What is a Deemed Prospectus?

In the world of capital markets, public offerings must follow a strict regulatory framework to protect investors. One such concept under Indian company law is the deemed prospectus, a provision designed to ensure transparency, especially in indirect public offerings.

This blog explains what a deemed prospectus is, how it differs from a regular prospectus, its legal context, and the importance of this often-overlooked concept for companies and investors alike.

What Is a Prospectus in Company Law?

Before understanding what a deemed prospectus is, it's essential to grasp what is a prospectus.

In company law, a prospectus is a formal document issued by a company inviting the public to subscribe to its shares or debentures. It contains vital information about the company’s financials, operations, risk factors, and objectives behind raising capital.

Under the Companies Act, 2013, the term includes any notice, circular, or advertisement inviting public subscription, and must comply with regulatory standards laid down by SEBI and the Registrar of Companies.

Types of Prospectuses Under Indian Company Law

There are different types of prospectuses recognised in Indian company law:

1. Red Herring Prospectus (RHP) – Issued before an IPO without including the final price or number of shares.

2. Shelf Prospectus – Used by companies issuing securities in multiple tranches over a period.

3. Abridged Prospectus – A summarised version of the full prospectus attached with application forms.

4. Deemed Prospectus – Treated as a prospectus even though the invitation is indirect.

Each type serves a specific purpose, and among them, the deemed prospectus plays a critical role in preventing disguised public offerings.

What Is a Deemed Prospectus?

A deemed prospectus is defined under Section 25(1) of the Companies Act, 2013. It refers to a situation where a company allots or agrees to allot shares to an intermediary (like an issuing house), which then offers those shares to the public.

Even if the company does not directly issue a prospectus to the public, such a document issued by the intermediary will be deemed to be a prospectus issued by the company itself.

This provision ensures companies do not bypass regulatory disclosures by using intermediaries to raise capital indirectly from the public.

Key Features of a Deemed Prospectus

Here are the essential features of a deemed prospectus:

• Indirect Invitation: Involves an intermediary offering securities to the public after an allotment by the company.

• Public Offer Threshold: If an offer is made to 50 or more people, it is considered a public issue.

• Company Accountability: The issuing company is held responsible for the content and compliance of the deemed prospectus.

• Disclosure Requirements: Must contain all the disclosures required in a standard prospectus under SEBI guidelines.

These features ensure the deemed prospectus upholds investor protection, just like any direct public issue.

Real-World Example of a Deemed Prospectus

Let’s understand with a simple example:

Suppose ABC Ltd privately allots 1,00,000 shares to XYZ Financial Services. Later, XYZ issues an advertisement offering those shares to the public. Even though ABC Ltd did not directly offer its shares to the public, this document issued by XYZ will be treated as a deemed prospectus under the law.

Hence, ABC Ltd will be subject to all legal obligations as if it had issued the prospectus directly.

Why the Deemed Prospectus Concept Is Important?

The concept of deemed prospectus exists to:

• Close legal loopholes where companies could bypass public disclosure norms.

• Protect investors by ensuring consistent disclosure standards for all public offers.

• Hold companies accountable, even in indirect public issues.

• Maintain trust in capital markets, especially in initial and secondary offerings.

In essence, this provision strengthens regulatory oversight over disguised or backdoor listings in the securities market.

How Deemed Prospectus Differs from Regular Prospectus?

The key differences between a deemed prospectus and a regular prospectus lie in the mode and intent of issue:

Understanding this difference is vital for companies structuring capital raises and for investors evaluating the legitimacy of an offer.

Legal Implications and Penalties

Issuing a deemed prospectus in company law without following proper disclosure norms can lead to severe penalties:

• Imprisonment: Officers involved may face imprisonment up to 10 years in case of fraudulent misstatements.

• Financial Penalties: Fines may range from ₹50,000 to ₹3 lakh or more, depending on the offence.

• Investor Remedies: Investors misled by statements in a deemed prospectus can claim damages or compensation under Section 35 and 36 of the Companies Act.

Thus, legal compliance and accurate disclosure are critical when any form of public offer is being made—even if indirectly.

Conclusion

The deemed prospectus provision under Indian company law ensures that investor interests are protected, even in indirect share offerings. By treating documents issued by intermediaries as formal prospectuses, the law prevents companies from sidestepping critical disclosure obligations.

For investors, understanding the nature of a deemed prospectus helps assess the transparency and legitimacy of a public issue. For companies, this reinforces the need to comply with prospectus regulations, regardless of how the public offer is structured.