, and economic trends. Therefore, a prospectus should only be used as a decision-support document.
“Companies always state the 100% truth in a prospectus” Not entirely true ”
Companies are required to provide accurate and complete information under SEBI and the Companies Act, but some assumptions and forward-looking statements may differ from actual results. Furthermore, risk factors and financial estimates are often written from the company’s perspective, so investors should always cross-check and conduct independent research.
“Only large companies issue prospectuses” Misconception
Every company that wishes to raise capital from the public is required to issue a prospectus.
These include:
- Main Board IPO
- SME IPO
- Public Issue of Bonds
- Rights Issue (in certain circumstances)
- So, the fundraising method, not the size, determines whether a prospectus will be issued.
“Red Herring Prospectus (RHP) is incomplete and unreliable” partially true
The price band and share details in the RHP are not final, but the rest of the business, financial data, and risks are fully verified.
That is:
- RHP = 95% final document, in which core information is correct and updated.
- Only the price, shares, and some regulatory details are added to the final prospectus.
This means that the RHP is just as useful to investors as the final prospectus; it just doesn’t have any final numbers.
Read Also: What is an IPO Subscription & How Does it Work?
Conclusion
A prospectus is the most reliable foundation of any public investment, as it provides a clear picture of a company’s financial position, risks, and fundraising objectives. When read correctly, this document helps investors understand the real situation without the hype.
Frequently Asked Questions (FAQs)
What is a prospectus in company law?
A prospectus is a document issued by a company that contains information about its business, financials, and risks.
What are the main types of prospectus?
General, RHP, Abridged, Shelf, and Deemed prospectuses are the main types.
Why is a prospectus important for investors?
It helps investors understand the company’s position and risks.
How is a RHP different from a final prospectus?
The price band in an RHP is not fixed; the final prospectus is completely complete.
Who prepares a company prospectus?
It is prepared jointly by the company’s management and advisors.
