Understanding the Deemed Prospectus: A Key Financial Disclosure Document

In the intricate world of financial markets, transparency and investor protection are paramount. When companies seek to raise capital or divest existing holdings through public offers, the documentation involved is crucial. While a traditional prospectus is a well-understood document, the concept of a deemed prospectus arises in specific transactional structures, particularly those involving an offer for sale. This document ensures that investors receive essential information, even when the initial share allotment isn't directly to the public.

What Constitutes a Deemed Prospectus?

A deemed prospectus is a legal instrument that is treated as a prospectus by law, even if it doesn't explicitly carry that title. It is issued when a company first allots securities to an intermediary, who then subsequently offers these securities to the general public through an offer for sale. This mechanism allows for indirect public offerings, and the deemed prospectus serves to protect investor interests by mandating disclosures equivalent to those in a traditional prospectus. Crucially, it confirms that the issuing company remains liable for the accuracy of the information presented.

When is a Deemed Prospectus Triggered?

The issuance of a deemed prospectus is typically triggered under specific circumstances defined by company law. The primary conditions that necessitate this documentation are:

• Condition 1: A company allots shares or securities to an intermediary, and this intermediary then offers these same securities to the public within a six-month period following the allotment. This timeframe is critical for ensuring the offer remains current and relevant.
• Condition 2: At the time the intermediary makes the offer of sale public, the company has not yet received any payment for the shares that were allotted to the intermediary. This condition highlights situations where the capital has not yet been fully transferred to the issuing entity before the public offer.

The Legal Foundation: Section 25 of the Companies Act

The legal basis for the deemed prospectus in many jurisdictions, such as India, is often found within the Companies Act. For instance, Section 25(1) of the Companies Act, 2013, stipulates that any document used to make an offer of sale of securities, when the company has allotted these securities with the intention of them being offered to the general public, can be considered a deemed prospectus. This provision underscores the regulatory intent to maintain disclosure standards regardless of the specific transaction structure.

Deemed Prospectus vs. Traditional Prospectus: Key Distinctions

While both documents aim to inform potential investors, there are fundamental differences between a traditional prospectus and a deemed prospectus:

Feature	Prospectus	Deemed Prospectus
Meaning	A document issued by a company directly offering its shares to the public.	A document issued by an intermediary offering shares previously allotted to them by the company to the public.
Purpose	To directly raise capital from the public.	To indirectly offer securities to the general public via an intermediary in an offer for sale.
Issuer	Issued directly by the company whose securities are being offered.	Issued by the intermediary to whom the securities were first allotted.
Legal Basis	Typically governed by Section 26 of the Companies Act (or equivalent).	Governed by specific sections like Section 25 of the Companies Act (or equivalent), addressing indirect offers.
Liability	The issuing company bears full liability for disclosures.	While the intermediary issues the document, the original issuing company remains liable for all disclosures.
Disclosure	Direct disclosure of company information to the public.	Indirect disclosure, where information originates from the company but is presented via the intermediary's offer.

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