A prospectus is a document that a public company must publish when it wants to issue shares, debentures, or other securities to the general public. It serves as an official information booklet that allows people to understand what they are investing in.
A prospectus in Nepal is a formal legal document published by a public company before issuing securities to the public. It serves as an invitation and provides crucial information that investors need to make informed decisions.
According to Section 2(p), a prospectus refers to a document that a body corporate is required to publish under Section 30 prior to the public issue of securities.
In Nepal, the rules governing the preparation, registration, and publication of a prospectus are set out in Chapter 3 of the Securities Act, 2063.
Section 23 of the Companies Act 2063 also mandates that a public company must publish a prospectus prior to issuing its securities to the public.
The Securities Board of Nepal (SEBON) reviews the prospectus and may require amendments, if necessary, before approving the public offering of insurance.
Think of a prospectus as a company’s open book to the public, which explains who the company is, what it does, its financial health, and why it is asking for investment. A prospectus is a legal document, which means every statement in it must be truthful and is subject to legal accountability and transparency.
What Is the Legal Framework for a Prospectus?
The Securities Act, 2063, provides a detailed framework for the issuance of securities, including the preparation and publication of a prospectus. Here are the key Sections of Chapter 3, including:
- Section 30 – This Section mandates that a prospectus must be approved by the Securities Board of Nepal and published before any public offering of securities, ensuring transparency and informed investor decisions. Certain exemptions apply, including securities issued by the Nepal Rastra Bank, government-guaranteed securities, offerings to a limited number of investors, and other cases allowed by SEBON.
- Section 31 – It requires SEBON to approve a prospectus only if it contains sufficient and truthful information for the investors to make informed decisions. It also allows reissuing unsold securities within a year by updating the prospectus with any latest information, ensuring transparency and investor protection.
- Section 32 – This Section outlines the specifics of the essential matters that must be included in a prospectus. These include details about the company’s business, financial status, assets and liabilities, profit and loss, plans, risk factors, and information about the securities being offered, among other disclosures. The goal is to provide potential investors with comprehensive and transparent information to make informed investment decisions and to ensure full disclosure of important facts in the prospectus.
- Section 33 – It holds the issuing company, its directors who sign the prospectus, and the experts preparing it jointly and individually liable for the truthfulness of the information in the prospectus. If investors suffer losses due to false, misleading, or malicious statements knowingly included in the prospectus, these parties must compensate for the damage. This Section ensures accountability and investor protection against false disclosures in the prospectus.
How Many Types of Prospectuses in Nepal?
In the context of Nepal, companies can issue various types of prospectuses, depending on the purpose of the fundraising. Here are the most common types:
- Red Herring Prospectus – A Red Herring Prospectus is issued during the Initial Public Offering (IPO) of a company, which does not contain details about the price of the securities or the number of shares offered. This type of prospectus is used to generate interest among potential investors and to gauge market demand.
- Shelf Prospectus – A Shelf Prospectus is issued by companies when they plan to issue securities in tranches over a period. The main benefit is that the company does not need to prepare a new prospectus for each offering time frame. This provides flexibility and reduces administrative burdens.
- Abridged Prospectus – An Abridged Prospectus is a summarised version of a full prospectus and is provided to investors along with the application form for purchasing securities. It contains only the essential details required by investors, making it easier for them to make informed decisions faster.
- Deemed Prospectus – A Deemed Prospectus is considered a prospectus under certain circumstances, even if it is not formally titled as such. This can include documents like application forms or advertisements that invite offers from the public for the subscription or purchase of any securities of a body corporate.
Why Is a Prospectus Necessary?
The requirement of a prospectus exists for one key reason is to protect investors. Without this safeguard, companies could exaggerate their achievements or hide their weaknesses.
By mandating a prospectus, the law ensures that investors receive accurate and complete information, companies are prevented from misleading the public with half-truths, and directors take personal responsibility for the statements they make.
This framework of accountability and transparency ultimately builds trust and confidence in Nepal’s securities market.
What Should Be Contained?
A prospectus is designed to answer all the questions an investor may have. Generally, the contents included are:
- Company Details – Name, history, and registered office
- People Behind the Company – Promoters, directors, and their backgrounds
- Financial Information – Audited accounts and financial statements performance
- Purpose of Fundraising – How the money raised will be used
- Details of Securities – Types of shares or debentures, their number, and price
- Risks – Potential threats such as market risks, regulatory changes, or industry challenges
How Is the Approval Process Done?
In Section 31 of the Securities Act, 2063, issuing a prospectus involves multiple steps to ensure reliability:
- The company prepares the draft prospectus
- It submits the document to the Securities Board of Nepal (SEBON) for review
- SEBON checks for completeness and accuracy. If errors or omissions are found, they must be corrected
- Once approved, the prospectus must be registered with the Office of the Company Registrar
- Only after these approvals can the Company publish and distribute it to the public
This layered process ensures that investors receive only verified and reliable information.
What Is the Liability for False Information?
The law takes false or misleading information in a prospectus in accordance with Section 33 of the Securities Act, 2063. If investors bear losses because of wrong statements, the company’s directors and promoters may suffer:
- Heavy fines and penalties
- Liability to compensate affected investors
- Possible disqualification from holding directorship in the future
This strict liability system ensures that companies remain honest and careful in their disclosures.
Conclusion
The prospectus provisions under Chapter 3 of the Securities Act, 2063, are a cornerstone of Nepal’s securities regulation. They ensure that public offerings are transparent, directors are accountable, and investors have the information they need to make wise choices.
For companies, issuing a prospectus is not just legal formality, it is an opportunity to build credibility and attract investor confidence.
In essence, the prospectus is the bridge of trust between companies and investors, making Nepal’s capital market safer, fairer, and more reliable.
FAQs
Q. What do you mean by prospectus?
A. A prospectus is a legal document that a public company must publish before issuing securities.
Q. Who approves a prospectus in Nepal?
A. The Securities Board of Nepal (SEBON) reviews and approves a prospectus before it can be published and shared with the public.
Q. Which laws regulate the prospectus in Nepal?
A. The prospectus is mainly governed by Chapter 3 of the Securities Act, 2063, and Section 23 of the Companies Act, 2063.
Q. What types of prospectuses are issued in Nepal?
A. Common types include Red Herring Prospectus, Shelf Prospectus, Abridged Prospectus, and Deemed Prospectus.
Q. Why is a prospectus necessary?
A. It protects investors by ensuring transparency, preventing companies from making misleading claims, and holding directors accountable for the information provided.
Babita Pariyar
Babita is a law student with a keen interest in property accountancy and legal compliance. She contributes insightful, well-researched articles that reflect a fresh and analytical perspective on evolving legal matters.