1. Introduction: There is a limitations of capital in soleprietorship and partnership firm. To remove this limitation, company form came in to existence. Company collects huge capital from public through shares and securities. Before investing capital in such companies, minute investigation is done on the safety of capital and economic benefits by public. In order to provide necessary information of a company to the public at large, the company issues a document which is known as prospectus. The investors are attracted to invest in the company if they are satisfied with information presented in the prospectus.
2. Meaning and Definition of Prospectus : In simple language prospectus means advertisement. Prospectus is an invitation given by a company through a document to public at large to purchase its share capital, debenture or other securities in order to raise capital.
As per Company Act a private company can not invite public to purchase its shares. Therefore the provision of issuing prospectus is not applicable to it.
Definition : Prospectus means any document described or issued as prospectus and includes a red herring prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.
In short, the circular issued by the promoters of a company after incorporation of the company in order to attract to purchase its shares or debentures to the public is known as prospectus. In which Red herring prospectus and shelf prospectus are included.
(A) Red herring prospectus : In Book building method, this type of prospectus is used for public offering. It includes all the information except the price of share and the number of shares being offered. This has to be registered with registrar prior to the opening of the subscription.
(B) Shelf Prospectus : This prospectus is for a company offering wide range of securities in a year. Due to that a company is not required to file a new prospectus every time. This facility is available to the public sector banks and public financial institutions.
3. Characteristics of Prospectus : Following are the characteristics of prospectus:
(1) Public document: Prospectus is a public document issued by the company. Public can go through the information mentioned in it and take decision whether to invest in company or not.
(2) Public invitation for subscription : Through prospectus a company invites public at large to purchase or to subscribe the shares, debenture or other securities.
(3) Nature: Prospectus is public document giving invitation to the public to purchase securities of a company. This document should be in nature of notice, circular or public advertisement.
(4) Written form: Prospectus issued by the company should be in written form, it means oral invitation is not considered as prospectus.
4. Conclusion : Prospectus should be in written form or printed. It can be in nature of notice circular or public advertisement. But in all forms it should be a document inviting public at large to subscribe or purchase of securities of the company.