PROSPECTUS

UNDER THE COMPANIES ACT, 2013

Submitted By:

MANSANGAT SINGH KOHLI

B.A LL.B.(H) (2019-24)

Section A

Semester VIII

Roll No.: 26/19

Paper: COMPANIES LAWS

Submitted To:
Submitted on:
Ms. ISHANI ARORA
__/__/2023
UILS

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Introduction

Capital in a company is vital because it indicates a company’s available finance and is used
by businesses to pay for the ongoing production of goods and services in order to produce a
profit. More the capital, the more the expansion of the company. Companies can raise funds
through debt or equity financing. In such cases, a prospectus becomes an essential tool. A
prospectus is a detailed document containing information on the securities issued by a
company to invite the potential public and investors to subscribe to the securities.

Prospectus under the Companies Act, 2013

Section 2(70) of the Companies Act, 2013 (hereinafter referred to as CA, 2013) defines a
prospectus as “any document described or issued as a prospectus and includes a red herring
prospectus referred to in Section 32 or shelf prospectus referred to in Section 31 or any
notice, circular, advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of a body corporate.”

In other words, a prospectus is any advertisement, circular, or document that invites public
deposits or offers to subscribe or purchase any shares or debentures of a corporate body. The
company’s operations and objectives, along with the purpose of the securities being offered
are disclosed in a prospectus. A prospectus may only be issued by a public company to offer
its shares and debentures. A private company cannot issue a prospectus because private
companies are relatively small in size, thus, they issue fewer shares, and share transferability
is limited, resulting in low liquidity of the private company’s stocks. A prospectus is released
by or on behalf of a public company with regard to the company’s formation or on behalf of
any individual who is, has been, or has expressed interest in the creation of a public business.
The individual is known as the ‘promoter’ of the company. A promoter is defined
under Section 2(69) as a person who is acting solely in a professional capacity and who is:

1. A person that the company has recognised in the annual return under Section 92;
or

2. A person with the authority over the company’s operations directly or indirectly,
acting as a shareholder, director or in another capacity; or

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 3. A person under whose advice, directions, or instructions the company’s board of
directors ordinarily acts.
Section 2(71) of the CA, 2013 defines a public company, whereas Section 2(68) of the CA,
2013 defines a private company.

A company that prohibits the transfer of its shares to the public is a private company. It
forbids public requests for an invitation to subscribe to any of the company’s securities. The
number of members in a one-person company is restricted to two hundred. When two or more
persons own one or more shares of a company together, they are recognised as a single
member in the situations mentioned below:

1. Persons who are employed in the company;

2. The number of members will not include those who were members of the
company at the time of employment and remained members after their
employment terminated.

Contents of a prospectus

A prospectus must enlist the following details:

1. Name of the company,

2. The registered address of the company,

3. Objectives and purpose of the company,

4. Purpose of the issue of prospectus,

5. Nature and capital structure of the business,

6. Name, location, and the number of shares that signatories have subscribed,

7. Qualification shares of the directors,

8. Details on redeemable preference shares and debentures,

9. Remuneration of directors and promoters,

10. Minimum subscription for allotment,

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 11. Date of opening and closing of the issue,

12. Information on underwriting commission and brokerage,

13. Name and address of the company’s auditor, secretary, banker, and trustee,

14. Particulars of material documents,

15. Forecasted rate of dividend and voting rights.

Requirements for the issuance of a company’s prospectus

Section 26 deals with the legal requirements for the issuance of a prospectus. The
requirements are as follows:

1. Every prospectus must be issued by or on behalf of a public company or behalf of

a person involved in or interested in the establishment of the company. The
prospectus has to be duly dated and signed. It must provide the information and set
out the financial information reports required by the Securities and Exchange
Board of India (hereinafter referred to as SEBI) under the Securities and Exchange
Board of India Act, 1992 (hereinafter referred to as SEBI Act, 1992) in
consultation with the Central Government.

2. A company is required to certify that the provisions, rules, and regulations under
the CA, 2013, as well as a statement that nothing in the prospectus is in violation
of the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992.

3. The issue of a prospectus or application form for shares or debentures to existing

members or debenture holders of a company is exempt under Section 26(1) even if
an applicant has a right to surrender the shares in favour of any other person or not
under Section 62(1)(a)(ii). The issuance of prospectus or application forms for
securities that are similar to securities that have previously been issued, traded or
listed on recognised stock exchanges will also be exempt from its applicability.

4. The date stated in the prospectus will be regarded to be the date of its issuance of a
prospectus or a form of application regardless of whether it was released prior to,
in compliance with, or after the foundation of a company.

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 5. It must be ensured that on or before the date of its publication, a copy duly signed
by every person who is named as a director or proposed director of the company or
by his duly authorised attorney must be delivered to the Registrar for filing
otherwise a prospectus cannot be issued by or on behalf of a company.

6. A statement claiming to be made by an expert may not be included in a prospectus

issued under Section 26(1) unless the expert is a person who is not, and has not
been, involved in any form of management or operations of the company. Written
consent to the issue of the prospectus must be given, and must not withdraw his
consent prior to delivery of a copy of the prospectus to the Registrar for filing. A
statement to that effect must also be included in the prospectus.

7. Every prospectus issued must mention that a copy has been supplied to the
Registrar for filing and must specify any documents that must be attached to the
copy supplied. It may also refer to statements within the prospectus that list the
requisite documents as per the provision of Section 26(1).

8. If a prospectus is issued more than 90 days after a copy is delivered to the

Registrar, it is deemed to be invalid.

9. If a prospectus is issued in violation of provisions mentioned under Section 26, the

company will be penalised with a fine not less than fifty rupees and not exceeding
three lakh rupees. Any individual who voluntarily participated in the issuance of
the prospectus would be penalised to a fine of not less than fifty thousand rupees
and cannot exceed three lakh rupees.

Types of Prospectus

According to the CA, 2013, there are four types of prospectus: Red Herring, Shelf, Abridged,
and Deemed;

Red Herring

A red herring prospectus is defined under Section 32 of the CA, 2013. A red herring
prospectus does not provide detailed information about the quantum, or quantity, and price of
the securities offered. It is used for the book-building process. The process through which an

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issuer seeks to identify the price at which an initial public offering (IPO) will be offered is
known as book building. An issuer often creates a book for institutional investors to make
offers for the quantity of shares and the estimated amount of money they will pay. The issuer
examines the data and estimates the final price for the security using an average value.

A company that intends to offer securities to the public can issue a red herring prospectus
before issuing the original prospectus. It must be filed with the Registrar at least three days
prior to the opening of the subscription list and offers.

A red herring prospectus is subject to the same obligations as a prospectus, and any
difference between the red herring prospectus and the prospectus must be identified as
‘deviations in the prospectus’. Following the close of the offer of securities, the prospectus
must state the total capital raised, whether by debt or share capital, and the closing price of
the securities, as well as any other details not included in the red herring prospectus, and must
be filed with the Registrar and the SEBI.

Shelf

The shelf prospectus is outlined under Section 31 of the CA, 2013. A shelf prospectus offers
securities for subscription in one or more issues over a specific period of time without the
need for a fresh prospectus to be issued. This is done especially in projects where the issue
size is substantial, and large sums of money are required to be raised in order to save on the
expense of filing a new prospectus every time.

Any company may file a shelf prospectus with the Registrar at the stage of the first offer of
securities, and the validity period of such prospectus shall not exceed one year, which shall
begin from the date of opening of the first offer of securities under the prospectus and in
respect to subsequent offers of securities issued during the period of validity of that
prospectus in accordance with the guidelines issued by SEBI. A fresh prospectus is not
required to be issued for the offer of securities.

A company filing a shelf prospectus must file an information memorandum under Form
PAS.2 with the Registrar within one month under Rule 10 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014, prior to the issue of a second or subsequent offer of

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securities, containing all updated charges in the facts, the company’s financial position that
changed between the previous offer of securities and the succeeding offer of securities, or any
other changes. Prior to applying any changes, a company or any other person shall inform
applicants of the changes, and if they express willingness to withdraw their application, the
company or other person shall reimburse money received as a subscription within fifteen
days.

When an information memorandum is submitted with the shelf prospectus at the time of the
offer for securities, it is considered a prospectus.

As per the SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2014, the
entities listed below may submit a shelf prospectus for the public issuance of their debt
securities:

1. Public financial institutions defined under Section 2(72) of the CA, 2013, and
scheduled banks defined under Section 2(e) of the Reserve Bank of India Act,
1934; or

2. Issuers authorised by the notification of the Central Board of Direct Taxes to make
a public issue of tax-free secured bonds, with respect to such tax-free bond
issuances; or

3. Infrastructure debt funds and non-banking financial companies regulated by the

Reserve Bank of India; or

4. Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of

India and Housing Finance Companies (HFCs) registered with the National
Housing Bank that meet the following criteria:

1. Having an audited net worth of at least Rs.500 crore balance sheet from the
previous fiscal year;

2. Has a track record of sustained distributable profit over the previous three years;

3. Securities issued under the shelf prospectus have been assigned a rating of not less
than the “AA-” category or equivalent by a credit rating agency registered with the
Board;

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4. There are no pending regulatory actions against the firm or its promoter or
directors before the Board, Reserve Bank of India or the National Housing Bank;

5. The issuer has not defaulted on any payments on deposits or interest due,
redeemed debentures or preferred stock, paid dividends to shareholders, or repaid
term loans or interest due to any public financial institution or banking company in
the prior three fiscal years.

6. The listed entities complying with the following requirements:

• Whose public issued equity shares or debt securities are listed on a recognised
stock exchange for a period of minimum three years immediately preceding the
issue and have been in compliance with the listing agreement entered into between
the issuer and the recognised stock exchanges where the issuer’s securities are
listed;

• According to the previous fiscal year’s audited financial statement, with a net
value of at least Rs.500 crore;

• Having a three-year track record of consistent distributable profit;

• Securities issued under the shelf prospectus have received a credit rating of
minimum “AA-” or an equivalent credit rating from a credit rating agency
registered with the Board;

• There are no pending regulatory actions against the firm or its promoter or
directors before the Board, Reserve Bank of India or the National Housing Bank;

• The issuer has not defaulted on any payments on deposits or interest due,
redeemed debentures or preferred stock, paid dividends to shareholders, or repaid
term loans or interest due to any public financial institution or banking company in
the prior three fiscal years.

6. The issuer who files a shelf prospectus must immediately submit a copy of the
information memorandum with the recognised stock exchanges and the Board
after filing it with the Registrar.

7. The disclosures must be included in the information memorandum required by the

CA, 1956 or the CA, 2013, as applicable, and the rules promulgated thereunder,

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 including disclosures regarding the summary term sheet, material updates,
including rating revisions, if applicable along with the rating rationale, and
financial ratios specified in Schedule I, specifying the pre and post issue change.

8. A single shelf prospectus shall not be used for more than four issuances.

Abridged

Section 2(1) of the CA, 2013 outlines an abridged prospectus. It means a memorandum
containing the salient features of a prospectus as per the regulations specified by the
Securities and Exchange Board. Section 33 mandates the issuance of application forms for
securities along with an abridged prospectus.

Section 33 shall not be applicable to the application form issued for:

1. A valid invitation to a person to engage in an underwriting agreement with regard

to such securities; or

2. Securities that were not offered to the public.

A copy of the prospectus shall be sent to any individual who requests it prior to the close of
the subscription list and the offer. If a corporation fails to comply with the provisions of
Section 33, it would be liable for a penalty of fifty thousand rupees for each default.

SEBI released regulations governing disclosures in the abridged prospectus and front cover
page of the offer document via circular number SEBI/HO/CFD/SSEP/CIR/P/2022/14 dated
4th February 2022.

Deemed

Section 25 of the CA, 2013 discusses deemed prospectuses. A deemed prospectus is a

document that is assumed to represent a company’s prospectus. A deemed prospectus is a
document that contains an offer for sale made by the intermediary or issuing house on behalf
of a company that allots or agrees to allot its shares or securities through an intermediary,
such as a merchant bank, another business, or an issuing house. A company usually opts for a
deemed prospectus to avoid complying with regulations issued by the SEBI.

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A deemed prospectus is considered a document of offer for sale if it meets any of the
following criterias:

1. The intermediary made an offer to sell shares to the public within six months of
the allotment of shares; or

2. The company which allotted its shares to the intermediary has not received
payment in exchange for the shares the offer for sale was made by the
intermediary.

Liability for misstatement in a prospectus

The SEBI Complaints Redressal System (SCORES), introduced by SEBI, requires all listed
businesses to address shareholder complaints. The SEBI’s centralised online grievance
redress system allows investors to file complaints, follow up on them, and see the progress of
their resolution from any location. The SEBI Act, 1992, imposes penalties on the corporation
for non-compliance. The liabilities for misstatement in a prospectus can be classified into
civil liability under Section 35 and criminal liability under Section 34 of the CA, 2013.

Civil liability under Section 35

A person who subscribed to the securities must prove that the prospectus was issued by the
company and the statements were untrue. A person who has subscribed to the securities of a
company can claim compensation for misstatements in the prospectus against:

1. The company,

2. The director of the company,

3. A person who has authorised to be named as a director of the company or has

consented to become a director, either immediately or after a period of time,

4. A promoter of the company,

5. A person who has authorised the issue of the prospectus, or

6. An expert under Section 26(5).

shall be liable to pay compensation to every subscriber of securities of the company who has
incurred loss or damage.

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The following are the exceptions to civil liability:

1. The person withdrew his permission or consent prior to the prospectus’s release,
and it was issued without his authority or consent, or

2. The prospectus was released without his knowledge or consent, and upon
discovery of its release, a reasonable public notice is released stating that the
prospectus was released without his knowledge or consent,

3. The individual had reasonable grounds to believe that the expert was competent to
make the assertion and that the document is an accurate copy, or a right and
appropriate extraction of the report or valuation.

Criminal liability under Section 34

If any statement in a prospectus is untrue, false, deceptive, or likely to mislead in any form,
context, or omission in which it is offered, and the person who approves the distribution of
such a prospectus is accountable under Section 447.

It exempts any person who proves that the statement or omission was irrelevant or the person
had reasonable grounds to believe the statement was accurate, or that the omission was
significant at the time the prospectus was issued

Conclusion

A prospectus contains information about the company, its management, financial stability,
and other essential information, and it is distributed to the general public and investors to
encourage them to subscribe to the securities of the company. A prospectus can be classified
into four types: Red Herring, Shelf, Abridged, and Deemed. Each prospectus performs
differently, which may help a company make a reasonable investment decision. Identifying
the appropriate type of prospectus for issuing securities helps the company to make an
informed investment strategy. As a result, a prospectus is essential for every public company,
and it must be issued in accordance with the terms of the Companies Act, 2013.

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