What Is a Deemed Prospectus? Meaning, Definition & Example

In securities regulation, the primary goal is investor protection through transparency. A company raising funds from the public is generally required to issue a prospectus—a detailed document containing all material information about the business, risks, financials, and terms of the issue.

However, companies sometimes try to avoid issuing a formal prospectus by using intermediaries, such as issuing houses or merchant bankers, to distribute securities. To prevent this loophole, the law introduced the concept of a “deemed prospectus.” It ensures that any document used for offering securities to the public, even if not issued directly by the company, is still treated as a prospectus under law.

A deemed prospectus is a document that is not directly issued by the company but is legally considered a prospectus under Section 25 of the Companies Act, 2013 (India).

This typically applies in situations where:

• The company allots securities to an intermediary (such as an issuing house, broker, or investment banker).
  

• That intermediary then offers those securities to the public for sale.
  

The rationale is straightforward: if the public is being invited to subscribe, they should receive the same comprehensive disclosures as if the company itself had issued a prospectus.

Key aspects:

• It acts as a legal safeguard against indirect or disguised public offers.
  

• Both the intermediary and the company are held jointly responsible for disclosures made.
  

• Ensures that the public has access to accurate financial and risk-related information before investing.

Not every sale of securities by an intermediary qualifies as a deemed prospectus. The law specifies conditions under which this happens:

1. Allotment to Intermediary: The company first allots securities to an intermediary (such as a broker or issuing house).
   

2. Subsequent Public Offer: The intermediary then offers those securities to the public.
   Specified Timeframe: If the offer to the public is made within a specified period (commonly six months), the offer document will be treated as a deemed prospectus.

This provision prevents companies from avoiding compliance by issuing shares privately and later letting intermediaries resell them to the public.

Suppose a company, ABC Ltd., wants to issue 10 lakh shares but wishes to avoid the legal burden of filing a prospectus. It allots the shares to an investment bank, which then sells those shares to the public within three months using an offer circular.

That offer circular will be treated as a deemed prospectus, and ABC Ltd. along with the investment bank will be responsible for ensuring all disclosures are truthful and complete.

This ensures investors are not misled simply because the securities reached them through an intermediary.

Just like a regular prospectus, a deemed prospectus must contain:

• Company Information: Business activities, promoters, directors, and history.
  

• Financial Statements: Balance sheet, profit & loss account, cash flow details.
  

• Risk Factors: Market risks, operational risks, legal disputes, etc.
  

• Terms of Issue: Price of securities, method of payment, allotment process.
  

• Material Contracts: Any agreements that significantly affect the offering.
  

• Use of Proceeds: Purpose for which funds raised will be utilized.
  

Such disclosures are critical for building investor trust and ensuring informed decision-making.

The deemed prospectus concept was created to close loopholes and strengthen market integrity. Its importance includes:

• Investor Protection: Ensures investors are not deprived of vital information even in indirect offers.
  

• Transparency: Forces companies and intermediaries to disclose all material facts.
  

• Regulatory Compliance: Makes it harder for companies to evade securities regulations.
  

• Market Confidence: Improves trust in capital markets by ensuring uniform standards of disclosure.
  

• Liability Sharing: Puts responsibility on both companies and intermediaries, reducing chances of misrepresentation.

The concept of a deemed prospectus ensures that the spirit of securities law—transparency and investor protection—is preserved even in indirect public offers. By treating intermediary-issued documents as prospectuses, regulators close potential loopholes and safeguard the investing public.

For companies, it serves as a reminder that disclosure obligations cannot be avoided. For investors, it is a valuable assurance that whether they invest via direct offers or intermediary offers, they are equally protected.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.