In the evolving Indian capital market, transparency and investor protection remain central to regulatory reforms. One such powerful provision is Section 25 of the Companies Act, 2013, which governs the “Deemed Prospectus”—a concept often misunderstood but vital for companies offering securities to the public.
This blog simplifies the broad scope of Section 25, explains the deemed prospectus mechanism, and highlights its compliance, disclosure, and legal implications for companies and investors alike.
KEY POINTERS
· Broad Definition of Deemed Prospectus: Any document—formal or informal—that invites the public to invest in securities can be treated as a deemed prospectus, triggering strict disclosure and compliance obligations under Section 26.
· Wide Scope of “Securities”: The law encompasses various financial instruments including shares, debentures, hybrid securities, and government bonds, ensuring companies can’t avoid regulations by simply renaming offerings.
· Legal Consequences and Compliance: Deemed prospectuses invite SEBI oversight and expose companies and their directors to legal liability for misstatements, omissions, or regulatory breaches.
· Exemptions Exist but Are Limited: Certain offers—like those to institutional investors, via stock exchanges, or in private placements—are exempt, easing compliance for specialized or small-scale fundraising.
· Investor Protection Through Transparency: Even simplified deemed prospectuses must disclose key information like fund usage and risk factors, balancing ease of fundraising with protection against information asymmetry.
What is a Deemed Prospectus under Section 25?
Section 25(1) of the Companies Act, 2013 classifies certain documents—although not named or structured as prospectuses—as “deemed prospectuses” if they functionally serve the same purpose. That is, any document offering securities to the public—even indirectly—may be treated as a prospectus, triggering legal obligations under Section 26.
This mechanism ensures that companies cannot bypass disclosure requirements simply by using informal or indirect communication strategies while publicly seeking investments.
Scope of the Term “Securities” under Section 25
The term “securities” has a broad interpretation under Indian law. It includes:
· Equity shares and debt instruments
· Debentures (secured or unsecured)
· Hybrid instruments
· Government securities (as defined in the Securities Contracts (Regulation) Act, 1956)
· Contracts for differences and risk-based financial contracts
This wide scope ensures that companies do not escape liability by labeling their instruments differently.
When Does a Document Become a Deemed Prospectus?
The triggering mechanism for a document to become a deemed prospectus includes:
· Any offer for sale of securities to the public
· Any agreement to allot or allotment of securities made with a view to offering them publicly
· Public advertisements, social media campaigns, or blogs soliciting investments—even without actual allotment
Example: If a startup like XYZ Tech announces an “investment opportunity” online, encouraging public participation in their funding round—even without share allocation—such a communication may be treated as a deemed prospectus.
Effects of Deemed Prospectus Status
Once a document is classified as a deemed prospectus, several consequences follow:
· Mandatory disclosures under Section 26 become applicable.
· The company becomes subject to SEBI regulations.
· Directors and company officers are liable for misstatements, omissions, or non-compliance.
· Legal actions and penalties may apply for false or misleading offers.
Content and Disclosure Requirements under Section 25 & 26
While deemed prospectuses may allow for streamlined disclosure (compared to full prospectuses), they must still include:
· Net sale proceeds
· Intended use of funds
· Risk factors
· Brief financial overview
· Management profile
This ensures transparency while avoiding information overload, especially for early-stage or smaller public offerings.
Exemptions from Section 25 Requirements
Section 25 provides exemptions for specific cases:
· Offers made only to institutional investors under SEBI norms
· Offers made via recognized stock exchanges
· Limited private placements (non-public offers)
· Bonus share issues to existing shareholders under prescribed limits
These exemptions reduce compliance burden for smaller or specialized fundraising efforts.
Case Study: Financial Planning Supervisory Board vs. SEBI (2015)
In a landmark case, the Financial Planning Supervisory Board (FPSB) challenged SEBI’s approval of a rival organization as a Self-Regulatory Organization (SRO), arguing that they were registered under Section 25 of the Companies Act.
The Securities Appellate Tribunal (SAT) ruled in FPSB’s favor, stating that SEBI did not follow due process in granting SRO status and ignored the procedural rights of FPSB. This case reaffirms the significance of registration and due process under Section 25.
Practical Implications for Companies
Faster Access to Markets
Deemed prospectuses can speed up fundraising with reduced formalities—but still require careful compliance.
Legal Exposure
Non-disclosure or misstatements could lead to regulatory action, investor lawsuits, or penalties.
Increased Due Diligence
Investors must analyze streamlined documents carefully and may require third-party validation.
Conclusion
Section 25 of the Companies Act, 2013, is a vital safeguard in India’s corporate legal framework. It ensures that public offerings, whether direct or indirect, cannot escape regulatory oversight. By holding informal offer documents to the same standard as formal prospectuses, Section 25 promotes transparency, investor trust, and a robust capital market.
Companies must ensure full compliance while preparing documents that may be treated as deemed prospectuses and seek professional legal guidance to avoid unintentional violations.
FAQs on Section 25 and Deemed Prospectus
Q1. What happens if I offer securities without a deemed prospectus?
You could face fines, imprisonment, or both. The offer may also be invalidated.
Q2. Are there any exemptions?
Yes, for institutional offers, exchange-based sales, limited private placements, and bonus issues.
Q3. What’s the difference in disclosure from Section 26?
Deemed prospectuses may omit historical performance or full financials but must include fund use, risk factors, and basic financials.
Q4. How can investors mitigate risks of information asymmetry?
Through independent research, legal and financial advice, and critical document analysis.
Q5. Is it always cheaper to use a deemed prospectus?
Not necessarily. While disclosure may be simpler, legal and compliance risks can increase costs.
