Meaning and Concept of Deemed Prospectus
A Deemed Prospectus refers to a document which is not formally issued as a prospectus by a company, but is legally treated as one due to the manner in which securities are offered to the public. Under Section 25 of the Companies Act, 2013, when a company allots or agrees to allot securities to an issuing house or intermediary, and that intermediary subsequently offers those securities for sale to the public, such an offer document is deemed to be a prospectus. The rationale behind this provision is to prevent companies from evading statutory disclosure requirements by indirectly issuing securities through third parties. The law ensures transparency and investor protection by treating such documents at par with a prospectus. As a result, all legal obligations, liabilities, and penalties applicable to a prospectus also apply to a deemed prospectus, safeguarding public interest in capital markets.
Legal Basis and Statutory Provisions
The concept of Deemed Prospectus is expressly governed by Section 25 of the Companies Act, 2013, which replaces Section 64 of the Companies Act, 1956. According to this provision, when securities are offered to the public for sale by any person who has received them from the company, the document used for such an offer shall be deemed to be a prospectus issued by the company. This ensures that misstatements or non-disclosures attract liability under Sections 34 and 35, which deal with criminal and civil liability for misstatements in prospectus. The law presumes that the company intended indirect public offering and therefore holds it accountable. This provision plays a critical role in maintaining market discipline and ensures that companies cannot avoid disclosure norms by using intermediaries as a façade.
Legal Effect and Importance
The legal effect of a deemed prospectus is significant because it imposes the same responsibilities and consequences as a regular prospectus. Any untrue or misleading statement in a deemed prospectus can make the company and its directors liable for penalties, compensation, or prosecution. This mechanism strengthens corporate governance by enforcing honesty and accountability in public issues. Moreover, it protects investors by ensuring access to accurate and complete information before making investment decisions. The concept also reinforces the principle that substance prevails over form, meaning that the real intention behind issuing securities matters more than the method adopted. Thus, deemed prospectus acts as a powerful regulatory tool to curb manipulation in capital markets and promote investor confidence.
Real-Time Example
Suppose XYZ Ltd. allots a large block of shares to an investment firm without issuing a prospectus. Later, the investment firm issues an advertisement inviting the public to purchase those shares. Although XYZ Ltd. did not directly issue the prospectus, the advertisement issued by the investment firm will be treated as a deemed prospectus under Section 25 of the Companies Act, 2013. If the advertisement contains false or misleading statements, XYZ Ltd. and its directors can be held liable. This real-time scenario highlights how companies can be held accountable even when public offers are made indirectly, ensuring transparency and investor protection.
Mnemonic to Remember Deemed Prospectus
A simple mnemonic to remember the concept of deemed prospectus is “A-S-O-L”.
A – Allotment of securities to intermediary
S – Sale offer made to public
O – On behalf of the company
L – Liabilities same as prospectus
This mnemonic helps students recall the essential elements of a deemed prospectus under Section 25 of the Companies Act, 2013. Using such memory tools is especially helpful during examinations, as it ensures structured answers and accurate reference to legal provisions.
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