The term Information Memorandum has been defined under the Companies Act of 2013 in Section 31(2). It includes within its ambit
which the company has to file with the Registrar within the prescribed time before the issue of a second or subsequent offer of securities under the shelf prospectus.
Now, a mere reading of this Section fails to provide the crux of what an information memorandum stands for and what purpose does it seeks to achieve. In layman’s terms, it is something which represents a resume of the company or corporate entity which is seeking investment from the prospective investors, be it the angel investors or the private equity investors or the venture capitalists.
The purpose behind the existence of an information memorandum is to raise investment capital in case of start-ups and bring in fresh investment in case of established companies. The information memorandum provides to the prospective investor, a holistic view of the affairs of the company or any other corporate entity which seeks investments. It is more of what may also be called a vision–mission document of the company as to what are its immediate and future goals and what benefits would the investor acquire if he considers investing in the company. This has been referred to by different names all around the globe, for example, in the case of capitalist countries of the west, it is called an information memorandum but elsewhere, it is referred to as an investment business teaser.
The other matter of concern while referring to an information memorandum is that the difference between it and a business plan. Now, speaking from the point of view of the purpose it seeks to achieve, there can be no broad distinction between them. The only underlying quality which the memorandum seeks to convey is that it puts before the investor the revenue model of the company or the entity, taking into consideration the fixed and the variable costs involved in the business so that it becomes simpler for the investor to assert the validity of their claim based on his prudence.
Moreover, when an information memorandum is being constructed by a Start-up or a company which has been recently floated, then the entire scheme of things involved in the subject has to be more comprehensive and should be aimed at dismissing all the doubts of the investor which arise as to the feasibility of the business.
Now let us discuss what an information memorandum should consist of or what the essential clauses have to be present in a standard information memorandum, keeping in mind the global view. So typically it must contain –
Now having discussed the important clauses to be inserted in the information memorandum, it must be mentioned that while seeking investment from foreign investors, certain things must be kept in mind while providing estimates as to the investment sought or the project cost. The valuation must be expressed regarding the currency of the respective foreign investor. It is also of tantamount importance that the memorandum is drafted in simple language, legal and technical jargons are to be avoided.
It must be kept in mind that no specific law makes the presence of an information memorandum a compulsion in undertaking any investment and it can be practiced by both the private and public companies. But when a listed company undertakes such a memorandum, it has to inform the Stock Exchange 24 hours before such undertaking, and it must also comply with SEBI (Securities and Exchange Board of India) Guidelines, 2015. This is primarily for the reason that with a foreign investor entering the picture, the prices of the shares of the company will fluctuate to a great extent on the Stock Exchange, and vested interests may be involved in taking advantage of such a situation.
An information memorandum may include some element of confidential information, be it relating to the product specifications or to the idea behind the product. This may require the investor to sigh a Non-Disclosure Agreement (NDA) before the memorandum is presented. Now, there may be circumstances when investment is only required for a particular project, it is then titled Project Information Memorandum.
An information memorandum is different from a prospectus which is regulated by the Companies Act 2013 and the ICDR regulations. An information memorandum unlike a prospectus is a commercial document.
Thus, it can be concluded that what an information memorandum does is that it lays down for a prospective investor, in simple words, why he may invest in a particular company by providing the necessary details of the company. The memorandum is to be made in accordance with Rule 10 of the Companies (Prospectus And Allotment of Securities) Rules 2014. The memorandum shall be prepared in Form PAS-2 and filed along with fees as provided in the Companies (Registration Offices and Fees) Rules 2014 within 1 month prior to the issue of second or subsequent offer of securities under the shelf prospectus.