When a company decides to go public and raise funds from investors, it is required to share detailed information about itself, its financials, management, risks, and the nature of the securities being offered. This is done through a document called a prospectus. Most people who follow the share market IPOs are somewhat familiar with this concept.
But what happens when a company does not sell shares directly to the public? What if it first allots those shares to an intermediary - say, a merchant bank or a registered broker, who then sells them to retail investors? Does the company get to bypass its disclosure obligations in that case?
The answer is no. And that is precisely where the concept of a deemed prospectus comes in.
Let’s understand what is Deemed Prospectus in detail.
What is a Deemed Prospectus?
A deemed prospectus is a legal document that is treated as equivalent to a regular prospectus, even though it is not issued directly by the company. It is the offer document through which an intermediary invites the public to purchase shares that were first allotted to it by the issuing company.
In simpler terms: if a company routes its public offering through a middleman, the document used by that middleman to sell the shares to investors is called a deemed prospectus.
The key principle here is that the law does not allow companies to sidestep transparency obligations by adding an intermediary into the chain. Whether shares reach investors directly or indirectly, investors are entitled to the same quality and depth of information.
Legal Basis: Section 25 of the Companies Act, 2013
The deemed prospectus is governed by Section 25(1) of the Companies Act, 2013. The section states that when a company allots or agrees to allot any securities of the company with a view to those securities being offered for sale to the public, any document through which that offer for sale is made shall be treated as a prospectus issued by the company.
A regular prospectus, by comparison, is covered under Section 26 of the same Act, which prescribes detailed disclosure requirements for direct public offers.
The significance of Section 25 is that it closes a potential loophole. Without it, a company could technically claim it never issued a prospectus, because the actual document reaching investors was issued by an intermediary. Section 25 ensures such an arrangement does not reduce the company's accountability.
When Does a Deemed Prospectus Get Triggered?
Not every offer-for-sale arrangement involving an intermediary automatically becomes a deemed prospectus. Two specific conditions, as laid down under the Act, determine when this classification applies:
Condition 1: The Six-Month Rule: If the intermediary that was allotted shares by the company offers those shares to the public within six months of receiving the allotment, the offer document is treated as a deemed prospectus. The assumption here is that the original allotment was always intended as a precursor to a public sale.
Condition 2: Non-Receipt of Consideration: If the company had not received payment for the allotted shares at the time the intermediary makes the offer to the public, the document used for that offer is deemed a prospectus. This condition captures situations where the company and the intermediary had an understanding that payment would only flow after the shares were sold to the public, a hallmark of a structured offering routed through a middleman.
If either of these two conditions is met, the offer document takes on the legal character of a prospectus and must meet all related compliance requirements.
Understanding It With a Simple Example
Consider a company called ABC Ltd. that wants to list on the share market. Instead of directly conducting an IPO investment process with the public, it allots shares to a merchant bank, let's call it XYZ Securities, in March 2025.
XYZ Securities then issues an offer document in August 2025, inviting the public to purchase these shares.
Since the public offer happens within six months of the original allotment, the offer document issued by XYZ Securities is classified as a deemed prospectus. ABC Ltd. remains legally liable for the disclosures in that document, just as it would have been had it issued the prospectus itself.
If ABC Ltd. had instead chosen to conduct a direct mainboard IPO, it would have issued a regular prospectus and complied with all the SEBI and Companies Act requirements directly.
What Does a Deemed Prospectus Contain?
Since a deemed prospectus is treated at par with a regular prospectus, it must include all the disclosures mandated under Section 26 of the Companies Act, 2013. These typically include:
- The name and registered address of the company
- Details of the promoters and directors
- Shareholding pattern and related information
- The type of securities being offered and the rights attached to them
- The minimum subscription amount
- Details of underwriters, if any
- Audited financial statements, including profit & loss accounts
- Risk factors and objectives of the issue
- Pricing details and commission/brokerage arrangements between the company and the intermediary
Essentially, an investor looking at a deemed prospectus should have the same informational advantage as one looking at a traditional prospectus.
Deemed Prospectus vs. Regular Prospectus: Key Differences
While both documents serve the same broad purpose, informing investors before they commit capital, there are some structural differences worth understanding:
| Aspect | Regular Prospectus | Deemed Prospectus |
| Issuer | The company itself | The intermediary |
| Legal Section | Section 26, Companies Act, 2013 | Section 25, Companies Act, 2013 |
| Method of Offer | Direct public issue (e.g., mainboard IPO) | Indirect offer via an intermediary (offer for sale) |
| Who Bears Liability | The company and its directors | The company retains liability, even though the intermediary issues the document |
| Disclosure Prepared By | The issuing company | The intermediary, on behalf of the issuing company |
One important point worth highlighting: even though the intermediary issues the deemed prospectus, the originating company retains legal liability for the accuracy of the disclosures. This is one of the most significant protections the law provides to investors.
Why Does This Matter for Investors?
If you participate in share market IPO investments or track upcoming listings on the mainboard or SME platforms, you are likely interacting with prospectuses, sometimes without realizing it. Understanding whether a document is a regular prospectus or a deemed prospectus helps you:
Know who is accountable:
In a deemed prospectus situation, both the company and the intermediary can be held responsible for misstatements or omissions. Your legal recourse as an investor is clear.
Verify the completeness of disclosures:
Whether you use a traditional broker or an IPO investment app, the information you are entitled to remains the same, regardless of whether the offering is direct or intermediary-driven.
Understand the offering structure:
Knowing that shares were first allotted to an intermediary and that you are purchasing via an offer for sale helps you better understand the price discovery mechanism and the interests involved.
Penalties and Legal Consequences
The law takes misrepresentation in a deemed prospectus very seriously.
1. Criminal liability (Section 34):
If a deemed prospectus includes materially false or misleading statements, or omits information that could mislead investors, it is a criminal offence under Section 34 read with Section 447 (punishment for fraud) of the Companies Act, 2013. Penalties can include imprisonment (minimum six months, up to ten years) and a fine not less than the amount involved in the fraud.
2. Civil liability (Section 35):
Anyone involved in producing a deemed prospectus, directors, promoters, or authorized signatories may be held liable to compensate investors for losses caused by false or misleading statements. The only defence available is demonstrating that the person had reasonable grounds to believe the statements were true.
3. SEBI action under ICDR Regulations, 2018:
SEBI can impose monetary penalties, suspend or cancel an intermediary's registration, restrict future participation in public issues, and direct refunds of investor money. These regulatory consequences reinforce the accountability framework for all parties involved.
A Brief Historical Note
The legal concept underlying deemed prospectuses has roots in English common law. The landmark case of Twycross v. Grant (1877) established that when shares are allotted to an intermediary with the clear intention of being passed on to the public, the offer document used in that process carries the same legal weight as a prospectus. This judgment laid the foundation for what Indian company law has now codified through Section 25.
Conclusion
The deemed prospectus may not be a term that comes up in everyday IPO investment conversations, but it plays an important role in keeping India's capital markets fair and transparent. It prevents companies from circumventing disclosure obligations simply by routing public offerings through intermediaries. For investors, it provides assurance that the information they receive, whether via a traditional IPO or an offer-for-sale arrangement, meets the same legal standards.
