What is Abridged Prospectus? Meaning, types & Importance

Before purchasing a new electronic device a consumer might spend a lot of time studying the advertisement material which states the features of the device. Similarly, conducting a thorough and detailed analysis of a company is a vital step in an investor’s decision-making process. Before a company goes public and gets its shares listed on the stock exchanges, the company is mandated to file a prospectus which provides detailed information about the issue and aids investors in gathering information about the security. However, a prospectus is typically very lengthy making it difficult to focus on the key points and details. This is where the abridged prospectus comes in.

In this blog, we will take a look at what an abridged prospectus is, the different types, and how it differs from a full prospectus.

What is an Abridged Prospectus?

Before we explore what an abridged prospectus is, we should first understand what a prospectus is and what it entails.

As per section 2 of the Companies Act, 2013, any public company or a company that is transitioning from private to a public company must issue a prospectus when inviting the public to purchase securities of the company. For example, if a company is going public through an initial public offer (IPO), it must issue a prospectus while inviting the public to subscribe to the issue.

The prospectus contains detailed information about the company and provides the contents of the company’s memorandum. Through the prospectus investors can access details such as the objectives of the issue, liabilities, and details about the share capital. Further details about the the signatories along with the number of subscribed shares is also available in the prospectus. The prospectus is a crucial document which can help investors study and assess the key information about a company.

However, the prospectus is often lengthy and an investor might miss out on the key points. As per section 2 of the Companies Act, 2013, the abridged prospectus is defined as a memorandum that contains the significant points and key information about the prospectus as specified by the Securities and Exchange Board of India (SEBI).

Purpose of an Abridged Prospectus

When a company invites the public to subscribe to its securities, there are numerous factors that an investor has to consider. The prospectus contains key details about the issue and the company and can help an investor get detailed information.

However, given its length, reading the entire prospectus is not convenient and practical for many investors. To safeguard the interests of investors and to provide them with all the necessary information, a company has to issue an abridged prospectus.

Under Section 33, of the Companies Act, 2013, a company is required to issue an abridged prospectus that does not exceed five pages. Issuing the abridged prospectus along with the application forms is mandatory and investors cannot invest in the company without it. Moreover, failure to issue this document attracts a fine of ₹50,000 per default.

Importance of an Abridged Prospectus

The abridged prospectus is important for the following reasons:

• Provides all the key details and highlights of the company’s memorandum.
• Summarises the prospectus, making it easier for investors to assess and analyse the company and the objective of the issue.
• Issuing the abridged prospectus is mandatory and helps safeguard investors.
• Failure to issue an abridged prospectus can lead to fines which holds companies accountable while making investors aware of their rights.

Types of Prospectus

Along with the abridged prospectus, there are several types of prospectus that an investor should be aware of. Here are the different types of prospectus:

Deemed Prospectus

As per section 25(1) of the Companies Act, 2013, a document is deemed to be a prospectus if the companies allots or offers its shares to the public. A deemed prospectus is usually filed when a company is allotting shares through an intermediary.

Red Herring Prospectus

A red herring prospectus (RHP) is a prospectus filed with the registrar prior to the offer. It is a preliminary prospectus and does not include detailed information about the offer such as the price or the securities offered.

Shelf Prospectus

A shelf prospectus is a prospectus issued by a company when it is issuing more than one type or class of security.

Contents of an Abridged Prospectus

The abridged prospectus contains the following information:

An overview of the company’s history, promoters, objectives, and goals.

• Financial information of the past three to five years which includes the P&L, revenues, balance sheets, and cash flow statements.
• A statement from the management about the market trend, industry, and company plans.
• The abridged prospectus must contain all the risk factors associated with the investment to provide investors with clear information.
• The abridged prospectus also contains the plans for the funds that are being raised. It should disclose if the funds are being used for growth, debt repayment, working capital, etc.

Difference between Abridged Prospectus and Full Prospectus

Is it Mandatory to Issue an Abridged Prospectus?

Although SEBI has mandated the issue of an abridged prospectus, there are certain instances where a company is not required to issue an abridged prospectus.

• If a company is not offering any securities to the general public, an abridged prospectus is not required.
• If the company receives a bonafide invitation for an underwriting agreement, an abridged prospectus is not required.

SEBI Guidelines on Abridged Prospectus  

SEBI has issued several guidelines on the format and the contents that need to be included in an abridged prospectus.

• The abridged prospectus must be printed on an A4 size paper in Times New Roman font with a font size of 10. The letter spacing must be at 100% scale with the line spacing at 1.00. The abridged prospectus must avoid condensation.
• The font size for headings and subheadings can be modified. Key headings need to be in bold, capital letters, and enclosed in boxes. Main sub-headings need to be enclosed in boxes while other subheadings need to be bold and underlined.
• The abridged prospectus must contain the application form along with directions on how to fill the form.
• Being an abridged prospectus, it must contain all the necessary information about the memorandum including the objectives and risks of the issue.
• The abridged prospectus must make references to the prospectus whenever deemed necessary.

Conclusion

An abridged prospectus is vital for retail investors as it highlights all the key details of the prospectus. The abridged prospectus helps companies communicate the offer to retail investors in a transparent, brief, and concise manner. Moreover, the issuance of the abridged prospectus helps safeguard the rights of investors.