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Prospectus – The Company's Dating Profile! 💼📱

Imagine: You're on a matrimonial site looking for a life partner.

Profile shows:

  • Photo (looks great!)
  • Education (IIT + IIM!)
  • Salary (₹50 lakhs/year!)
  • Family (respectable!)
  • BUT ALSO: "Has ₹20 lakh loan" (honest disclosure!)

That's a PROSPECTUS - Company's dating profile for investors! 😄

What is a Prospectus?

Legal Definition (Section 2(70), Companies Act 2013):

"Any document described or issued as a prospectus, including any document inviting deposits, offers or invitations to subscribe to or purchase shares or debentures of a company."

Simple version: Advertisement inviting public to buy company's shares!

When issued? During IPO (Initial Public Offering) - when company goes public!

The IPO Journey - Where Prospectus Fits

Zomato's IPO (2021) - Timeline:

Step 1: Company decides "Let's go public!" 🎯

Step 2: Hire merchant bankers (Kotak, Morgan Stanley, etc.)

Step 3: Get SEBI (Securities Exchange Board of India) approval

Step 4: Issue DRAFT Prospectus → Public can comment!

Step 5: File Final Prospectus with SEBI & Stock Exchanges

Step 6: Launch IPO marketing roadshow (convince investors!)

Step 7: Open IPO for applications (3-5 days)

Step 8: Allocate shares (if oversubscribed, lottery!)

Step 9: List on NSE/BSE - Trading begins! 🎊

Prospectus = Star of Steps 4-6! The main selling document!

Purpose of Prospectus (Why Bother?)

1. Inform the Public 📢

What investors need to know:

  • What does company do?
  • Who runs it?
  • Financial health?
  • Future plans?
  • RISKS!

Example - Paytm Prospectus (2021):

  • "We operate digital payments, e-commerce, financial services"
  • "Our revenue grew 65% YoY!"
  • BUT ALSO: "We have NEVER made annual profit!" (Honest! 😅)

2. Legal Protection 🛡️

If company LIES in prospectus → Criminal offense!

Section 34-35, Companies Act: Directors can be jailed + fined for false statements!

Real case - Satyam Computer Services (2009):

  • Ramalinga Raju (Chairman) fabricated balance sheet
  • Showed ₹5,000 crores fake cash!
  • Result: Arrested, company collapsed, shares crashed!

Lesson: Prospectus = Legal contract, not marketing fluff!

3. Price Discovery 💰

Helps investors decide: Is share worth ₹100 or ₹500?

Prospectus contains:

  • Financials (last 3 years)
  • Peer comparison
  • Valuation rationale

Investors analyze → Decide fair price!

4. Build Confidence ✅

Detailed prospectus = Professional company = Investor trust

Example: Life Insurance Corporation (LIC) IPO (2022)

  • Prospectus was 600+ pages! (Longest in Indian history!)
  • Covered everything from history to claim settlement ratio
  • Result: Investors trusted → India's biggest IPO (₹21,000 crores!)

Contents of Prospectus (What's Inside?)

1. Company Overview 🏢

Contains:

  • Name, registered office
  • Date of incorporation
  • CIN (Corporate Identity Number)
  • Business description

Example - Nykaa Prospectus (2021):

"Nykaa is India's leading lifestyle-focused consumer technology platform... Founded in 2012 by Falguni Nayar... Omnichannel presence with 80+ physical stores and e-commerce platform..."

2. Risk Factors ⚠️

THE MOST IMPORTANT SECTION!

Every prospectus MUST disclose risks:

Internal risks:

  • "We depend heavily on our founder"
  • "We've never been profitable"
  • "Our business model is unproven"

External risks:

  • "Regulatory changes may affect us"
  • "Competition from Amazon, Flipkart"
  • "COVID-like pandemic can hurt business"

Zomato's bold risk disclosure (2021):

"We have a history of net losses and may continue to incur net losses in the future..." "Our promoter and Chairman holds significant voting rights and may exercise control in a manner adverse to minority shareholders..."

Why so honest? Legal protection! If investor loses money, can't sue saying "You didn't warn me!" 🛡️

3. Financial Information 💰

Mandatory:

  • Last 3 years of audited financial statements
  • Profit & Loss, Balance Sheet, Cash Flow
  • Key ratios (P/E ratio, Debt/Equity, etc.)

Example - Paytm (2021):

YearRevenue (₹ Cr)Profit/Loss (₹ Cr)
20193,540-3,960 (LOSS)
20203,629-2,942 (LOSS)
20213,186-1,701 (LOSS)

Investors saw: Losses decreasing! Growth potential! (Still subscribed!)

4. Objects of the Issue 🎯

Where will IPO money BE USED?

Must specify:

  • Expansion plans
  • Debt repayment
  • R&D
  • General corporate purposes

Policybazaar IPO (2021) - Use of funds:

  • Technology & data science: ₹150 crores
  • Marketing & branding: ₹75 crores
  • Organic & inorganic growth: ₹290 crores
  • General corporate purposes: ₹180 crores

Why detailed? So investors know money won't be wasted!

5. Management Details 👥

Who's running the show?

Details of:

  • Promoters
  • Directors (with photos, qualifications!)
  • Key Managerial Personnel (CEO, CFO, CS)

Example - Reliance IPO (1977):

  • Dhirubhai Ambani's complete profile
  • His vision for company
  • Management team credentials

Investors think: "Good team = Good company!" ✅

6. Share Capital Structure 📊

Before IPO:

  • Promoter holding: 70%
  • Existing investors: 30%

After IPO (proposed):

  • Promoter: 55%
  • Public: 25%
  • Existing investors: 20%

Example - Zomato:

  • Before: Deepinder Goyal (founder) + VCs held 100%
  • After IPO: Public got 25%, founders diluted but still in control!

7. Underwriting Details 💼

Underwriter = Bank/Institution that GUARANTEES to buy unsold shares

Example:

  • Zomato IPO underwritten by Kotak, Morgan Stanley
  • If public doesn't buy all shares, underwriters buy remaining!

(This rarely happens - Indian IPOs usually oversubscribed!)

8. Legal & Tax Matters ⚖️

  • Pending litigations
  • Tax disputes
  • Major contracts

Example:

"There are 15 pending income tax cases aggregating to ₹500 crores..."

(Investors know what they're getting into!)

9. Comparison with Peers 📈

How does company compare to competitors?

Example - Zomato vs Swiggy:

MetricZomatoSwiggy (not listed)
Monthly Active Users17 million15 million
Restaurant Partners3,90,0003,00,000

(Helps investors decide!)

10. Statutory

& Other Information 📄

  • Auditor's report
  • Board's approval
  • Stock exchange listing details
  • Registrar & transfer agents

Types of Prospectus

1. Deemed Prospectus

When: Company issues shares to public via intermediaries (brokers, dealers)

Not directly from company, but counts as prospectus!

2. Shelf Prospectus (SMART shortcut! 🧠)

Used by: Banks, financial institutions

How it works:

  • File ONE prospectus
  • Valid for 1 year
  • Issue securities multiple times without filing each time!

Example: HDFC Bank issues bonds every quarter

  • Files shelf prospectus once
  • Issues bonds 4 times in year
  • Saves time & cost!

3. Abridged Prospectus (Summary version)

Short version of full prospectus

Sent with application form

Contains: Key highlights, not full details

Think: Movie trailer vs full movie! 🎬

Red Herring Prospectus (Coming up next lesson!)

Sneak peek: Prospectus WITHOUT final price!

Used when: Company hasn't decided share price yet (depends on investor demand!)

More in next lesson! 👀

Prospectus Liability - Consequences of Lying! ⚖️

If prospectus contains FALSE statement:

Criminal Liability:

  • Imprisonment: Up to 2 years
  • Fine: Up to ₹5 lakhs

Civil Liability:

  • Compensate investors for losses
  • Directors personally liable!

Example - Sahara India case:

  • Issued misleading prospectus
  • Raised ₹20,000 crores from public
  • SEBI ordered refund with interest!
  • Subrata Roy (Chairman) jailed for 2+ years!

Lesson: Honesty in prospectus = Non-negotiable! 🛡️

Quiz Time! 🎯

Test Your Knowledge

Question 1 of 6

1. Prospectus is issued during:

Company formation
IPO (Initial Public Offering)
AGM
Audit

💡 Final Wisdom: "Prospectus is like a job interview - highlight strengths, but MUST disclose weaknesses! Honesty builds trust, lies land you in jail! Every investor's decision starts with reading the prospectus!" 📖✨

Next up: Red Herring Prospectus - The prospectus with a missing piece! 🧩🔴

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