OTM Law Nov 2022

Prospectus Notes
Kunal Mandhania
❏ Audit & Law

❏ 11 Years Teaching Experience

❏ Taught more than 30k+ Students

Join KUNAL Sir’s Telegram Channel
on UNACADEMY

Telegram Channel
 Prospectus [Sec 2(70)]

MEANING
• Any document described or issued as prospectus & it includes

a) Red hearing prospectus;

b) Shelf prospectus;
c) Any notice Circular or advertisement

• Only in writing
o oral X
o video or audio X
• Meaning [Sec 2(70)]
 Prospectus (Sec 26)

Dated & Signed When required When not Matter to be Process to issue
required (RRIP) stated
Every prospectus  1. Public offer (IPO 1. Right issue 1. Matters 1. Make a prospectus
SIGNED or FPO) specified by  True, fair, correct
OR 2. Repeat SEBI picture of a Co.
Date in the Deemed to be issue within 2. Declaration that  Signed by all
prospectus = date of public offer same T & C all provisions director & proposed
its publication (Offer to more than of Companies director
3. Invitation to Act , SCRA  Consent of expert
200 person Except:
i. Qualified underwriter Act and SEBI
Institutional Act regarding 1. File / Register it with
Buyers 4. Pvt. this has been ROC
ii. Employee under Placement complied 2. within 90 days Issue
(ESOP Scheme)  3. Inclusion of to public
PPOL expert’s (advertisement)
statement.
 Types of Prospectus
Shelf Prospectus
Shelf Prospectus (Sec. 31) 31)
(Sec.
1. Why?
Companies like Banks or Financial
Institutions, etc. issue share many time
during a year. Thus, every time issuing full
prospectus is not feasible for them.
Therefore concept of shelf prospectus was
introduced.
1. To whom?
Every Co. prescribed by SEBI
2. Procedure?
a) File shelf prospectus with ROC which is
valid for 1 year from opening of first
offer
b) Till that year in every FPO Co. need not
file prospectus again
c) Any change in terms & condition &
financial position and details about Co.
should be intimidated through information
memorandum (Form No. PAS 2)
d) Information memorandum should be file
with ROC at least 1 month before FPO
Red- Herring Prospectus (Sec. 32)
1. Why?
This concept is used as a book building
process or price discovery method.
When co. is unsure about their issue
price per share.
2. Procedure?
a) File red-herring Prospectus with ROC
which does not contain amount per share
& no of shares, at least 3 days before
opening of offer.
b) Issue information memorandum to
public informing them about opening or
closing date and rules for bidding
c) Depending upon binds decide final
price & communicate them to bidders.
d) File final prospectus with ROC
including details of no. of shares and
amount per share before issuing shares
to bidders .
Deemed Prospectus (Sec. 25)
1. Introduction:
Many time Co. appoints underwriters
or issue house or merchant bankers to
mange share issue. The document
(Notice, circular or advertisement)
through which it invites subscription
from public should contain all the
salient features of a prospectus & is
termed as deemed prospectus.
2. Conditions:
a) Offer for sale to public was made
within 6 months from agreement.
Or
a) Whole consideration has not been
received by Co. when offer to
public was made (after 6 months)
b) Should comply with all the rules
and laws related to Prospectus.
c) Person making the offer is Director.
d) Doc. Must be signed :
Co.- at least 2 directors
Firm - At least half of the partners
 GOLDEN RULES FOR FRAMING THE
PROPECTUS
1) It should show whole picture of the
Company.
2) No suppression of facts.
3) All material facts should be disclosed.
4) Prospectus should not be misleading /
untrue.
 Remedies for Mis-Statements in Prospectus

Against Company Against directors / Promoters/ Experts Against Others

Against Others
• Contract voidable Civil liability Criminal liability
@ shareholders
Sec. 36
• Shareholders Can Sec 35 Sec. 34 Fraudulently induce
rescind contract a) Investors
{without intention of
and can claim cheating} b) Underwriters
damages c) Fin. Institution
• No criminal
liability [contract Protection
Protection Sec. 447
act  law of 1. Believed it to be
1. Believed it to
damages] true  based on
be true
• To sue the • Public
document reasonable
company grounds.
• Expert report
2. Withdraw his 2. Omission was
consent. immaterial.
Note:
1. Suppression of material fact, however remote will make the
prospectus misleading. (Rex vs. Kylsant)
2. Company will not be liable if shares are purchased through
secondary market (Stock Exchange) {Peek v. Gurney}

3. Remedy is available to original allottee only. {Peek v. Gurney}

4. Remedy is available to such allottee to whom personal loss

has been caused. {Derry v. Peek}
 Sec 447 : Punishment for fraud.
Against public Other cases
Fraud – Rs. 10,00,000
interest
Min Jail 3 years /amt. of 6 months
A] Amt of at least or (w.e.L) /Fine fraud /amt. of
fraud
1 % of T/o of Co. Max Jail/ 10 years / 10 years /
Fine 3 x amt. of fraud 3 x amt. of
fraud

B] Amt less than above limits

Impr – Max 5 years; or
Fine – Max Rs. 50,00,000; or
Both.
 Sec. 40 Underwriting Commission
Rate Conditions

1. SHARES 1. Authorized by AOA

5% of Issue Price 2. Cannot be paid on Private Placement.
Or 3. Can be paid out of
As per Articles of Association • proceeds of share; or
(w.e.L.) • profits of company or both
4. Disclose details in prospectus-
2. DEBENTURES • name of u/w;
2.5% of Issue Price • rate & amt of comm payable;
Or • no. of securities underwritten
As per Articles of Association 5. A copy of underwriting agreement to be
(w.e.L.) filed to ROC along with Prospectus to be
deliverd.
Sec. 28  Offer for Sale (MARO)
Meaning : Members Company Public
Shares

Authorised • BOD
• Procedures in SEBI Should be followed
Rules/ Document through which offer for sale is made
Registration 
Deemed prospectus [Sec.25]

All rules of prospectus (Content of prospectus and Liability in case of mis-
statement ) Applies

Other IMP i. If done through intermediary (Issue house )

points 
Sec. 25 applies
ii. Consideration received by Co. transferred to concerned
shareholders after deducting expense of such issue
Allotment of Securities (Sec. 39 & Sec. 40)

 Before prospectus, make application to one or more stock

Listing exchange if public offer
Permission
 Mention this in prospectus

 At least 5% of nominal value or amount prescribed by SEBI

Obtain share  Deposit money in separate bank account
application
money Can be utilized Adjusting against allotment
only for Refund if can not allot shares
  As provided in prospectus
Obtain  Received within 30 days of issue of prospectus
minimum
 If not - repay within 15 days
subscription
 If late - 15% p.a. interest

Allot security

 Within 30days

File return of  With ROC in form no. PAS 3

allotment  Mentioning:
a) List of allottee
b) Contract copy (if consideration other than cash)
c) Copy of resolution (bonus shares)
Examples Of Irregular Allotment
1. Pubic Offer without issue of Prospectus
2. Untrue or Misleading Prospecus
3. Prosp issued to Public without registration with Roc
4. Allotment without minimum Subsription
5. Application Money less than 5 %
6. Return of allotment not filled with ROC
7. No listing permission on Public Offer
 Private placement
When Sec. 42 complied
To whom Identified person i.e. selected group of person identified by board.
No Max 200 in a F.Y. (individual limit for each class of security) excluding
a. QIB
b. Employees getting share under ESOS
Resolutions S.R
Procedure • PPOL (PAS -4) sent to offeree within 30 days of recording name
• Maintain record in PAS -5
• File return of allotment within 15 days of allotment in form no PAS-3 with
ROC along with complete details of allottee.

Conditions No other person other than offeree can apply

No fresh offer unless previous offer completed / withdrawn/ abandoned.
Mode Cheque / D.D. /other banking channel but not by cash.
 Private placement
Use • Money can be used after allotment and return filled with ROC.
Time Limit • Allot securities within 60 days of receipt of application money,
Or else
• Repay Money within 15 days of expiry of 60 days, Or else
• Pay interest@ 12% p.a. from and of 60th day

Utilization of Application money to be kept at separate bank Account in scheduled bank

money and can be used only for
 Adjusting money allotted
 Repayment if failed to allot

Restriction Cannot release public advertisement or utilize any media, marketing or

distribution channel or agent to inform public at large
Join KUNAL Sir’s Telegram Channel
on UNACADEMY

Telegram Channel
SAMEERLIVE
KUNAL