CALL NOW +91 – 8800110989 There are often times when companies seek to raise funds from the public. There are two major ways in which companies can raise money from the public and those are shares and debenture. These two instruments govern the various aspects of corporate finance and investment. Raising of capital, forming of company and how the company gets operated is regulated by the company law. In this article we will explore the key instruments of corporate finance and understand associated provisions of company law.
Prospectus in Company Law
A prospectus plays a significant role in corporate finance, it is required when a company decides to raise capital through public investment using share or debenture as the instrument, they need to provide details through prospectus. A prospectus has four major requirements: financial statements, management information, use of proceeds and risk factors. A prospectus is a legal document that contains details about companies financial health, area of business and the purpose of raising capital. A prospectus is driven by 3 key components.
Purpose: It should clearly state the objective of the prospectus, and provide details about the company’s business operation, financial health and risk associated. This transparent information will help potential investors to make informed decisions.
Content: It contains, financial statement, management detail, area of business, risk factor and regulatory adherence information.
Compliance: The prospectus has to be in compliance with the rule and regulation set forth by SEBI (Securities and Exchange Board of India) to make sure the information provided is accurate and transparent.
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Types of Prospectus: Prospectus are generally of 4 types
Preliminary Prospectus: This type of prospectus is known as red herring; it is an initial version that the company files with the regulatory body. Red herring gives investors the opportunity to assess the prospectus before offering.
Offering Prospectus: This is the final version of prospectus and it carries comprehensive information about such offering price, number of securities and terms of the securities. It is important for investors to read the details in offering prospectus before making an investment decision.
Shelf Prospectus: Shelf prospectus is used by companies when they want to offer multiple securities over a period. Shelf prospectus eliminates the need of filing new prospectus every time for a new offering and helps in expediting the process of offering securities.
Every prospectus is specifically designed to serve a different purpose in the investment process. The objective of prospectus is not only to invite investment but also to provide crucial information to investors through disclosure keeping the process fair and transparent.
Free Writing Prospectus: It works as a supplemental prospectus as it provides additional information such as updates, summaries and promotional materials related to the security offering etc.
Understanding Debenture in Company Law
Debenture basically is a form of debt, when a company seeks to raise capital from investors in the form of long term loan they use debenture. In the debenture the company just like a normal loan company promises to repay the principal over a certain period of time including the interest. A debenture interest rate is predetermined and maturity date is already fixed along with the terms of payment, a debenture is less risky in comparison to equity. The investors in debenture of the company are known as the creditors. The debentures have fixed maturity date
Types of Debentures in Company Law
Secured Debenture: This type of debentures are considered very safe and secure as these are backed by specific charges on the company’s assets. In case of failure of repayment the debenture holder has a right to claim the asset and to recover loss.
Unsecured Debentures: As the name suggests, unsecured these debentures are exposed to more risk as these are not backed up by any collateral or asset. The debenture holder has to solely rely on the company’s history and credit reputation.
Convertible Debentures: Convertible debentures offer the unique advantage of acquiring equity in the business after a certain amount of time. After a predetermined time the debenture holder can convert it to equity share at an agreed price and ratio. This helps debenture holders to get capital appreciation.
Non-Convertible Debentures: In this type of debenture the owner of the debenture doesn’t get to convert the debenture in equity like convertible debenture. It acts like a source of fixed income till maturity.
Fixed Rate Debentures: Offer a fixed interest rate throughout the tenor, suitable for investors seeking stability in returns.
Floating Rate Debentures: Interest rate varies with market benchmarks, offering potential for higher returns in rising rate environments.
Issue & Redemption: The companies seeking funding through debenture issues them through public offering following the regulatory guidelines. The redemption of the debentures happens either at par value or after applying a premium at the time of maturity as per the terms outlined in the agreement.
Compliance: Corporate financial investment through debentures is subject to compliance under regulatory authority to these investments safe for the investors.
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Conclusion
The prospectus and debenture plays a vital role in corporate finance. While the prospectus provides vital information about the company’s business, financial health and associated risk factors to the potential investors, debenture works as an investing instrument. It is more like a conventional debt where the investor gets the principal repaid along with interest after agreed upon terms. The regulatory authorities play a crucial role in safeguarding interest of the investors. Understanding these key concepts related to a company’s finance is important for investors.
Frequently Asked Questions
What are the 4 types of prospectus?
The four types of prospectus are
1. Preliminary Prospectus (Red Herring)
2. Offering Prospectus
3. Shelf Prospectus
4. Free Writing Prospectus
What is the prospectus of company case law?
A prospectus is a legal document that contains details about company’s financial health, area of business and the purpose of raising capital and it has four major requirements: financial statements, management information, use of proceeds and risk factors.
What is the prospectus of an Indian company?
A prospectus is a legal document that contains details about company’s financial health, area of business and the purpose of raising capital. Through the prospectus companies invite investment from the public.
