What is a Deemed Prospectus?

Would you like to know what is deemed prospectus means?  A deemed prospectus is a document that is treated as a company’s official prospectus. In simple terms, it is a legal document that provides detailed information about the stocks, shares, or securities a company offers to the public. According to Section 25 (1) of the Companies Act, a deemed prospectus is a type of prospectus. This applies when a company wants to sell shares through an intermediary, like an issuing agency or merchant bank, to avoid following SEBI guidelines.

Understanding deemed prospectus meaning with an example

Let's say there is a company called XYZ that wants to sell or issue its shares to the public but doesn't want to notify SEBI directly. Instead, XYZ company decides to work with an underwriting company (an issuing agency) to issue its shares. In January 2025, the underwriting company agrees to help ABC by issuing its shares through an Offer for Sale. This means the shares are being sold to the public, not directly by ABC, but through the intermediary (the underwriting company). 

Because the underwriting company is handling the offer, the document they use to sell the shares is considered the "prospectus" for ABC, even though it's being issued by the agency. 

If ABC had issued its shares directly, it would have had to follow certain rules under the Companies Act and SEBI regulations. But by going through the agency, ABC is trying to avoid these rules. According to Indian law, if a company gets help from another agency to issue shares, the agency will be seen as representing the company. Therefore, the Offer for Sale document will be treated as the "deemed prospectus" of ABC, meaning it must meet certain legal criteria.

Scenario 1

As mentioned earlier, ABC Company gave its shares to the agency in January 2025. The agency must offer these shares to the public within 6 months, by June 2025. If ABC Company meets this requirement, their Offer for Sale will be treated as a Deemed Prospectus. 

Scenario 2

The second condition is that when the agency issued the shares of ABC, the company should not have received any payment or valuation for them at that time. 

If either of these conditions is met, the Offer for Sale will be considered a Deemed Prospectus.        

What Is the Importance of a Deemed Prospectus?

A Deemed Prospectus plays a crucial role in the financial and legal landscape of capital markets. Below are important points highlighting its significance:

Legal Disclosure Requirement: A Deemed Prospectus ensures that companies provide the necessary information to potential investors, even when no formal prospectus is issued. This helps ensure transparency and allows investors to make informed decisions about the investment.

Regulatory Compliance: It helps companies comply with securities laws and regulations, especially in cases where offers or invitations are made to the public without a formal prospectus. This protects both the company and investors from legal disputes.

Investor Protection: By ensuring that essential details about the company, such as financial status, risks, and business operations, are made publicly available, a Deemed Prospectus safeguards investors against fraud and misrepresentation.

Market Confidence: The availability of accurate and comprehensive information through a Deemed Prospectus builds investor trust in the market, leading to increased participation and better market liquidity.

Facilitates Public Offers: A Deemed Prospectus is important when companies engage in public offerings, as it can serve as an alternative to a traditional prospectus, ensuring the offering complies with the regulatory framework without unnecessary delays.

What Are the Contents of a Deemed Prospectus?

  A deemed prospectus must include the following information:

• Company details, like its name, registered address, and purpose.
• Information about the company’s directors.
• The participants in the company’s memorandum and how many shares they hold.
• Information about the shares being offered, including their type and voting rights.
• The minimum amount needed to subscribe.
• Information about the underwriters of the shares.
• The amounts are due when applying for shares, during allotment, and for any future payments.
• The company’s profits and losses as shown in its audited financial reports.

What Are the Other Types of Prospectuses?

Under the Companies Act 2013, there are three types of prospectuses:

Red Herring Prospectus: This is used by companies launching an Initial Public Offering (IPO) or issuing shares for the first time. It doesn’t include details like the price or number of shares being offered.

Shelf Prospectus: This is filed when a company is offering securities to the public. It can be used for a year, starting from the first offer to the public.

Abridged Prospectus: This is a shorter version of the prospectus that includes only the most important information, making it easier for investors to understand and make decisions.

Deemed Prospectus: A deemed prospectus is a document considered a prospectus under securities law, even if it is not formally titled as one. It may arise in situations like a private placement or a public offering, where the document contains information intended to invite investors.

Draft Red Herring Prospectus: A Draft Red Herring Prospectus (DRHP) is a preliminary version of a prospectus filed with regulatory authorities before an IPO. It provides potential investors with essential information about the company's business, financials, and risks, but does not include the offer price or number of shares to be issued.

Conclusion

The deemed prospectus outlines the responsibilities associated with the terms presented in the prospectus, ensuring that both the intermediary and the issuing company bear liability. It serves to protect the interests of investors by emphasizing the importance of thorough analysis, research, and alignment with personal investment objectives before making investment decisions. To open a demat account, download the BlinkX app today, access comprehensive prospectuses, and make informed investment decisions.