Prospectus
Also written Draft prospectus
The offer document a company issues when it raises money from the public. It sets out the company, its promoters, finances, risks, purpose of the issue and terms, so investors can decide.
In plain language
When a company wants money from the public, it must first tell the public about itself. The document that does this is the prospectus.
According to the booklet, it contains "the history of the company, details of the promoters, business model, financial history of the company, risks in that business, purpose for which the money is being raised, terms of issue and such other information that will help an investor to make an informed decision."
In simple words: who they are, how they have done, what could go wrong, and what they will do with your money.
The booklet's first word of caution for anyone applying in a public issue is to read the prospectus carefully before investing.
How it works
Filing with SEBI (securities-market booklet). To raise funds from the public, companies file an offer document with SEBI, "called as the draft red herring prospectus or the draft prospectus."
Who prepares it (Chapter 5). Companies hire merchant bankers, who prepare the prospectus and ensure compliance for the issue, including allotment and listing.
What SEBI does (Chapter 5). SEBI "examines the prospectus issued to the public for subscription of shares to see that it meets with the requirements of the SEBI Regulations." It checks compliance with the rules. It does not tell you the share is a good buy.
After the issue. Investors apply through ASBA (available to all investors in public issues from 1 May 2010) or UPI, and the application money is blocked in their bank account. Shares allotted are credited to the demat account; if not allotted, the blocked money is released.
Listing timeline, and a change. The securities-market booklet gives it twice, slightly differently: shares are listed "in less than six (06) working days from the date of the closure of the issue", and elsewhere "the entire process of listing of an IPO takes six (06) working days after the closure". For the exam, the booklet's figure is six working days. SEBI has since shortened the listing timeline to T+3 (three working days after the issue closes), so check the current rule before relying on it in practice.
Law. The Companies Act, 2013 provides regulations for issue, allotment and transfer of securities in public issues.
A worked example
Company, figures and dates are illustrative.
Pooja, an engineer in Hyderabad, sees an advertisement for the IPO of Deccan Agro Foods Ltd, priced at Rs 200 per share, minimum lot 75 shares. Her friends say it will "double on listing".
She reads the prospectus first. Among other things it shows:
| Section | What she finds |
|---|---|
| Promoters | Two founders; one faces a pending regulatory case |
| Financial history | Revenue up, but losses in 2 of the last 3 years |
| Risks in the business | 60% of sales from one buyer |
| Purpose of the issue | Mostly an offer for sale; little new money goes to the company |
The last point matters. The booklet explains that in an offer for sale, the investors' money goes to the selling shareholders, not the company.
Her decision. She applies for only one lot:
Application amount = 75 × 200 = Rs 15,000
The money is blocked in her account through ASBA. She is not allotted shares, and the Rs 15,000 is released. She lost nothing, and she applied knowing the risks, because she followed the booklet's advice not to invest on market sentiment.
Why NISM asks about it
Chapter 5 (Investment in Securities Market) covers SEBI's examination of the prospectus, merchant bankers and ASBA; the securities-market booklet covers the draft red herring prospectus, its contents, the listing timeline and the word of caution. Expect: who prepares the prospectus (merchant bankers), what it contains, and what SEBI's examination means.
Common exam traps
- SEBI examines the prospectus for compliance with its Regulations; it does not approve the company or guarantee returns.
- Merchant bankers prepare it, on behalf of the company.
- The document filed with SEBI is the draft red herring prospectus or draft prospectus.
- In an offer for sale, the money goes to the selling shareholders, not the company. The prospectus tells you which kind of issue it is.
- Booklet listing figure: six working days after closure. SEBI has since moved to T+3; answer the booklet's figure in the exam.
- ASBA blocks your money; it is debited only on allotment and released if you get nothing.
Where this is taught
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
Related terms
- ASBAThe mandatory payment mechanism for public and rights issues, in which your bank blocks the application money in your own account and debits it only if you actually get an allotment.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Red Herring ProspectusThe offer document used in a book-built public issue, containing every disclosure a prospectus carries except the final price or number of shares, filed with the Registrar before the issue opens.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Securities and Exchange Board of IndiaThe statutory regulator of India's securities market, set up under the SEBI Act, 1992, to protect investors and to develop and regulate the market. It registers brokers, DPs and mutual funds.
- Offer documentThe document inviting subscription to an issue — a red herring prospectus, prospectus, shelf prospectus or information memorandum in a public issue, and a letter of offer in a rights issue.
- Fixed price issueA public issue in which the company, with its lead manager, sets the issue price in advance and discloses it, so investors know exactly what they will pay when they apply — the alternative to a book built issue.
- UnderwriterAn institution that agrees, under an underwriting agreement, to subscribe to the part of a public issue that investors do not take up — and is paid a commission for standing behind the issue.