Understanding the Concept of Deemed Prospectus

A company doesn’t always sell shares directly to the public. Sometimes it hands over a block of securities to a merchant banker or an issue house, which then resells them to investors. If that sounds like a neat way to dodge prospectus disclosure rules, company law has already closed that loophole. This is where the idea of a deemed prospectus comes in, and understanding it is essential for anyone studying the law relating to public offers.

What is a deemed prospectus? 🔗

A deemed prospectus, also called a prospectus by implication, arises when a company allots or agrees to allot securities to an intermediary with the intention that those securities will eventually be offered for sale to the public. The document through which that resale offer is made is then treated, in the eyes of the law, as if the company itself had issued a prospectus.

This concept is codified in Section 25 of the Companies Act, 2013, which corresponds to Section 64 of the earlier 1956 Act. The provision states that when a company allots securities with a view to their being offered for sale to the public, any document containing that offer is deemed to be a prospectus issued by the company, and all the statutory rules on prospectus content and liability apply to it just as they would to a regular prospectus.

Why the law needed this fiction 🔗

Without this provision, a company could sell an entire issue of shares to a single intermediary, such as a merchant bank or underwriting firm. That intermediary could then advertise and resell the shares to the public through its own circular, one that skips the disclosures, liability standards, and registration requirements a genuine prospectus must meet. The company would effectively raise public money while avoiding the very safeguards Parliament built into the prospectus framework.

The deemed prospectus rule prevents this indirect route from becoming a shortcut. As legal commentary on the provision explains, it ensures that liability for disclosures and compliance does not disappear merely because an intermediary is involved. The substance of the transaction, a company raising funds from the public, matters more than the form it takes.

When is an offer presumed to be a deemed prospectus? 🔗

Proving that a company always intended its shares to reach the public through an intermediary would be difficult in practice. So the Act builds in two statutory presumptions under Section 25(3). If either condition is satisfied, the allotment is presumed to have been made with a view to a public offer, unless the company can show otherwise.

The six-month rule 🔗

If the intermediary offers the securities for sale to the public within six months of the original allotment or agreement to allot, the law presumes the entire arrangement was designed for a public issue from the start. This time-based test stops companies from claiming the resale was a coincidental, independent decision by the intermediary.

Consideration not fully received 🔗

The second trigger applies when, at the date the public offer is made, the company has not yet received the full consideration for the securities from the intermediary. If the issue house hasn’t actually paid for the shares in full, it suggests the shares were passed on as a conduit for a public sale rather than a genuine, completed private transaction. This condition is detailed in the Companies Act, 2013 as administered by the Ministry of Corporate Affairs.

What disclosures does a deemed prospectus require? 🔗

Once a document is deemed a prospectus, Section 26 (the section governing prospectus contents) applies to it with some modifications. Beyond the usual disclosures, the deemed prospectus must additionally state:

• Net proceeds: The net amount of consideration received, or to be received, by the company for the securities.
• Contract details: The date, parties, and terms of the contract under which the securities were allotted to the intermediary.
• Inspection rights: The place and time where that contract can be inspected by prospective investors.

These extra requirements exist precisely because an ordinary investor reading the resale document might otherwise never know the shares had already changed hands once before reaching the market.

How courts have applied the concept 🔗

Indian courts have interpreted the “offer to the public” test broadly, which keeps the deemed prospectus provision from being circumvented through technical arguments about who exactly received the offer.

In an early and often-cited case, an advertisement in a newspaper stating that a limited number of shares were still available for purchase was held to constitute an offer to the public, even though it wasn’t styled as a formal prospectus. Similarly, in SEBI v. Kunnamkulam Paper Mills Ltd., a rights issue where renunciation was extended to more than fifty outsiders was treated as a deemed prospectus situation, since offering securities to a wide, indeterminate group of people functions the same way a public offer does, regardless of the label attached to the document.

The consistent judicial theme is that courts look at the substance and reach of an offer document, not its title, before deciding whether prospectus obligations apply.

Deemed prospectus versus a regular prospectus 🔗

Liability under a deemed prospectus 🔗

Because a deemed prospectus is treated as a prospectus “for all purposes,” the civil and criminal liability provisions for misstatements apply in full. This means both the company and the intermediary issuing the resale document can be held responsible if the document contains false or misleading statements, or omits material facts. The law is careful to note that this liability doesn’t shift entirely onto the intermediary either. Section 25(1) preserves whatever liability the persons making the offer would separately face, so responsibility can be shared rather than diluted. Details on this dual liability structure are discussed in coverage of Section 25 of the Companies Act, 2013.

For students, the practical takeaway is that structuring an issue through a middleman offers no shield against prospectus liability. The law traces the transaction back to its source.

A quick example to tie it together 🔗

Suppose a company allots two lakh equity shares to a merchant banking firm on 1 January. If that firm advertises those same shares for sale to the public on 1 May, well within six months, the resale document is deemed a prospectus issued by the company. The company cannot argue it merely sold shares privately to the merchant banker and had nothing to do with the later public sale. The statutory presumption, combined with the short time gap, places the burden on the company to prove otherwise, which is rarely straightforward. Commentary on this mechanism, including how the six-month presumption interacts with actual practice, is explained in detail by tax and corporate law resources covering the Companies Act, 2013.

Why this matters beyond the exam 🔗

Deemed prospectus provisions reflect a broader principle in company law: substance prevails over form. Regulators and courts consistently look past the label a company gives a document and examine what the transaction actually achieves. For anyone heading into corporate law, compliance, or capital markets work, this principle recurs constantly, whether the question involves prospectus liability, related-party transactions, or disguised private placements.

What do you think? If a company sells its entire issue to a single institutional investor who resells only a small portion to the public seven months later, should the deemed prospectus rule still apply in spirit, even if it technically falls outside the six-month window? And should the intermediary bear equal liability with the company, or does that discourage legitimate underwriting activity?

References

1. https://indiankanoon.org/doc/91805737/
2. https://lawbhoomi.com/what-is-a-deemed-prospectus/
3. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
4. https://drishtijudiciary.com/to-the-point/ttp-company-law/prospectus-under-the-companies-act-2013
5. https://ibclaw.in/section-25-of-the-companies-act-2013-document-containing-offer-of-securities-for-sale-to-be-deemed-prospectus/
6. https://taxguru.in/chartered-accountant/companies-act-2013-complete-guide-public-offer-prospectus-allotment-rules.html