Prospectus

By
Manvi Dutta
Assistant Professor
 Introduction

• The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be
defined as “any document which is described or issued as a prospectus”.
• This also includes any notice, circular, advertisement or any other document acting as
an invitation to offers from the public.
• Such an invitation to offer should be for the purchase of any securities of a corporate
body. Shelf prospectus and red herring prospectus are also considered as a prospectus.
• A Prospectus is an invitation issued to the public to offer for purchase/subscribe shares
or debentures of the company. In other words, any advertisement offering shares or
debentures of the company Private limited companies are strictly prohibited from
issuing a prospectus and they cannot invite the public to subscribe to their shares.
• A prospectus can only be issued by public limited institutions. Making it an open
invitation prolonged to the public at large.
 Essentials

• For any document to considered as a prospectus, it should satisfy

two conditions.
• The document should invite the subscription to public share or
debentures, or it should invite deposits.
• Such an invitation should be made to the public.
• The invitation should be made by the company or on the behalf
company.
• The invitation should relate to shares, debentures or such other
instruments.
 Objectives

• To know the investment strategies and investment objectives of the company.

• To know the nature and future plans of the company.
• To know the assets and liability of the company.
• To know the rights of directors, shareholders, denture holders of the company.
• To know where the company is situated and what is the capital structure of the
company.
• To know about the minimum subscription amount.
• To know about the procedure to file the application of share or debenture
application.
• To know the classes, face value, the amount payable on application, and
allotment of shares.
• To know the information about the managing director, directors, promoters,
bankers, brokers, solicitors of the company.
 Fundamentals of Prospectus

A prospectus should include the following details:

1. There must be an appeal submission to the unhindered public.
2. The appeal must be made on behalf of the company or future
company.
3. The application must be pledged or purchase.
The request must transmit to shares or debentures.
 Essentials

• The document should invite the subscription to public share or

debentures, or it should invite deposits.
• Such an invitation should be made to the public.
• The invitation should be made by the company or on behalf
company.
• The invitation should relate to shares, debentures, or such other
instruments.
 Statement in lieu of Prospectus

• Every public company either issue a prospectus or file a statement

in lieu of prospectus.
• This is not mandatory for a private company.
• But when a private company converts from private to public
company, it must have to either file a prospectus if earlier issued
or it has to file a statement in lieu of prospectus.
• The provisions regarding the statement in lieu of prospectus have
been stated under section 70 of the Companies Act 2013.
 Importance

Whenever the company issues the prospectus, the company must file it
with the regulator. The prospectus includes the details of the company’s
business, financial statements.
• To notify the public of the issue
• To put the company on record with regards to the terms of the issue and
allotment process
• To establish accountability on the part of the directors and promoters of
the company
 Contents of Prospectus
The contents of the prospectus have been specified in Schedule II of the Companies Act. The important contents
in the prospectus include the following.(Section 26)
• Name and address of the company
• Objects of the company
• Full particulars of the signatories to the Memorandum and number of shares taken by them.
• The names, addresses, and occupations of the directors, managing directors or managers, etc.
• The number and classes of shares.
• The minimum subscription
• The qualification shares of a director and the remuneration of the directors.
• The amount payable on application, on the allotment, and on calls.
• The names of the underwriters.
• The estimated amount of preliminary expenses.
• The names and addresses of the auditors of the company
• Particulars about reserves and surplus
• Voting rights of the different classes of shares.
• Reports of the auditors regarding profits and losses of the company.
• A similar report by the Chartered Accountant regarding the Profits and Losses and Assets and Liabilities of the
Company.
 Advertisement of Prospectus

• Section 30 of the Companies Act 2013 contains the provisions

regarding the advertisement of the prospectus.
• In any manner where an advertisement of any prospectus of a
company is published, it shall be necessary to specify therein the
contents of its memorandum as regards the objects, the liability of
members and the amount of share capital of the company, and the
names of the signatories to the memorandum and the number of
shares subscribed for by them, and its capital structure.
Types of Prospectus

• Red Herring Prospectus

• Shelf Prospectus
• Abridged prospectus
• Deemed Prospectus
 Deemed Prospectus (Section 25)

• A deemed prospectus has been stated under Section 25(1) of the Companies Act,
2013.
• It is a document which the company issues in case of an offer for sale of securities
to the public. Moreover, this document is an invitation to the public to purchase
the shares of the company through an intermediary such as Issuing House.
• When any company to offer securities for sale to the public, allots or agrees to
allot securities, the document will be considered as a deemed prospectus through
which the offer is made to the public for sale.
• The document is deemed to be a prospectus of a company for all purposes and all
the provision of content and liabilities of a prospectus will be applied upon it.
• In the case of SEBI v. Kunnamkulam Paper Mills Ltd, it was held by the court that
where a rights issue is made to the existing members with a right to renounce in
the favour of others, it becomes a deemed prospectus if the number of such
others exceeds fifty.
 Abridged Prospectus

• It means a memorandum containing salient features of a prospectus. It contains the

information in brief which helps the investor to make investment decisions quickly. In
this case, the Company needs to attach it along with every application form for the
purchase of securities.
• The abridged prospectus is a summary of a prospectus filed before the registrar. It
contains all the features of a prospectus. An abridged prospectus contains all the
information of the prospectus in brief so that it should be convenient and quick for an
investor to know all the useful information in short.
• Section33 (1) of the Companies Act, 2013 also states that when any form for the
purchase of securities of a company is issued, it must be accompanied by an abridged
prospectus.
It contains all the useful and materialistic information so that the investor can make a
rational decision and it also reduces the cost of public issues of the capital as it is a
short form of a prospectus.
• If a company makes any default regarding the attachment of the abridged prospectus,
then they shall be liable to a penalty of ₹50000 for each default.
 Red Herring Prospectus (Section 32)

• Red herring prospectus is the prospectus that lacks the complete particulars about the quantum
of the price of the securities.
• A company may issue a red herring prospectus before the issue of prospectus when it is proposing
to make an offer of securities.
• This type of prospectus needs to be filed with the registrar at least three days before the
opening of the subscription list or the offer.
• The obligations carried by a red herring prospectus are the same as a prospectus.
• If there is any variation between a red herring prospectus and a prospectus then it should be
highlighted in the prospectus as variations.
• When the offer of securities closes then the prospectus has to state the total capital raised
either raised by the way of debt or share capital. It also has to state the closing price of the
securities.
• Any other details which have not been included in the prospectus need to be registered with the
registrar and SEBI.
The applicant or subscriber has the right under Section 60B (7) to withdraw the application on
any intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.
 Shelf Prospectus (Section 31)

• Shelf prospectus can be defined as a prospectus that has been issued by any public
financial institution, company, or bank for one or more issues of securities or class of
securities as mentioned in the prospectus.
• When a shelf prospectus is issued then the issuer does not need to issue a separate
prospectus for each offering he can offer or sell securities without issuing any further
prospectus.
• The provisions related to shelf prospectus have been discussed under Section 31 of the
Companies Act, 2013. The regulations are to be provided by the Securities and
Exchange Board of India for any class or classes of companies that may file a shelf
prospectus at the stage of the first offer of securities to the registrar.
• The prospectus shall prescribe the validity period of the prospectus and it should be
not be exceeding one year.
• This period commences from the opening date of the first offer of the securities. For
any second or further offer, no separate prospectus is required. While filing for a shelf
prospectus, a company is required to file an information memorandum along with it.
The prospectus is an offer or Invitation to Offer?

• The Prospectus has issued to the public at large, so the question arises that the prospectus is
whether a general offer to the public? No, a prospectus is not an offer but merely it is an
invitation to offer according to the Indian Contract Act. The prospectus is a constructed
document that shall be issued to the public as an invitation for the subscription of shares.
• When the new company is incorporated, they issue a prospectus through which the public
gets to know about the existence of the Company. The company tries to convince the public
that they give the best opportunity to them for their investment. If the public is convinced
then they give an offer through the application for the purchase of shares and debentures.
1. Prospectus — invitation of offer
2. Application for purchase of shares — Offer
3. Allotment of Shares — Acceptance
• After acceptance, the contract is binding to the Companies and the shareholders.
• A Company gets 120 days for this whole process after the prospectus was issued. But if the
company fails to do so i.e. obtain a minimum subscription from the public with a specified
period, then the amount they received from the public is returned to them. Also, the
company didn’t get the “Certificate of Commencement of Business” because the public
doesn’t rely upon or interested in this company.
 Who needs a Prospectus ?

• The potential investors need a prospectus to evaluate the value of

the offered public securities.
• Prospectus also states the company history, financial
performance, company’s projects, capital structure of the
company, potential growth of a company, etc.
• In other words, a prospectus discloses material facts of the
company in front of the potential users which helps them to
understand the risk factor on their investment.
 When Prospectus is not required to be
issued?
• Under Section 26 of the Companies Act, 2013, the following state of affairs where the
prospectus need not be issued-
1. When the shares or debentures are not offered to the public.
2. When shares and debentures are to be allotted to the existing shareholders or debenture
Holders with or without a right to renounce (reject).E.g. when shares are placed privately
to less than 50 persons (private placement means less than 50 (i.e. 49), if 50 or more then
considered as a public issue).
3. When shares and debentures are to be allotted are similar (uniform in nature) to the
current shares and debentures (already issued shares and debentures), then there is no
requirement to issue a new prospectus.
4. When not permissible by law (i.e. a Private Company is not required to issue prospectus
(Section 2 (35)).
5. Where invitation to the public for subscription to the shares or debentures of a company is
made in the form of Newspaper Advertisement (Section 30).
6. When an invitation to such person who has an underwriting contract for shares and
debentures.
 Content incorporated in Prospectus

• The Prospectus has issued on the behalf of the company. Section 26 of the Companies Act, 2013, read
with Rule 3 of the Companies (Prospectus and Allotment of Securities) Rule 2012:- For the formation of
the Public Company, the prospectus must be signed and dated and contains the following information:
1. General Information:
a) Name and Addresses- It includes the name and registered office address of the Company. It must also
include the name and address of the Company Secretary, Auditor, Chief Financial Officers, Legal
Advisor, Banker, Trustee.
b) Issued Listed at (Name of Stock Exchange)
c) Opening and Closing Date of the issue- Details of opening and closing date of the Subscription list.
d) Rating of the shares and debentures
e) Details about underwriters
f) A statement by the Board of Directors- A statement was given by the Board of Directors about the
separate bank account in which the money raised from the issue shall be deposited. Also, the Board
of the Director discloses that how much amount they used or utilized.
g) Consent of the directors/ auditors/ bankers to the issue, experts opinion or another person as may be
prescribed.
 Content incorporated in Prospectus

2. The capital structure of the Company:

• Issued, subscribed, and paid-up capital
• Size of the present issue
3. Terms of the Present Issue:
• The Authority for the issue
• Procedure and schedule for allotment and issue of securities
• How to apply- Availability of Prospectus and Terms & Mode of Payment for the
subscription
• Special tax benefits to the shareholders and Company
4. Particulars of the Issue:
• Objects of the Issue
• Project Cost
 Content incorporated in Prospectus
5. The company, Management and Project:
• History, main objects and present Business of the Company
• Plant location, machinery, technology, etc.
• Backgrounds of promoters, collaboration, etc.
• Infrastructure and facility
• The products and services
• Information related to threat factors of certain specific projects or their imminent legal
actions, the gestation period of the project, and all other information related to it.
6. Financial Performance of the Company:
• Balance Sheet Data, Profit And Loss Account
• Any change in accounting policy during the last three years
• Stock market quotation of shares and debentures
7. Details of all payments refunds, interest, dividend, dues, etc.
8. Detail of Companies under same management- If there are numbers of companies under
the same management, disclose all the details of these companies
 Issues of Prospectus

• Under Section 26 of the Companies Act, 2013, the issues of a

prospectus are stated-
• The prospectus shall be considered invalid if the company does not
issue a prospectus before 90 days from the date from which the
copy was delivered to the registrar.
• The company can be punished if a prospectus was issued in
contravention under Section 26 of the Act. The punishment for the
contravention is a fine of ₹50000 and it may extend to ₹300000.
 Application Forms (Sec.33)

As stated under section 33, the application form for the securities

is issued only when they are accompanied by a memorandum with
all the features of prospectus referred to as an abridged prospectus.
The exceptions to this rule are:
• When an application form is issued as an invitation to a person to
enter into underwriting agreement regarding securities.
• Application issued for the securities not offered to the public.
 Misstatement of a Prospectus

• The prospectus is a trusted legal document on which

people can rely before subscribing or purchasing
securities from the company.
• But any misstatement that occurs in the prospectus leads
to punishment in the form of a fine or imprisonment.
• Misstatement includes an untrue or misleading
statement, non-disclosing facts, which is issued in the
prospectus.
Liability for misstatement in a Prospectus
• The liabilities for Misstatement in a prospectus are Civil Liability (Section 35) and Criminal Liability (Section 34).
1. Civil Liability (S.35) :According to the provision of Section 35 under the Companies Act, 2013, civil liability arises when
a person who has subscribed for securities on the faith of the misleading prospectus has remedies against the company
and the directors, promoters, experts & every person who authorized the issue of prospectus.
i. Remedies against Company:-
• In against company, two remedies are available:
a) Rescind the Contract– The person who purchases the shares can rescind the contract if he found any misstatement in
the prospectus and the money will be refunded to him which he pays to the company while purchasing securities.
Right to rescind or terminate the contract is available if the person proves the following:
• The prospectus was issued on the behalf of the company;
• The statement must be untrue;
• The statement must be a material misrepresentation;
• The misrepresentation must have induced the shareholders to take the securities and he must have relied on the
statement in applying for securities;
• The misrepresentation of statement must be of fact and not of law
• That he has taken action promptly to rescind the contract within a reasonable time and before the company goes into
liquidation.
b) Damages for Fraud – In this case, the person only claims damages against the company but he cannot rescind the
contract because of unreasonable delay, affirmation (provide assurance), and commencement of winding- up. At these
stages, the shareholder can file a suit against the company for the misstatement and claim damages for it.
 Liability for misstatement in a Prospectus

(ii) Remedies against the directors, promoters, experts & every

person who authorized the issue of prospectus–
In cases where it is proved that a prospectus has been issued with
intent to defraud the applicants, then, every person referred to in
subsection (1) of Section 35 shall be personally accountable without
any limitation of liability any of the losses or damages that may
have been sustained by any person who subscribed to the securities
based on such prospectus.
 Defences available to avoid civil liability:

Under Section 35 (2) of the Act, if the person proves that,

• Having a director of the company given his consent for issuing
prospectus but he withdrew his consent before the issue of the
prospectus and that it was issued without his authority or consent;
• That the prospectus was issued without his knowledge or consent
and that on becoming aware he gave a reasonable public notice
that it was issued without his knowledge or consent.
 Criminal Liability

• According to the provision of Section 34 of the Companies Act,

2013, criminal liability arises where prospectus contains any
untrue statement, then, every person who has authorized the
issue of the prospectus shall be punishable under Section 447.
• The punishment involves imprisonment for a period of 6 months
which can be extended to 10 years or a fine, maybe the amount
involved in the fraud, or it can be extended 3 times the amount
involved in the fraud or both.
 Defences available under criminal liability

The defenses are available under criminal law if a person proves

that,:
• Such statement or omission was immaterial;
• He has a judicious ground to consider that the inclusion or
omission was necessary;
• He has judicious ground to consider that the statement was true.
 Case Laws

• In APL Industries Ltd. v. Securities and Exchange Board of India, The SEBI (Securities and Exchange Board
of India) ordered the company to refund the amount of subscription to the subscriber where the public issue
of share was unsubscribed.
• In Derry v. Peek, The prospectus of a company contained that the company has been authorized to use steam
power in moving its trams. But, the authority that was authorized to approve the Board of Trade refuses its
approval. The court held that there is no misstatement in the prospectus, the Board of Directors was not held
guilty of fraud, because they were honest and they mentioned the statement in a good faith. They were not
intended to deceive anyone.
• In Henderson v. Lacon, In the prospectus, it is contended that the directors and their friends have subscribed
a large portion of and they now offer to the public remaining shares. But in reality, the directors had
subscribed only 10 shares each. The court held that the subscribers can rescind the contract.
• In Arnison v. Smith, The court held that, in the prospectus, the non-disclosure of facts does not amount to
misrepresentation unless the concealment has prevented an adequate appreciation of what was stated.
• In Peek v. Gurney, The court held that-
1. Every man must be held responsible for the consequence of false representation made by him to another,
upon which the other acts and is injured.
2. The aforesaid false representation was made with the intention that it should be acted upon by the third
person in the manner resulting in injury.
3. Such injury must be an immediate consequence and not remote.
 Conclusion

• The prospectus is a legal document only issued by a public company on the verge of
raising funds. The prospectus plays a major role in the decision-making of the
subscribers for the subscription of securities (shares, debentures, and other related
instruments).
• It is merely an invitation to offer for the subscription of shares. It includes detailed
information of the company’s Board of Directors, Company Secretary, company’s
management, capital structure, financial performance, recent projects of a company,
and other related information.
• For being a valid prospectus, it should contain all the essential requisites and it must be
registered. If any prospectus is not registered then, it is considered invalid.  For any
misstatement of a prospectus i.e. untrue statement or misleading statement to deceive
anyone, then such person was held guilty and was liable for fine or imprisonment.
• The public company must issue a prospectus for raising funds but, in case of private
company converts into public then they should issue a prospectus or statement in lieu of
prospectus with the memorandum of association (MOA) on its conversion into a public
company.