PROSPECTUS

The Companies (Prospectus and Allotment of Securities) Rules, 2014

Definition u/s 2(70) - "Prospectus" means any document described or issued as a prospectus and
includes Shelf Prospectus referred in section 31 or a red herring prospectus referred in section 32 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.

Public offer and private placement [section 23]

Modes of issue of securities by a Public Company [section 23(1)– A public company may issue securities
–

a. To public through prospectus (referred as ‘Public offer’).

b. Through private placement; or
c. Through a rights issue or a bonus issue, and
d. In case of a listed company or a company which intends to get its securities listed, in compliance with
the provisions also of SEBI .

Explanation to section 23: “Public Offer” includes Initial Public Offer (IPO), Further Public Offer (FPO) or an
offer to sale of securities by an existing shareholder, through issue of a prospectus.

Power of SEBI and Central Government to Regulate issue and transfer of securities- (section 24):

1. The provisions of prospectus and allotment of securities, share capital and debentures and
punishment of failure to distribute dividends be administered as below
a. In case of listed companies and companies which intend to list their securities in any stock
exchange, shall be administered by SEBI by making regulations.
b. In any other case, be administered by Central Government.
2. All powers relating to all other matters relating to prospectus, return of allotment, redemption of
preference shares and any other matter specifically provided in this Act, shall be exercised by Central
Government, the Tribunal or Registrar, as the case may be.

Offer or Invitation to the Public

Note1 – Offer to public includes members, debenture holders, clients of the person issuing prospectus.

Note 2 – Offer to public does not include if invitation or offer is made to particular person(s). However, if
offer is made to 50 or more persons, it shall amount to offer or invitation to public.

When Prospectus is not required to be Issued - section 56(5)

1. Where offer or invitation is made to the existing members (whether or not the members have the
right of renunciation) or debenture holders of the company.
2. When offer or invitation is made to subscribe for shares or debentures which are –
a. In all respects uniform with shares or debentures previously issued, and
b. For the time being dealt in or quoted on a recognized stock exchange.
3. Where no offer or invitation is made to the public for issued of shares or debentures.
4. Where shares or debentures are issued by a private company.

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Abridged Prospectus – Section 2(1) read with section 33 :

Meaning – Abridged prospectus means a memorandum containing such salient features of a prospectus as
may be specified by Securities and Exchange Board by making regulations in this behalf.

Other Aspects – (issue of application forms for securities:

1. As per sec 33(1) it shall form part of the application. This sec 33 provides that every form of
application issued for the purchase of any securities of a company shall be accompanied by an
abridged prospectus.
2. As per sec 33 abridged prospectus is not necessary in following cases:
a. Where form of application was issued bona fide inviting a person to enter an underwriting
agreement with respect to such securities.
b. Or, in relation to securities which were not offered to the public
3. A copy of the prospectus shall be furnished to any person, before the closing of the subscription list
and the offer.
4. If a company makes any default the company shall be punishable with fine of amount Rs.50,000 for
each default.

Deemed Prospectus (offer for sale) Section 25

1. Meaning – where a company allots or agrees to allot any securities with a view to all or any of those
securities being offered for sale to the public by the issue house, any document by which the offer
for sale to the public, is made shall be deemed to be prospectus issued by the company.
2. Presumptions with respect to deemed prospectus – Unless contrary is proved, it shall be presumed
that allotment or agreement to allot the securities was made with a view to the securities being
offered for sale to the public if it is shown –
a. That the offer for sale to the public was made within 6 months of allotment or agreement to
allot. Or
b. That the whole consideration had not been received by the company when offer to the
public was made.
3. Effects of Deemed Prospectus –
a. All enactments and rules with respect to prospectus shall apply to deemed prospectus.
b. All enactments and rules with respect to liability with respect to mis-statement in prospectus
shall apply to deemed prospectus.
c. It shall be deemed that the persons by whom the offer to the public is made were named in
the prospectus as the directors of the company.
4. Signing of deemed prospectus – The document by which the offer for sale to the public is made
(deemed prospectus) must be signed –
a. in case the person making the offer for sale to the public is a company, by 2 directors of the
company.
b. In case the person making the offer for sale to the public is a firm, by not less than one – half
of the partners in the firm.

Shelf Prospectus (Section 31) –

1. Meaning – A Shelf Prospectus means a prospectus in respect of which the securities or class of
securities included there in are issued for subscription in one or more issues over a period without
the issue of a further prospectus.

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 2. Applicability – The provisions of section 31 shall apply to any class or classes of companies, as
Securities and Exchange Board of India may provide by regulations in this behalf.
3. Procedure for filing Shelf Prospectus –
a. Any class or classes of companies, as Securities and Exchange Board of India, may
provide by regulations in this behalf, may file a shelf prospectus with the Registrar at
the stage of the first offer of securities specified in shelf prospectus.
b. The Shelf Prospectus shall be valid for a period of 1 year from the date of opening of
the first issue of securities.
c. A company filing a Shelf Prospectus shall not be required to file prospectus with the
validity period of 1 year.
d. At the time of making second or subsequent offer of securities under Shelf
Prospectus, the company shall-
i. File an updated information memorandum with the Registrar within the time
prescribed.
ii. The information memorandum shall contain all material facts relating to the
new charges created, changes in the financial position of the company
between first or previous offer and the succeeding offer of securities and
such other changes as may be prescribed.
e. The updated information memorandum together with the Shelf Prospectus shall be
deemed to be a Prospectus.
f. The company shall intimate the variations (between shelf prospectus and
information memorandum) to the applicants and if money has been received for
allotment of securities, and if any applicants wants to withdraw their application, the
company shall refund such money received as subscription within 15 days thereof.

Information Memorandum and Red Herring Prospectus (Section 32)

Information Memorandum (provisions as discussed above)

Red-Herring Prospectus

Definition– The expression ‘red herring prospectus’ means a prospectus which does not include
complete particulars of the quantum or price of the securities included therein.

Filing procedure –

a. A company proposing to make an offer of securities may issue a red herring prospectus prior
to the issue of a prospectus.
b. Such red herring prospectus must be filed with the Registrar atleast 3 days prior to the
opening of the subscription list and offer.
c. Any variation between red herring prospectus and prospectus shall be highlighted as
variations in the prospectus.
d. Upon closing the offer of securities, the prospectus shall be filed with the Registrar and SEBI.
e. The prospectus shall state the total capital raised (including debt capital), the closing price of
securities and any other details not included in the red herring prospectus.

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 Note: A red herring prospectus shall carry the same obligations as applicable to a prospectus.

Public Offer in Dematerialized form (Section 29)

1. Every company making a public offer and such other class or classes of companies as may be
prescribed shall issue securities in dematerialized from by complying the provisions of
Depositories Act 1996.
2. Any other company may convert its securities into dematerialized form or issue its securities
in physical form in accordance with the provisions of this Act or issue securities in
dematerialized form in accordance with the provisions of the Depositories Act 1996.

Golden Rule for Framing the Prospectus

 The Prospectus must present the whole picture of the company.

 It must disclose all material facts truly, honestly and accurately.
 All facts which are likely to influence the decision regarding applying for shares must
be disclosed.
 The prospectus should not contain any untrue or misleading statements.
 No fact should be omitted, the existence of which might, in any degree, affect the
nature or quality of privileges and advantages disclosed by the prospectus.
 Suppression of a fact, howsoever remote, will make a prospectus ‘misleading
prospectus’, if inclusion of such fact might have affected investor’s decision to
subscribe for the shares.

Example: A Prospectus stating that the company is regularly paying dividend, but not
disclosing that the company is incurring losses and that the dividend was paid out of
reserves, is misleading.

Remedies against the company for Mis-Statement in Prospectus

An investor has a right to rescind the contract to take shares, if he subscribes to the shares on the
basis of a false or untrue statement contained in the prospectus, i.e., where the prospectus is a mis-
leading prospectus. The following are the conditions for rescission of contract-

 Prospectus has been issued by or on behalf of the company.

 There must be a representation of fact.
 Such representation must be false.
 The false representation of fact must be material.
 The investor must have relied and acted on the prospectus, i.e., he subscribed for
shares after being influenced by the mis-statement in prospectus.
Thus, a person who purchases shares from the secondary market cannot claim any
remedy against the company.
 The false representation must have induced the investor to purchase shares.
 The investor rescinds the contract within a reasonable time.

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Right of Recession is lost in the following conditions.

 Lapse of reasonable time.

 Affirmation or adoption of the contract.
 Start of Liquidation / Winding up proceedings.

Note- Where the investor rescinds the contract to take shares, he may, also sue the company for
recovery of loss / damage caused to him by surrendering the shares.

Remedies against Promoters, Directors and Experts Or mis-statements in prospectus (section 35)
(Civil Liabilities)

1. Where a person has subscribed for securities of a company acting on any statement
included or inclusion or omission of any matter, which is misleading and has sustained any
loss or damage, then this section gets attracted.
2. The following persons are liable for mis-statement
a. The company
b. Every person who is a director of the company at the time of issue of prospectus
c. Every person who has authorized himself to be named as director in the prospectus.
d. Every person who has agreed to become a director of the company, either
immediately or after sometime.
e. Every person who is a promoter of the company.
f. Every person who has authorized the issue of prospectus
g. Every person who is an expert.
3. Every person liable for mis-statement shall be liable for payment of compensation to every
person who sustained damage or loss and be punishable u/s 36 of 2013 Act.
4. Defense – No person shall be liable u/s 35, if he proves
 He consented to the issue of prospectus, but
 Afterwards he withdrew his consent (before issue of the prospectus); and
 Therefore, the prospectus was issued without his consent or authority

If the prospectus was issued without his knowledge or consent, and that on becoming aware of its
issue, he has given reasonable public notice that it was issued without his knowledge or consent.

Note: If it is proved that the prospectus was issued with the intention of fraud, every person
referred above shall be personally liable without any limitation of liability for all the losses or
damages.

Criminal Liability for Mis-statements in Prospectus (section 34 of 2013 Act)

Where a prospectus includes any statement which is untrue or misleading in form or context in
which it is included or where any inclusion or omission of any matter is likely to mislead, every
person who authorizes the issue of such prospectus shall be liable u/s 447.

Defences –

 If the person proves that the statement or omission was immaterial.

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  If the person proves that he had reasonable ground to believe that the statement was true
and he continued to believe up to the time of issue of the Prospects, that the statement was
true.

Punishment for Fraudulently Inducing persons to invest money (Section 36)

If a person, either knowingly or recklessly makes any statement, promise or forecast which is false,
deceptive or misleading or deliberately conceals any material facts, as to the induce any other
person to enter into or to offer to enter into –

a. Any agreement for or with a view to, acquiring, disposing of, subscribing for or
underwriting securities
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
c. Any agreement for or with a view to obtaining credit facilities from any bank or
financial institution

Such person shall be liable for action u/s 447.

Punishment u/s 447 is given below:

1. Where any person is found guilty of fraud involving an amount of at-least Rs. 10 lakhs or 1%
of the turnover of the company, whichever is lower, shall be punishable as follows:

Imprisonment / Fine Fraud Involving public interest Any other case

Minimum Imprisonment 3 Years 6 Months
Maximum Imprisonment 10 Years 10 Years
Minimum Fine Amount involved in the fraud Amount involved in the fraud
Maximum Fine 3 times the amount involved in 3 times the amount involved
the fraud in the fraud

2. Where any person is found guilty of fraud involving an amount less than Rs. 10 Lakhs or 1%
of the turnover of the company, whichever is lower, and the fraud does not involve public
interest, any person guilty of such fraud shall be punishable with, imprisonment up to 5
years or fine up to 20 Lakhs or both.
3. The person liable u/s 447 shall continue to be liable for any other liability under this Act or
any other law for the time being in force (including repayment of any debt).

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