Meaning of Prospectus, Red Herring, Shelf Prospectus

Doctrine of Ultra Vires, Indoor Management

 Meaning of Prospectus
• As per the definition given in section 2 (70), prospectus means 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.

According to the above definition, following points emerge in relation to

prospectus:
(i) Prospectus is any document described or issued as a prospectus. Thus,
any document which is described as a prospectus or issued as a prospectus is
to called prospectus.
(ii) A prospectus shall include a red herring prospectus or shelf prospectus.
(iii) A prospectus shall also include any notice, circular, advertisement or
other document which intends to invite offers from the public for the
subscription of any securities or purchase of any securities of a body
corporate.
• What Is a Red Herring?
• A red herring is a preliminary prospectus filed by a company with the
Securities and Exchange Commission (SEC), usually in connection with
the company's initial public offering (IPO). A red herring prospectus
contains most of the information pertaining to the company's
operations and prospects but does not include key details of the
security issue, such as its price and the number of shares offered.
• A red herring prospectus may refer to the first prospectus filed with
the SEC as well as a variety of subsequent drafts created prior to
obtaining approval for public release.
• To be considered eligible for release, the SEC must thoroughly review
a red herring prospectus to ensure the information contained therein
does not include any intentional or incidental falsehoods or
statements that are in violation of any laws or regulations.
 Shelf Prospectus
• A shelf prospectus is a type of prospectus issued by companies making
multiple issues of bonds for raising funds. A prospectus is a notice,
advertisement or any other document inviting the public to subscribe for
securities. It is compulsory for public limited companies to issue a
prospectus before issuing securities. A shelf prospectus can be issued by any
public limited company raising funds through multiple issues of bonds.
Companies which issue a shelf prospectus should file an Information
Memorandum in Form PAS-2.

• A shelf prospectus can be filed only by companies issuing non-convertible

debt bonds (these are bonds which cannot later be converted into share
capital). The procedure for raising funds using a shelf prospectus is the same
as for raising debt funds. The only additional requirement is to file an
Information Memorandum.
• Doctrine of Indoor Management

• According to this doctrine, persons dealing with the company cannot be assumed to have
knowledge of internal problems of the company. He can simply assume that all the required things
were get done properly in the company.

• Stakeholders need not enquire whether the necessary meeting was convened and held properly or
whether necessary resolution was passed properly. They are entitled to take it for granted that the
company had gone through all these proceedings in a regular manner.

• The doctrine helps protect external members from the company and states that the people are
entitled to presume that internal proceedings are as per documents submitted with the Registrar of
Companies.

• The doctrine of indoor management evolved around 150 years ago in the context of the doctrine of
constructive notice. The role of doctrine of indoor management is opposed to the role of doctrine of
constructive notice. Whereas the doctrine of constructive notice protects a company against
outsiders, the doctrine of indoor management protects outsiders against the actions of a company.
This doctrine also is a possible safeguard against the possibility of abusing the doctrine of
constructive notice.
• Doctrine of Ultra Vires
• In the case of a company, whatever is not stated in the memorandum
as the objects or powers is prohibited by the doctrine of ultra vires.
As a result, an act which is ultra vires is void, and does not bind the
company. Neither the company nor the contracting party can sue on
it. The company cannot make it valid, even if every member assents
to it.
• The general rule is that an act which is ultra vires the company is
incapable of ratification. An act which is intra vires the company but
outside the authority of the directors may be ratified by the company
in proper.
• If the act is ultra vires (beyond the powers of) the directors only, the
shareholders can ratify it. If it is ultra vires the articles of association,
the company can alter its articles in the proper way.