RED HERRING PROSPECTUS AND ROLE OF SEBI

X Semester

SUBMITTED TO RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB IN PARTIAL

FULFILMENT OF THE REQUIREMENT FOR B.A. LLB (HONS.) FIVE INTEGRATED COURSE,
TENTH SEMESTER

2021-2022

Submitted to: Submitted by:

Dr. Shiva Satish Sharda Sambhav Jain
Professor of Law 17163
RGNUL

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 DECLARATION

I hereby declare that this Corporate Law project on the topic “Red Herring Prospectus and Role
of SEBI” submitted at Rajiv Gandhi National University of Law, Punjab is to the best of my
knowledge free from issues of plagiarism. I have to the best of my understanding acknowledged
all the sources from where the ideas, inspirations and extracts have been taken.

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 ACKNOWLEDGMENT

I would like to express my gratitude towards Prof. Dr. Shiva Satish Sharda for giving me this
opportunity to do this project and explore my knowledge in the field of “Red Herring
Prospectus and Role of SEBI”. I would like to thank them for the guidance which was
indispensable for completing this project.

I would also like to express my gratitude towards my batch mates and seniors who have helped
me in successfully completing this research project.

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 Table of Contents
Abstract.................................................................................................................................................. 5
1. INTRODUCTION .............................................................................................................................. 6
2. MEANING OF RED HERRING ......................................................................................................... 8
3. LEGAL FRAMEWORK ................................................................................................................... 10
a. The Companies Act, 2013 ....................................................................................................... 10
b. Other Provisions...................................................................................................................... 10
c. SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009........................... 11
4. VARIOUS ISSUES AND LITIGATION CONCERNING RED HERRING PROSPECTUS ..................... 13
a. Claiming the Public Issuance of Shares as Private Distribution ........................................ 13
i. Non-disclosure of material information in the prospectus ................................................. 15
ii. Misrepresentation in red herring prospectus ...................................................................... 16
iii. Civil liability ..................................................................................................................... 19
5. JUDICIAL PRONOUNCEMENTS/CASE LAWS CONCERNING RED HERRING PROSPECTUS ....... 21
a. Ajay Jain v. Registrar of Companies .................................................................................... 21
b. Casa Paradiso, Owner Welfare Association v. M/s Sanathnagar Enterprises Limited.... 21
c. Indowind Energy Limited v. Wescare (India) Ltd. & Ors. Subuthi Pvt. Ltd. .................. 21
d. S.V. Khandekar v. SEBI ......................................................................................................... 22
e. Palco Recycle Industries Limited v SEBI ............................................................................. 22
6. FILING OF RED HERRING PROSPECTUS ........................................ Error! Bookmark not defined.

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 RED HERRING PROSPECTUS AND ROLE OF SEBI

Abstract
The red herring prospectus does not contain all of the information about the quantity or value
of the securities. In general, the red herring prospectus includes information about the
company's functions and operations, as well as the prospectus, which allows potential investors
to gather the necessary information to make an informed decision.

The Red herring prospectus should be filed with the relevant registrar three days before the list
of subscriptions or offers. The obligations to the Red herring prospectus are similar to the
obligations to the other prospects, and any differences between the prospectus and the Red
herring prospectus must be highlighted.

Following the close of the offer, the prospectus should state the total capital raised through
share capital or debt, as well as the closing price of securities. The author thoroughly examines
the process of issuing Red herring prospects, the role of SEBI, and judicial pronouncements on
the subject.

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 1. INTRODUCTION

Knowing the definition of prospectus is essential before learning about Red Herring
Prospectus. A "prospectus" is defined in Section 2(70)1 of the Companies Act, 2013 as "any
document described or issued as a prospectus, including a red herring prospectus referred to in
Section 32 or a 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."

So, we can conclude that the prospectus of any company is a document that is considered a
prospectus, it also has shelf prospectus as mentioned in Section 312 and it should include any
notice, advertisement, circular, or any other document that invites offers for the Subscription
or purchase of a company's securities from the general public.3

And in this context, the term "public" refers to any segment of the general public, whether they
are members, debenture holders, or the person's [issuing prospectus] clients.

When the offer to endorse for the share capital is made open to anyone who brings money and
applies for the share capital without regard to whether such prospectus is issued to him or not,
the document is considered to be in the public domain. As a result, the proper litmus test is who
applies for the shares in response to the prospectus' invitation.4

In addition, the issuance of a prospectus is not required in certain circumstances, such as the
issuance of rights to shares or debentures to existing members with or without the right of
renouncement under Section 26(a) of the Companies Act, 20135 [Equivalent to Section 56(5)(a)
of the Companies Act, 1956].

In another case, when a prospectus is issued for shares or debentures that are identical in every
way to the previous prospectus and the issuance of a prospectus is not required for the time
being under Section 26(2)(b)6 of the Companies Act, 2013 [Equivalent to 56(5)(b) of the
Companies Act, 1956].

1
Section 2(70) of the Companies Act, 2013, Act No.18, 2013
2
Section 31 of the Companies Act, 2013, Act No.18, 2013
3
Meaning of Prospectus, Guide to SEBI, Capital Issues, Debentures & Listings, 5th ed, K Sekhar in Lexis Nexis
4
Red Herring Prospectus, Chandratre: Company Secretarial Practice Manual by KR Chandratre in Lexis Nexis
5
Section 26(a) of the Companies Act, 2013, Act No.18, 2013
6
Section 26(20(b) of the Companies Act, 2013, Act No.18, 2013

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The red-herring prospectus should be filed with ROC by the unlisted public company. When it
comes to a listed company, the red herring prospectus must be filed with SEBI at least three
days prior to the start of the offer.7 Following that, the final prospectus must be filed.

Following the completion of the offer, the unlisted and listed companies will file reports with
ROC/SEBI, respectively of securities stating the total amount raised, the final price, and any
other relevant information RHP8 makes no mention of it.

Misstatements and inaccuracies, as well as the obligations to use proper care and diligence
when drafting a prospectus, should be considered, even when drafting a RHP, and it is a duty
on every company.9

As a result, the red-herring prospectus is a popular way to learn the price for a public offer by
book-building with the RHP. As previously stated, such a document would assist merchant
bankers in testing the demand for securities and their price for the public offering.

In the explanation to Section 32 of the Companies Act, 2013, the term "red-herring prospectus"
is defined as "a prospectus that does not include complete particulars of the quantum or price
of the securities included in such prospectus."10

7
Section 32(2) of the Companies Act, 2013, Act No.18, 2013
8
“SEBI’s Power to Monitor and Regulate the Securities of Unlisted Companies - An Analysis from Legal
Perspective” by T.V. GANESAN, [2013] 30 taxmann.com 190 (Article)
9
SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009
10
Datta on the Company Law. Author, C. R. Datta. Edition, 5. Publisher, Orient Law House, 1992 in Lexis
Nexis

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 2. MEANING OF RED HERRING

A red-herring prospectus [RHP] is a document distributed by a company that is about to sell

shares for the first time, providing information about the company but no information about
the price of the shares, and so on. It is distributed to people who may be interested in purchasing
the shares. A red herring prospectus is typically issued by a company during the book-building
process11.

It is critical to understand that in the initial offer, the building process is used by the company
to determine the best price and to get a sense of the market. Prior to the start of the offer, the
issuing company will issue a "red herring prospectus."

The "red herring prospectus" should include all of the information required in the prospectus,
with the exception that instead of specifying the exact issue size or price, a minimum price or
band may be specified. [According to SEBI guidelines, the minimum floor price must be
specified rather than the maximum price or band.] The company's directors must sign the "Red
herring prospectus."

Following the close of the offer, the corporation will make allotments based on the finalised
price and issue size, and will then submit the final prospectus to ROC and SEBI. As a result,
the final prospectus is prepared by stating the total capital received either through debt or share
capital, the final price of securities, and other details that are not mentioned in the "Red Herring
Prospectus"12

During the IPO's open period, investors bid at a variety of prices based on their estimates,
which are more or less equal to the floor price. The Red herring prospectus includes the floor
price of securities given or a price band, as well as the range within which bids are able to
move.

The applicants submit bids for the shares, indicating the amount and the amount at which they
intend to bid. A red herring prospectus is used by merchant bankers to understand the demand
for securities and the price at which they will be offered. They later use this to determine the
final price of the securities and the quantity for the public offering, providing the company with
a more complete picture.

11
The book building is a process of collecting offers from prospective investors based on an indicative price
range which aims at fair pricing of the issue to be emerged out of the offers given by various investors. Final
price is determined at a date close to the date of opening of offer.
12
Section 32(4) of the Companies Act, 2013, Act No.18, 2013

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A prospectus that has been filed for a stock issue but is not yet accepted by the SEC such
prospectus is called as Red Herring as already mentioned above. The SEC wants such
prospectus to have a notice which has to be printed in red lettering stating that the document is
incomplete. Such notice, which is published in red ink, usually reads as below:

“The information here given is subject to completion or amendment. A registration statement

relating to these securities has been filed with the Securities and Exchange Commission. These
securities cannot be sold — and offers to buy cannot be accepted — until the registration
statement becomes effective. This prospectus does not constitute an offer to buy. And these
securities cannot be sold in any state where the offer, solicitation, or sale would be unlawful
before registration or qualification under the securities laws of that state”.

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 3. LEGAL FRAMEWORK
a. The Companies Act, 2013

Under Companies Act, 2013, the Section 32 of the Companies Act deal with Red Herring
Prospectus. The said provision reads as follows “S. 32. Red herring prospectus. —

(1) A company proposing to make an offer of securities may issue a red herring prospectus
prior to the issue of a prospectus.

(2) A company proposing to issue a red herring prospectus under sub-section (i) shall file it
with the Registrar at least three days prior to the opening of the subscription list and the offer.

(3) A red herring prospectus shall carry the same obligations as are applicable to a prospectus
and any variation between the red herring prospectus and a prospectus shall be highlighted as
variations in the prospectus.

(4) Upon the closing of the offer of securities under this section, the prospectus stating therein
the total capital raised, whether by way of debt or share capital, and the closing price of the
securities and any other details as are not included in the red herring prospectus shall be filed
with the Registrar and the Securities and Exchange Board.

Explanation. —For the purposes of this section, the expression “red herring prospectus” means
a prospectus which does not include complete particulars of the quantum or price of the
securities included therein.”

b. Other Provisions

This provision is related to Section 60B of the Companies Act of 1956, which was added in the
year 2000 by an amendment to the Companies Act of 1956. The Companies (Amendment Act)
200013 inserts the concepts of Red Herring Prospectus and Information Memorandum into
Section 60B.

It also authorised SEBI to control the provisions of Section 60B of the 1956 Act with regard to
listed companies as well as companies that wish to be listed. All other companies, on the other
hand, must be controlled by the central government. The SEBI was also given the authority to
inspect the account books and other books and papers of listed companies as well as companies
that want to be listed.

13
Red-Herring Prospectus and Information Memorandum by Sanjiv Agarwal, [2001] 34 SCL 28 (MAG.)

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According to Section 621 of the Companies Act, 1956, the SEBI was also given the authority
to report complaints for crimes involving the issuance and transfer of securities, as well as non-
payment of dividends.14

There are more than a few changes between the old and the new act, with respect to this section
as follows15:

• The option of filing information memorandum prior to red herring prospectus has been
dispensed with under the new act.
• Procedure with respect to receiving subscription money through post-dated cheque or
stock investment do not find mention in the new act of 2013.
• The new act does not cast an obligation to individually intimate the prospective investors
about the variations in the interregnum period amid issue of “Red Herring Prospectus”
and the prospectus.
• The new act does not grant an option to withdraw applications available to prospective
investors, who has offered advance monies prior to the date of issue, without being aware
of variations during the interregnum period between issue of red herring prospectus and
the prospectus.

Apart from the above provision the SEBI Regulations of 2009 also deal with Red Herring
Prospectus under various regulations which are mentioned below.

c. SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009

These regulations specify specific disclosures that must be made in the red-herring prospectus,
which must be followed by every company. SEBI has made it mandatory for companies to file
a draught RHP with SEBI before submitting it to the registrar, so that SEBI can review its
documents, check the disclosures, make variations, and make recommendations before
submitting a final red herring prospectus16.

Following the changes, the final document is filed with SEBI, the registrar, and the stock
exchanges, and after it has been reviewed and approved, it becomes a red herring prospectus.

14
Red Herring Prospectus (Section 32), Guide to SEBI, Capital Issues, Debentures & Listings, 5th ed, by K
Sekhar in Lexia Nexis
15
A Ramaiya: Guide to The Companies Act, 18th Edition 2014, Lexis Nexis
16
Dia Rekhi, Why Red herring prospectus is important?. Economic Times (May 20, 2016 03:08 am)
https://economictimes.indiatimes.com/why-is-draft-red-herring-
prospectusimportant/articleshow/52352430.cms., Last Accessed on April 15th, 2022)

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 • Regulation 2(1)(f) of SEBI (ICDR) Regulations, 2009 defines ‘book-building’ as
follows: “(f) ‘book building’ means a process undertaken to elicit demand and to assess
the price for determination of the quantum or value of specified securities or Indian
Depository Receipts, as the case may be, in accordance with these regulations”
• Under Regulation 57(2)(a) of “SEBI (ICDR) Regulations, 2009”, where a company
proposes that through book building process the capital is issued to public then the
pertinent “red-herring prospectus” must fulfill the disclosures mentioned in Schedule II
of the Companies Act, 1956 and also the disclosures which are mentioned in Part A of
Schedule VIII considering the provisions of Parts C and B thereof.
• According to Schedule XI of para 7 of the above ICDR Regulations the price is not
required to be provided in red herring prospectus. Where the size of the issue is
mentioned in the the red herring prospectus and it might not include the price and
quantity of securities.
• The draft “red herring prospectus” including all the disclosures with total size of issue,
if relevant, as mentioned in Schedule VIII, excluding that of price and the quantity of
securities to be given through it has to be recorded with the SEBI by the lead merchant
banker. The draft Red Herring Prospectus is not required to be filed with SEBI in the
case of Fast Track issue.
• The Regulation 2(1)(o) of the said ICDR Regulations, 2009 provides that, “green shoe
option means an option of allotting equity shares in excess of the equity shares offered
in the public issue as a post-listing price stabilising mechanism.” The Regulation 45
puts down the procedure of stabilizing price via green shoe option.

This is Red Herring Prospectus's legal position in India. Before issuing securities to the public
and drafting the RHP and Final Prospectus, each company is required to follow the above law.

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 4. VARIOUS ISSUES AND LITIGATION CONCERNING RED HERRING PROSPECTUS

Let us now consider the judicial stand on the Red Herring Prospectus after considering the
RHP's statutory provisions. There may be discrepancies between the Red Herring Prospectus
and the final prospectus provided or distributed by a corporation, which may result in a large
number of complaints.

The author would address three irregularities that would arise in relation to Red Herring
Prospectus.

a. Claiming the Public Issuance of Shares as Private Distribution17

There have been numerous instances where companies have avoided filing the prospectus
following the collection of funds or the issuance of funds under the private distribution
guideline. The court addressed a similar issue in the case of "Re: Gitanjali Udyog Ltd and
Others." In that case, the company distributed Non-convertible Debentures (NCDs) to a small
number of allottees and later claimed to have done a private distribution.

The offer was made to ongoing 'Financial Institutions, Mutual Funds, HUFs, and Cooperate
Bodies,' as revealed by the prospectus and offer documents. As a result, the SEBI ruled that
such an issuance should be considered a public issuance rather than a private distribution.

As a result, the SEBI ruled that such an issuance should be considered a public issuance rather
than a private distribution. As a result, the SEBI determined that the issuance of NCDs is of a
public nature, and thus the company must register the prospectus with the ROC prior to such
issuance.

Furthermore, the company did not follow the directions given under Section 40(2)18 of the 2013
Act, which requires that the names of the Stock Exchanges be mentioned in the prospectus. As
a result, the company was held liable for the unauthorised and illegal transfer of public funds.

In yet another instance of "In Re. The issue in Shah Group Builder19" was whether the issuance
of stock by a corporation denotes a public offering. Section 67 of the Constitution was
considered by the court.

17
Rights Offer of Shares with the right of Renunciation: Whether amounts to Public Offer under Companies Act
2013 - The never-ending Confusion and Controversy by DR. K.R. CHANDRATRE, [2016] 74 taxmann.com 51
(Article)
18
Section 40(2) of the Companies Act, 2013, Act No.18, 2013
19
In Re. Shah Group Builder, WTM/RKA/CFD/ 65/2015 1

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Companies Act, 1956, and held that the issuance of shares is a public offer, and the builders
liable for infractionThe court relied on the decision made in the case of "Sahara India Real
Estate Corporations Ltd." is an abbreviation for "Sahara India Real Estate Corporations Ltd."
And Others v. SEBI20," the court ruled that, "A public issue is carried out if an offer or invitation
is extended to 50 or more people, even if it is not accepted."

It is demonstrated that the shares or debentures are not available for subscription or purchase
by individuals other than those who are the recipients of the offer or invitation."

"The Supreme Court first culled out some hard facts from the case in Sahara Case 21." The
primary issues before the Court concerned the nature of OFCDs. The Red Herring Prospectus
made it abundantly clear that Sahara had no intention of listing the securities and that the issues
consisted of unsecured OFCDs with the option to convert them to equity shares.

As a result, it was discovered that the six different types of bonds issued by SIRECL and SHICL
were given the freedom to be transferred to any other person, subject to the company's approval.

Despite the fact that it was obvious that the issue was based on private placement, the
Information Memorandum was distributed to three crore people via ten different channels.

It was also discovered that while Sahara did produce documents pertaining to the individuals
who had invested in the securities, there was no relationship between the investors and the
company.

The Sahara Group Sahara bore the burden of proving that the investors were connected. They
did not, however, with them.22

Justice Khekhar also pointed out that the Companies had taken the absurd position of not
having all of the information relating to the securities issued by them and the companies' refusal
to provide information appeared to be a calculated and deliberate denial of information.

The Court also noted that if there had only been forty-nine subscribers to the issue, each would
have paid Rs. 98.84 crores, but the face value of OFCDs issued ranged from Rs. 5,000 to Rs.
24,000, implying that it could not have been an offer to less than 50 people.

20
Sahara India Real Estate Corporations Ltd. And Others v. SEBI, (2013) 1 SCC 1
21
Ibid.
22
Analysis of the Sahara Judgment by AKSHAY AMRITANSHU, 2013] 30 taxmann.com 198 (Article)

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Finally, the court upheld the SEBI's proceedings as well as the SEBI's order (WholeTime
Member) (WTM). Sahara was required to refund the amount of Rs. 17,400 crores with a 15%
interest rate within three months of the day.

Sahara was also required to provide details as well as supporting documentation to establish
whether or not they had refunded any money to those who had subscribed to the Red Herring
Prospectus. It was also ordered that Sahara submit all documents to the SEBI in order to verify
the legitimacy of the subscribers.

Thus, these cases provide a clear stand on the issue.

i. Non-disclosure of material information in the prospectus23

In this regard, the well-known case is DLF Limited and Ors v. SEBI24, which was heard by the
Securities Appellate Tribunal [Mumbai bench]. DLF filed a draught Red Herring prospectus
stating that Sudipti Estates Pvt. Ltd. (SEPL) was a joint venture of DLF. However, their stance
has shifted since they issued the most recent prospectus after revoking the previous one.

The SEBI barred DLF's six directors from trading in the securities market for three years, citing
a complaint that claimed the two wholly-owned subsidiaries disclosed in DLF's prospectus
were the only shareholders of SELP, despite the fact that they stated in the later prospectus that
it was not a joint venture.

The DLF argued that because there was no evidence that DLF was unfairly benefiting from its
alliance with the subsidiaries, the SEBI's prohibitive order should be overturned. The Tribunal
upheld DLF's violation of the DIP guidelines due to the non-disclosure of data pertaining to
subsidiary corporations, but condemned the SEBI's prohibitory order, stating that DLF did not
use any material or documents that would've deceived stockholders, and also held that the
interests of investors would be harmed if DLF was barred from transacting in securities for a
period of three years.

There are numerous claims supporting the argument that the three companies are not "acting
in concert," and that simply having a subsidiary relationship does not prove that they are
abusing it.

23
Non-Disclosure of material facts in the offer documents may debar from accessing the Securities Market By
DR. RAJEEV BABEL, [2016] 73 taxmann.com 290 (Article)
24
DLF Limited and Ors v. SEBI, [2012] 170 COMPCAS 22 (DEL)

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Furthermore, the purpose of releasing a draught prospectus is to ensure that all material relating
to any commercial activity or financial practise to which the resulting securities proceeds may
be directly or indirectly applicable is included in the prospectus.

It is also claimed that the entities' inability to report a holding-subsidiary arrangement would
constitute essential material that would have to be included in the prospectus.25

ii. Misrepresentation in red herring prospectus

The third problem is misstatement or false representations in a prospectus. In India, both civil
and criminal liability would be imposed for misstatement. As the transaction involves monetary
harm, civil liability would be attracted, and compensation would be required under it.

However, in cases where an Initial Public Offering (IPO) concerning securities is false, If a
document has been filed in the public domain, a minimum sentence of three years, in addition
to a fine26, will be imposed.

The term "misrepresentation" is not defined in the Companies Act of 2013. Despite the fact
that a comprehensive explanation of deception is provided in Section 447 of the 2013 Act. It
claims that,

“fraud in relation to affairs of a company or anybody corporate, includes any act, omission,
concealment of any fact or abuse of position committed by any person or any other person with
the connivance in any manner, with intent to deceive, to gain undue advantage from, or to
injure the interests of, the company or its shareholders or its creditors or any other person,
whether or not there is any wrongful gain or wrongful loss.”

Under the Companies Act of 2013, the criminal liability for fraud and misrepresentation is the
same.

Concerns have been raised about having the same civil liability for fraud and misrepresentation.
This issue was addressed in the case of "R. v. Kylsant27."

25
DLF Saga : Debatable role of Merchant bankers in IPOs by PRASHANT PRANJAL, [2015] 56 taxmann.com
64 (Article)
26
SEBI’s Power to impose penalty for Mis-utilization of IPO proceeds - An Analysis by T.V.GANESAN,
[2016] 75 taxmann.com 159 (Article)
27
R. v. Kylsant, (Lord) [1932] 1KB 442

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The court ruled in this case that "by treating civil liability for both fraud and misrepresentation
as the same, the company jeopardised the interests of the investors." As a result, the company
was liable."

Apart from that, this case emphasised the point that, in contrast to criminal proceedings, even
genuine assertions made in the prospectus can be interpreted as false if there is a suspicion of
unfairness.

There was a misrepresentation in the draught "Red Herring Prospectus" in the case of Kimsuk
Krishna Sinha v. SEBI28. "SEBI was empowered to examine the draught red herring prospectus
and insist on complete and truthful disclosure of all relevant facts," the court ruled.

The fact that the public offering has ended does not absolve SEBI of its statutory duty to
investigate the veracity of the statements made in the prospectus."

In another well-known case, New Brunswick and Canada Railway and Land Co. v.
Muggeridge29, the court ruled that "only the true nature of the company's venture shall be
disclosed and Strict and scrupulous accuracy shall be maintained in drafting prospectus as it
invites the public to take shares on the basis of the representations contained in the prospectus."

In addition to the mandatory information required to be provided under Part I and Part II of
Schedule II of the Act, voluntary disclosures of information that would reasonably constitute a
fair representation of facts for the public to act on must be made."

According to Section 34 of the Companies Act, 201330, if any prospectus is issued, distributed,
or circulated that contains a false statement in any form or context, whether the inclusion or
omission of any misleading matter, the person authorised to issue such prospectus will be held
liable under Section 44731 of the Companies Act, 2013.

Section 447 reads as follows: “Without prejudice to any liability including repayment of any
debt under this Act or any other law for the time being in force, any person who is found to be
guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than
six months but which may extend to ten years and shall also be liable to fine which shall not
be less than the amount involved in the fraud, but which may extend to three times the amount

28
Kimsuk Krishna Sinha v. SEBI, (2010) 155 Com Cases 295 : (2010) 100 SCL 197(Del).
29
New Brunswick and Canada Railway and Land Co. v. Muggeridge, (1860) 1 Dr. & Sm. 363, 381.
30
Section 34 of the Companies Act, 2013, Act No.18, 2013
31
Section 447 of the Companies Act, 2013, Act No.18, 2013

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involved in the fraud. Where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.”

With respect to any company, "fraud" includes any omission, act, or suppression of any detail
or misuse of position devoted by any person or another person in collusion in any way, with
the intent to cheat and obtain unwarranted benefit from, or to affect the interests of the
company, its shareholders, its creditors, or any other person, whether or not there is any
wrongful gain or wrongful loss.32

Since the fraud committed by way of suppression of facts in the prospectus in an preliminary
public offer, with an intention to cheat the public shareholders, which includes interest of public
then the minimum punishment would be 3 years.

It is important to note that punishment for false statements is enclosed by section 448 of the
2013 Act according to which if in any report, return, financial statement, prospectus, certificate,
statement or other papers needed by, or for the purposes of any provisions of this enactment or
the regulations made thereunder, any person who makes a declaration:

• which is fake in any material details, knowing it to be erroneous, or

• which excludes any important fact, by being aware of it to be a material fact

shall be liable as per the Section 447 of the Act. The Sections 447 and 448 have been reported
to come into existence from September 12, 2013.

And the prescribed punishment for fraud is both a fine and imprisonment, and that would be a
non-compoundable offence, i.e., under Section 441 of the Act, offences involving any
misstatements in the prospectus may not be compounded, making the fraud more serious
offence.

The proviso to Section 34 of the 2013 Act provides a defence to a person who could be held
criminally liable for any misstatements in the prospectus by stating that nothing in Section 34
of the Act should apply to any person if such person shows that such statement or omission
was not significant or that he had some rational grounds to consider, and did believe up until
the time such prospectus was issued, that such statement was true or the omission or inclusion
was mandatory.

32
Criminal and Civil Liability for Misstatements in Prospectus, By VINEET SAWHNEY, [2015] 62
taxmann.com 112 (Article)

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 iii. Civil liability

As per Section 3533 of the 2013 Act, “A person has subscribed to securities of a company acting
on any statement, or the inclusion or omission of any matter, in the prospectus which is
misleading and has sustained any loss or damage as a consequence thereof, the company and
every person who —

(a) is a director of the company at the time of the issue of the prospectus;

(b) has authorized himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director, either immediately or after an interval of time;

(c) is a promoter of the company;

(d) has authorized the issue of the prospectus; and

(e) is an expert as defined in the Act

shall, without prejudice to any punishment to which any person may be liable under section 36,
be liable to pay compensation to every person who has sustained such loss or damage.”

By using the correct measure of reparations to be awarded in order to reimburse a person who
has been fraudulently induced to buy shares, and the important criterion is the difference
between the price at which they purchased and the actual value of it.

It may be appropriate to use the subsequent market share price after the fraud became public
and the market remained at the share's actual price value.

Furthermore, if it is proven that a prospectus was issued in order to defraud investors in a

company's securities or any other person, or for any other unlawful purpose, then every such
person mentioned above should be held personally liable for any losses or damages suffered
by any person who chose or invested in such Securities based on such fraudulent prospectus.

However, no one should be held liable for any civil wrong if he can prove that his consent as a
director of the company to RHP was withdrawn prior to the issuance of the prospectus, and
that such issuance of the prospectus was done without his consent or authority and without his
knowledge, and that later upon learning about such illegal prospectus, he should have given a
reasonable public notice highlighting that such prospectus was issued.

33
Section 35 of the Companies Act, 2013, Act No.18, 2013

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According to Section 3634 of the 2013 Act, “Any person who either knowingly or recklessly
makes any statement, promise or forecast which is false, deceptive or misleading, or
deliberately conceals any material facts to induce another person to enter into or to offer to
enter into—

(a) any agreement for or with a view to acquiring, disposing of, subscribing to, or underwriting
securities; or

(b) any agreement the purpose or the pretended purpose of which is to secure a profit to any of
the parties from the yield of securities or by reference to fluctuations in the value of securities;
or

(c) any agreement for or with a view of obtaining credit facilities from any bank or financial
institution

shall be liable for action under section 447 of the Act.”

As already mentioned above in criminal liability the punishment that is prescribed for fraud
under the Companies Act, 2013 was covered under section 447 for all cases of fraud, distinct
from the Companies Act, 1956 where various punishments are given for different actions which
leads to fraud.

Also, the Punishment for fraud which is mentioned in the Companies Act, 2013 is a supplement
to another liability under the Companies Act, 2013, including the repayment of debt wherever
the Act mandates for such repayment of debt.

In other words, a person who is found guilty of fraud has to endure that other liability apart
from the punishment provided for fraud as per Section 447 of the Companies Act, 2013.

34
Section 36 of the Companies Act, 2013, Act No.18, 2013

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 5. JUDICIAL PRONOUNCEMENTS/CASE LAWS CONCERNING RED HERRING
PROSPECTUS
a. Ajay Jain v. Registrar of Companies35

In this case, the company issued a prospectus in which it stated that it would handle leasing
activities in order to attract investors. In the Red Herring Prospectus, the company also stated
that it has been profitable. However, the true intention of the company's directors behind such
a prospectus is to raise funds from the general public.
As a result, it appears from the outset that the directors are aware of the false prospectus. As a
result, the court in this case dismissed the director's petition under Section 482 of the Criminal
Procedure Code.
b. Casa Paradiso, Owner Welfare Association v. M/s Sanathnagar
Enterprises Limited36
In this case the bookings were made in respondent’s building but later on respondent made
unilateral changes in his oral assurances to the petitioner and thus because of these
inconsistencies, the aggrieved petitioner filed this case before the commission.
The aggrieved approached the commission claiming that the enterprise was abusing its
dominant position and this fact could be proved based on its red herring prospectus.
This case is important as here the commission held that self-acclaims by enterprises in their
own documents like red herring prospectus cannot be taken as evidence of dominance per se
by respondent to show that its major real estate developer in India.
c. Indowind Energy Limited v. Wescare (India) Ltd. & Ors. Subuthi Pvt. Ltd.
In the case of Indowind Energy Limited v. Wescare (India) Ltd. & Ors. Subuthi Pvt. Ltd.37,
the second respondent is the appellant's company's promoter. Subhuthi entered into a sale
agreement with respondent 1, agreeing to transfer some business assets for a total of Rs. 98.19
crores, of which Rs. 24.19 crores was paid in cash and Rs. 74 crores was paid through the
issuance of shares. In the event of a dispute, the agreement provided for arbitration as a means
of resolving it.
The agreement, however, could not be enforced unless all three companies approved it, which
the appellant never did. The companies proceeded to carry out their contractual obligations.
In between a dispute arose and respondent filed for an arbitration proceeding and asked for an
interim relief to prohibit appellants to proceed with an IPO by issuing “Red Herring
Prospectus”.
The court stated that the appellant was bound by the sale agreement as their issue of “Red
Herring Prospectus” for issuance of equity shares clearly indicates their intention to be bound
by the agreement. The red herring prospectus issued by applicant states that the appellant
entered into agreement for sale with respondent.

35
Ajay Jain v. Registrar of Companies, (2015) 4 PLR 303
36
Casa Paradiso, Owner Welfare Association v. M/s Sanathnagar Enterprises Limited, Case No. 34 of 2013
37
Indowind Energy Limited v. Wescare (India) Ltd. & Ors. Subuthi Pvt. Ltd, 2010) 5 SCC 306

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 d. S.V. Khandekar v. SEBI
In the case of S.V. Khandekar v. SEBI38, an appeal was filed against SEBI's order in its
appellate tribunal. In this case, the appellant filed a request under the Freedom of Information
Act for a copy of a company's red herring prospectus in connection with its acquisition of
another company.
This case demonstrates how, if the prospectus is not available on any public platform, an RTI
application can be filed to obtain it from the issuing company. Furthermore, this case
distinguishes between a red herring prospectus in relation to the acquisition of a private
company by a public company and a red herring prospectus in relation to an IPO.
e. Palco Recycle Industries Limited v SEBI39
In the case of Palco Recycle Industries Limited, the company filed a draught red herring
prospectus with the SEBI for its recommendations and approval in accordance with Regulation
6 of the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2009.
The company answered all of the SEBI's questions but did not receive approval, so this case
was filed. The board took an unusually long time to approve the project.
This case demonstrates that the board is aware of situations that may cause delays in obtaining
approvals. The board mandated that the respondents take action within two weeks.

38
S.V. Khandekar v SEBI, Appeal no. 1206 of 2011 (SEBI).
39
Palco Recycle Industries Limited v SEBi, (Securities Appellate Tribunal), Appeal No. 199 /2011

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 6. ROLE OF SEBI VIZ-A-VIZ IPO PROCESS

The year 2021 will undoubtedly go down in history as one of the best for Indian primary
markets. According to data available on the BSE website, 64 companies entered the primary
markets in 2021, raising the most ever in a calendar year – a total of approximately USD13.33
billion.

Even events near the end of 2021, such as an increase in Omicron variant cases, were
insufficient to slow this trend, with 12 companies raising USD2.05 billion in December and 16
filing draught documents with the Securities and Exchange Board of India (SEBI).

Among the many reasons cited for this trend are the performance of the stock markets and a
rapid increase in first-time investors, including high-net-worth individuals. According to one
estimate, over 14.2 million new individual investors participated in the stock markets in 2020-
21.

2021 also saw some of the best primary market performances, with new-age tech companies
(NATCs) leading the way. NATCs such as Nazara, Zomato, CarTrade, Nykaa, Paytm, and
Policybazaar were listed in India during this year of startups. Many of the companies that raised
capital during this period did so to recover from the effects of covid as well as to expand their
businesses, which they expect to grow rapidly.

Even though the start of 2022 has not been great in terms of stock market performance – with
key indices Sensex and Nifty50 both falling by around 3% since the beginning of the year –
the pipeline for IPOs appears to be strong.

This year, companies are looking to enter primary markets in industries such as insurance,
education technology, and healthcare. This year, three companies have already listed, and
approximately 20 others have filed draught documents with SEBI, including Life Insurance
Corporation of India (LIC).

LIC, India's largest government-owned life insurer, is looking to enter the primary markets
with an IPO worth around USD9.29 billion, far exceeding the largest IPO to date, Paytm, which
raised about USD2.39 billion.

Companies' access to Indian equity markets is largely governed by SEBI regulations. Although
the Companies Act, Foreign Exchange Management Act, and Securities Contracts (Regulation)

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Act all apply to companies seeking to raise capital, the primary governing framework is SEBI's
Issue of Capital and Disclosure Requirements Regulations, 2018.

These rules apply to both listed and upcoming companies, and they govern: (1) public issues
(IPOs and subsequent public offerings); (2) rights issues (basically, an offer to a company's
existing shareholders); and (3) private placements (issuance to select investors, including to
qualified institutions buyers).

SEBI is the primary regulator of Indian capital markets and has historically been very active,
frequently struggling to achieve a balance between its statutory goals of investor protection on
the one hand and development on the other.

Following the recent surge in IPO activity, SEBI has made several changes to its framework
governing offerings, ostensibly aimed at NATCs, in the last year or so. As expected, many
NATCs enter the public markets with rather unique business models and, as a result, unique
capital requirements.

A majority, if not all, of these NATCs want to raise capital as a "blind pool" for acquisitions in
order to grow their business through acquisitions and strategic investments rather than
traditional capital expenditure, and thus want to raise capital as a "blind pool" for acquisitions.

SEBI recently limited the use of IPO funds for such blind pool acquisitions to 25% of the total
primary amount raised in the IPO. According to the regulator, this change is required to remove
the ambiguity of a blind pool acquisition.

SEBI recently limited the number of shares an existing shareholder can offload in an IPO
through an offer for sale, which appears to be a regressive move for companies that are not
profitable (typically NATCs) (OFS).

Large shareholders who own more than 20% of the pre-IPO shares can now sell up to 50% of
their holdings, with the remainder locked in for six months. Furthermore, shareholders with
less than 20% of the company's pre-IPO share capital can only sell up to 10% of the company's
pre-IPO share capital. These new restrictions will have far-reaching consequences for investors
in companies that are about to go public.

According to data available on the SEBI website, the OFS component has been quite high in
recent years, contributing to 86 percent of public issues during fiscal year 2019-20, 70 percent
in FY2020-21, and 62 percent last year until November 2021. It is clear that new stock

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exchange listings are taking place primarily to provide an exit for existing investors, rather than
to raise new capital.

Private equity investors have recently not shied away from acquiring large stakes in companies,
frequently exceeding the 10% threshold. With a cap on how much they can offload in an IPO,
funds may need to reconsider their investment and exit strategies for such unprofitable
companies, given the timelines surrounding a fund's IPO.

In SEBI’s words: “The enthusiastic reception of issuances by investors, including retail

investors, is a reflection of the confidence reposed by them in the Indian securities market”,
but the truth might be more complicated.

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