Before investing in security, it is essential to get comprehensive information about it. Furthermore, the investor has the right to receive detailed information regarding a security offering. This is where the prospectus is handy.
Section 2 of the Companies Act 2013 requires public companies to file a prospectus with all the information related to a stock or debt offering. However, a prospectus can become lengthy, making reading them a chore. Abridged prospectuses can be helpful in this situation. Let’s learn more about the abridged prospectus definition and how it works.
What is an Abridged Prospectus?
As defined within the Companies Act of 2013, an abridged prospectus is a memorandum which contains the salient features of a prospectus as defined by regulations of the Securities and Exchange Board.
Cambridge dictionary defines 'abridge' as "a method of making a written text shorter." Abridged prospectus accomplishes precisely that. It becomes more straightforward to understand by simplifying a lengthy and complex prospectus.
Alternatively, an abridged prospectus is a document that includes a summary of the prospectus. A prospectus' objective is to summarise all pertinent information prescribed by the Securities and Exchange Board of India (SEBI) without omitting anything important.
Importance of an Abridged Prospectus
Now that you know the abridged prospectus meaning let’s learn its importance.
It is impossible to read a prospectus fully in this fast-paced world. However, you cannot expect to invest without it. Getting information about a company quickly, accurately, and concisely is essential. An abridged prospectus serves this purpose.
Moreover, the abridged prospectus will contain only the most vital information needed to decide on your investment. It makes research much easier.
Retail investors also benefit from this factor. A retail investor might not have the time to review an entire portfolio since investing isn't their full-time job. A short, crisp and abridged portfolio can help you here as well.
Abridged prospectuses must accompany applications for purchasing securities under Section 33 of The Companies Act 2013. As a result, a company can't accept offers from the public, and the public can't invest in the company unless it receives an abridged prospectus. It’s mandatory to inform investors of the nature and rights of their investments and the consequences of their acquisitions to protect them.
Types of Prospectus
Companies Act 2013 specifies four different kinds of a prospectus.
● Deemed Prospectus
By law, any document intended to sell shares is a prospectus. A company needs a deemed prospectus when it intends to issue securities through an intermediary instead of following SEBI laws. The company must issue a document of an offer for sale whenever it issues securities, whether through a merchant bank or broker. The document is a deemed prospectus. This marks the sale of securities and protects investors' rights even when intermediaries are involved.
● Red Herring Prospectus
The red herring prospectus does not provide all the information about the prices and numbers of securities. According to the act, the registrar must receive this prospectus three days before the offer and subscription period.
● Shelf prospectus
Public financial institutions or companies issue shelf prospectuses when they offer securities to the public. In the prospectus, the company must specify the validity period, which should not exceed one year. As soon as the first offer is made, the validity period begins. Additional offers do not require a prospectus. An organisation must file an information memorandum with its shelf prospectus.
● Abridged Prospectus
The abridged prospectus consists of all the salient features of the full prospectus, as defined by SEBI. This type of prospectus concisely summarises all the information, giving investors a quick overview before making a decision. An abridged prospectus must accompany application forms for the purchase of securities.
Elements of Abridged prospectus
The abridged prospectus should be printed in Times New Roman size 10 on A4 size paper with one line spacing. General information documents shall contain information of a generic nature. It is mandatory to submit an abridged prospectus to SEBI. Abridged prospectuses and application forms are not to exceed five pages.
● Whenever an issuer makes a public offering of securities, it must indicate whether the issue is a 100% book-building issue or a fixed price issue, as well as the total number of pages.
● A logo, name, and corporate identity number of the issuer, along with the registered office and registrar.
● It should contain detailed information regarding the issue's opening and closing dates, the minimum bid, and the name of the stock exchange where the specific securities are traded.
● It should include details about the ten largest shareholders, board of directors, and company promoters.
● The top five outstanding lawsuits against the company and the amount involved, SEBI or Stock Exchange disciplinary action against the promoter or group companies, including any action taken in the last five years against the promoter, and any criminal proceedings against the promoter.
● Company/Subsidiary/Joint Venture details.
● Approvals pending from the government and other entities.
● An overview of the company's assets and liabilities, a breakdown of dividends and bonus issues, an account of profit and loss for the last five years, and information on the authorised, subscribed, issued, and paid-up capital.
● Italicise, bold and highlight risks arising from offences/litigations/losses, as well as risks specific to a company/group, project/object.
● A description of the project, its objectives, cost, and financial means.
● A tabular representation of stock market data, including the highest and lowest closing prices, total volume (separately for each stock exchange), and the maximum turnover of shares traded in the last six months.
When is it not necessary to issue it?
Application forms do not require an abridged prospectus in the following circumstances:
● In the absence of a general public offering of shares and bonds.
● Upon receipt of a bonafide invitation to get into an underwriting agreement.
Prospectuses are essential documents that provide investors with information about a company's stock offering. As a prospectus can contain a lot of information, the SEBI mandates that abridged documents be issued that contain only the simplest and most important information.
By presenting abridged information, investors are ensured not to miss important details of a company's upcoming offering in a sea of information. For your investments to meet your investment horizon, read the abridged prospectus thoroughly.