Why is a Company’s Prospectus

Important for an Investor, & What

Should it Entail?

As long as companies emerge and grow, there should be no dearth of

stocks and shares in the equity market. As corporate firms try to
establish firm footholds in their respective industries, they offer
shares to the public as a means of sustaining themselves financially
and pooling funds to enable further development. At the other end
of this transaction are investors and traders who fund these
organizations, providing them with a helping hand in return for
eventual interests on their investment amounts. With this mutual
understanding, the commercial and corporate sectors boom in their
industries, while individuals reap equally huge benefits of a
financially secure future.

But even as this give-and-take process is extremely significant for a

mutually conducive world to thrive, it is also important for investors
to thoroughly analyse and research on the company whose shares
s/he may purchase. That’s where a company’s prospectus proves to
be literally the most important document before investors may buy
shares online. So, what should a company’s prospectus entail, and
why is it so important? Here’s a look:

What is a Prospectus, and Why Should it Matter?

 In its most basic sense, a prospectus is an official document

that a private company issues when it decides to offer
securities (including stocks, bonds, debentures etc.) in the
 public domain. Mutual fund houses also provide prospectuses
that include key financial information about the mutual funds
investment strategy.

 The information to be contained in a prospectus is specified by

the Securities & Exchange Board of India in association with the
Central Government.

 Before a prospectus may be issued for public circulation, the

company is required to submit a copy of the same for due
registration. Further, the prospectus should be issued within 90
days of being approved by the registrar.

 A company also needs to sign a compliance declaration stating

that the prospectus abides by all the regulations put forth by
the SEBI as well as the Companies Act and the Securities
Contracts (Regulation) act.

 A prospectus allows an investor to not only gather basic

information about a company’s industry, experience, core
management and objectives but also helps one to actively
gauge its transparency and commitment levels.

 Today, the stock market consists of hundreds of thousands of

stocks being offered on a daily basis by companies at different
echelons. In such a situation, it becomes crucial for investors
and traders to be able to discern genuine securities from the
fraudulent ones. Moreover, while making a decision to buy
stocks and invest in securities, it always helps to understand
the domain that the particular company deals with and its
overall performance to date. Such a fundamental analysis of
stocks enables investors to avoid any major lacunae in
communication and spend their earnings in growing a company
 whose ideals resonate with them.

What Should a Company’s Prospectus Entail?

So, now that we have taken a look on what a prospectus is all about
and why it is such an important document, here’s a glimpse at the
basic information that all companies are required to mention in their
prospectuses before offering their shares in the equity market:

1. Information About the Security: A company’s prospectus is

required to contain very specific details about the security
being offered by it in the public domain. Ideally, the
information contained should be such that an investor has the
bare bones of the security before s/he plunges in. This
information includes (but is not limited to) the number of
shares or securities being offered, minimum investment
amounts expected, the interest rates and dividends promised
to the buyer, underwriter details etc.

2. Details About the Issuer: A prospectus should ideally contain

all the significant financial and general details about the
company, including the company’s objectives, vision and
mission, the industry it deals with, its future plans, risk factor,
competitor analysis and so on. A well-drafted prospectus is
characterized by transparency and openness and allows
individuals access to all the relevant information about the
company.
 3. Mutual Funds Objectives and Past Performance (if it is a
mutual funds company): A mutual funds company is
additionally required to provide investors with an in-depth
bifurcation of the securities incorporated in the mutual funds
investment scheme and the denominations of the amounts to
be invested in each security. Further, the company must also
specify, in its prospectus, how it would use the funds generated
from the security.

Conclusion

A report by icon.com rightly points out that a prospectus is an

extremely valuable document for an investor to evaluate the
profitability and potential of the company. The prospectus of the
company serves as a window for the investor to understand the in-
depth functioning and objectives of a company and make the
investment decision accordingly. Are you looking for some assistance
in buying shares from the right company? We’re here to help you!
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