What is a Deemed Prospectus?
5paisa Research Team
Last Updated: 23 Sep, 2024 03:50 PM IST
Want to start your Investment Journey?
Content
- Introduction
- What is a deemed prospectus?
- Understanding what has been deemed a prospectus with the help of an example
- Importance of deemed prospectus
- Other types of prospectuses
- Conclusion
Introduction
The primary purpose of the Securities and Exchange Board of India (SEBI) is to protect investors' interests and ensure complete transparency in securities trading. Therefore, it enforces various regulatory and compliance requirements to safeguard investor rights.
The deemed prospectus is a reporting requirement mandated by SEBI for companies aiming to raise capital from the securities market.
Section 2(70) of the Companies Act defines a prospectus as a legal document that describes the shares or securities of a company offered to the public. The document may be a notice, circular, advertisement or manuscript. The purpose of a prospectus is to raise capital and invite the general public to purchase shares or securities.
A company is legally bound to disclose relevant information for the sale of securities through a prospectus. Some companies may use loopholes and sell securities through an intermediary. In such cases, a deemed prospectus is of relevance.
What is a deemed prospectus?
Typically, the deemed prospectus meaning a detailed document addressed to the public with an offer for the sale of securities by a company. Section 25(1) of the Companies Act enforces the same. By itself, the document is not a prospectus but is deemed as one due to its characteristics and content. A deemed prospectus is also known as an abridged prospectus.
The concept of a deemed prospectus is especially useful if the company intends to issue securities through an intermediary and bypasses the compliance requirements of SEBI. Deemed prospectus ensures that market participants are fully aware of the sale. Also, it improves the efficiency of decision-making by investors.
Whenever a company issue shares to the general public, it submits an offer for sale called the prospectus with SEBI. If the company allows securities to an intermediary to offer those securities for sale eventually, then the intermediary or issuing entity releases an offer for sale. The intermediary may be a merchant bank, financial institution, another company, or an issuing house.
The offer for sale is a deemed prospectus if it fulfils one of the two conditions below:
Condition 1 – Sale within six months
The offer for sale is a deemed prospectus if the intermediary makes the offer to the general public on or before six months from the date of allotment of securities by the intermediary. SEBI assumes such a sale as the issuing company's plan to raise capital directly from the public. In such a situation, the intermediary or issuing company must release all the information about the issue to the SEBI and investors and issue a prospectus.
Condition 2 – No consideration for the sale
The offer for sale is a deemed prospectus if the company that allots shares to the intermediary does not receive any consideration for the securities until the intermediary makes the offer for sale. SEBI views it as an attempt by the company to issue shares to the public through an intermediary without filling out a prospectus. Therefore, the law requires the intermediary to file an offer for sale or a deemed prospectus in this case.
Suppose any of the two conditions is true. In that case, the document used by the intermediary to present the offer for sale is automatically the deemed prospectus of the company that allotted its securities to the intermediary. The rules and regulations that apply to the company's prospectus also extend to the deemed prospectus. Even though the intermediary issues the offer for sale, the deemed prospectus expands responsibility to the original issuer of shares.
Understanding what has been deemed a prospectus with the help of an example
For example, XYZ Ltd plans to raise capital through a public issue but wishes to avoid the rules and regulations concerning public offerings issued by SEBI.
In January 2020, XYZ Ltd decided to issue shares through an intermediary, ABC Ltd which is a merchant bank. They buy a sizeable number of shares from XYZ Ltd. The sale transaction does not require a prospectus since the offer is not to the general public. The pretext of the transaction is that ABC Ltd can sell the stock to the general public, transfer the proceeds to XYZ Ltd, and charge a fee for their services. XYZ Ltd aims to sell its shares to the public through ABC Ltd without filing a prospectus.
Suppose ABC Ltd offers the shares of XYZ Ltd to the general public for sale. However, there are limitations to protecting investor rights in such situations. If ABC Ltd offers the shares for sale within six months of the initial sale, then ABC Ltd must furnish an offer for sale containing all the details of the issue. The offer for sale document is the deemed prospectus for XYZ Ltd. In this case, if ABC Ltd offers shares of XYZ Ltd to the public on or before June 2020, the offer for sale is the deemed prospectus for the transaction.
Suppose ABC Ltd issued shares to the public in October 2020, then one must evaluate the second condition. The second condition focuses on the receipt of consideration by XYZ Ltd. If XYZ Ltd does not receive any consideration till ABC Ltd offers the shares to the public, then the second condition is applicable. In this case, if XYZ Ltd does not receive any consideration for the transaction till October 2020, the offer for sale issued by ABC Ltd is the deemed prospectus for XYZ Ltd. The second condition safeguards the interest of investors since the security price may fluctuate with time, and intermediaries are unlikely to agree to future payment in such a situation.
Importance of deemed prospectus
A deemed prospectus legally binds the issuer to submit relevant details of an investment offering to the general public to the concerned authority. It enables investors to evaluate the risk associated with the investment. The issuer must furnish material information that impacts its financial stability and obligations.It helps to maintain complete transparency. If an issuer uses gaps in the law not to file a prospectus, then the deemed prospectus comes to the rescue.
Other types of prospectuses
Every security sale requires the issuing company to release information to the general public and release a prospectus. Each type of issue has a different prospectus. These include
● Red Herring Prospectus – A red herring prospectus is applicable for the first public issue of a company or an IPO. It does not contain all the relevant details about the price and number of securities offered.
● Shelf Prospectus – An entity uses a shelf prospectus when it issues one or more securities to the public. The issuing company provides a validity period of the prospectus subject to a maximum of one year. The validity period starts with the first offer, and there is no requirement for a year for a prospectus on other offers.
Conclusion
The purpose of a deemed prospectus is to eliminate ambiguity concerning who is responsible for the terms and conditions mentioned in the prospectus. It pinpoints accountability to the intermediary and the issuing company for the contents in the offer for sale.
A deemed prospectus protects the interest of the investors. Therefore, investors must thoroughly analyse the terms and conditions of the prospectus and do their research before investing. Additionally, the investment must also be in line with the investor’s objectives and time horizon.
More About Stock / Share Market
- Tick by Tick Trading: A Complete Overview
- What is Dabba Trading?
- Learn about Sovereign Wealth Fund(SWF)
- Convertible Debentures: A Comprehensive Guide
- CCPS-Compulsory Convertible Preference Shares : Overview
- Order Book and Trade Book: Meaning & Difference
- Tracking Stock: Overview
- Variable Cost
- Fixed Cost
- Green Portfolio
- Spot Market
- QIP(Qualified Institutional Placement)
- Social Stock Exchange(SSE)
- Financial Statements: A Guide for Investors
- Good Till Cancelled
- Emerging Markets Economy
- Difference Between Stock and Share
- Stock Appreciation Rights(SAR)
- Fundamental Analysis in Stocks
- Growth Stocks
- Difference Between ROCE and ROE
- Markеt Mood Index
- Introduction to Fiduciary
- Guerrilla Trading
- E mini Futures
- Contrarian Investing
- What is PEG Ratio
- How to Buy Unlisted Shares?
- Stock Trading
- Clientele Effect
- Fractional Shares
- Cash Dividends
- Liquidating Dividend
- Stock Dividend
- Scrip Dividend
- Property Dividend
- What is a Brokerage Account?
- What is Sub broker?
- How To Become A Sub Broker?
- What is Broking Firm
- What is Support and Resistance in the Stock Market?
- What is DMA in Stock Market?
- Angel Investors
- Sideways Market
- Committee on Uniform Securities Identification Procedures (CUSIP)
- Bottom Line vs Top Line Growth
- Price-to-Book (PB) Ratio
- What is Stock Margin?
- What is NIFTY?
- What is GTT Order (Good Till Triggered)?
- Mandate Amount
- Bond Market
- Market Order vs Limit Order
- Common Stock vs Preferred Stock
- Difference Between Stocks and Bonds
- Difference Between Bonus Share and Stock Split
- What is Nasdaq?
- What is EV EBITDA?
- What is Dow Jones?
- Foreign Exchange Market
- Advance Decline Ratio (ADR)
- F&O Ban
- What are Upper Circuit and Lower Circuit in Share Market
- Over the Counter Market (OTC)
- Cyclical Stock
- Forfeited Shares
- Sweat Equity
- Pivot Points
- SEBI-Registered Investment Advisor
- Pledging of Shares
- Value Investing
- Diluted EPS
- Max Pain
- Outstanding Shares
- What are Long and Short Positions?
- Joint-Stock Company
- What are Common Stocks?
- What is Venture Capital?
- Golden Rules of Accounting
- Primary Market and Secondary Market
- What Is ADR in Stock Market?
- What Is Hedging?
- What are Asset Classes?
- Value Stocks
- Cash Conversion Cycle
- What Is Operating Profit?
- Global Depository Receipts (GDR)
- Block Deal
- What Is Bear Market?
- How to Transfer PF Online?
- Floating Interest Rate
- Debt Market
- Risk Management in stock Market
- PMS Minimum Investment
- Discounted Cash Flow
- Liquidity Trap
- Blue Chip Stocks: Meaning & Features
- Types of Dividend
- What is Stock Market Index?
- What is Retirement Planning?
- Stock Broker
- What is the Equity Market?
- What is CPR in Trading?
- Technical Analysis of Financial Markets
- Discount Broker
- CE and PE in the Stock Market
- After Market Order
- How to earn 1000 rs per day from the stock market
- Preference Shares
- Share Capital
- Earnings Per Share
- Qualified Institutional Buyers (QIBs)
- What Is the Delisting of Share?
- What Is The ABCD Pattern?
- What is a Contract Note?
- What Are the Types of Investment Banking?
- What are Illiquid stocks?
- What are Perpetual Bonds?
- What is a Deemed Prospectus?
- What is a Freak Trade?
- What is Margin Money?
- What is the Cost of Carry?
- What Are T2T Stocks?
- How to Calculate the Intrinsic Value of a Stock?
- How to Invest in the US Stock Market From India?
- What are NIFTY BeES in India?
- What is Cash Reserve Ratio (CRR)?
- What is Ratio Analysis?
- Preference Shares
- Dividend Yield
- What is Stop Loss in the share market?
- What is an Ex-Dividend Date?
- What is Shorting?
- What is an interim dividend?
- What is Earnings Per Share (EPS)?
- Portfolio Management
- What Is Short Straddle?
- The Intrinsic Value of Shares
- What is Market Capitalization?
- Employee Stock Ownership Plan (ESOP)
- What is Debt to Equity Ratio?
- What is a stock exchange?
- Capital Markets
- What is EBITDA?
- What is Share Market?
- What is an investment?
- What are Bonds?
- What Is a Budget?
- Portfolio
- Learn How To Calculate The Exponential Moving Average (EMA)
- Everything about the Indian VIX
- The Fundamentals of the Volume in Stock Market
- Offer for Sale (OFS)
- Short Covering Explained
- What Is The Efficient Market Hypothesis
- What Is Sunk Cost: Meaning, Definition, and Examples
- What Is Revenue Expenditure? All You Need To Know
- What are operating expenses?
- Return On Equity (ROE)
- What is FII and DII?
- What is Consumer Price Index (CPI)?
- Blue Chip Companies
- Bad Banks And How They Function.
- The Essence Of Financial Instruments
- How to Calculate Dividend per Share?
- Double Top Pattern
- Double Bottom Pattern
- What is the Buyback of Shares?
- Trend Analysis
- Stock Split
- Right Issue of Shares
- How To Calculate the Valuation of a Company
- Difference between NSE and BSE
- Learn How to Invest in Share Market Online
- How to Select Stocks for Investing
- Do’s and Don’ts of Stock Market Investing for Beginners
- What is Secondary Market?
- What is Disinvestment?
- How to Become Rich in Stock Market
- 6 Tips to Increase your CIBIL Score and Become Loan-worthy
- 7 Top Credit Rating Agencies in India
- Stock Market Crashes In India
- 5 Best Trading Books
- What Is the Taper Tantrum?
- Tax Basics: Section 24 Of The Income Tax Act
- 9 Read-worthy Share Market Books for Novice Investors
- What is Book Value Per Share
- Stop Loss Trigger Price
- Wealth Builder Guide: Difference Between Savings And Investment
- What is Book Value Per Share
- Top Stock Market Investors In India
- Best Low Price Shares to Buy Today
- How Can I Invest in ETF in India?
- What is ETFs in Stocks?
- Best Investment Strategies in Stock Market for Beginners
- How To Analyse Stocks
- Stock Market Basics: How Share Market Works In India
- Bull Market Vs Bear Market
- Treasury Shares: The Secrets Behind The Big Buybacks
- Minimum Investment In Share Market
- What is Delisting of Shares
- Ace Day Trading With Candlestick Charts - Simple Strategy, High Returns
- How Share Price Increase or Decrease
- How to Pick Stocks in Stock Market?
- Ace Intraday Trading With Seven Backtested Tips
- Are You A Growth Investor? Check These Tips to Increase Your Profits
- What Can You Learn From The Warren Buffet Style of Trading
- Value or Growth - Which Investment Style Can be the Best For You?
- Find Why Momentum Investing is Trending Nowadays
- Use Investment Quotes to Improve Your Investment Strategy
- What is Dollar Cost Averaging
- Fundamental Analysis vs Technical Analysis
- Sovereign Gold Bonds
- A Comprehensive Guide To Learn How to Invest In Nifty In India
- What is IOC in Share Market
- Know All About Stop Limit Orders And Use Them To Your Benefit
- What is Scalp Trading?
- What is Paper Trading?
- Difference Between Shares and Debentures
- What is LTP in the Share Market?
- What is Face Value of Share?
- What is PE Ratio?
- What is Primary Market?
- Understanding the Difference between Equity and Preference Shares
- Share Market Basics
- How to Choose Stocks for Intraday Trading?
- What is Intraday Trading?
- How Share Market Works In India?
- What is Scalp Trading?
- What are Multibagger Stocks?
- What are Equities?
- What is a Bracket Order?
- What Are Large Cap Stocks?
- A Kickstarter Course: How To Invest In Share Market
- What are Penny Stocks?
- What are Shares?
- What Are Midcap Stocks?
- Beginner's Guide: How to Invest in the Share Market Successfully Read More
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.