Prospectus

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”.
• prospectus is any law related document outlining the financial securities for the
sale to the investors of the corporate which also includes any circular, notice ,
ads or document which acts as an invite to offers from the general public. And
these invitations to offers must be for the purchase of any securities of a
company. It is a legal document for the public and investors to buy and have the
details of the features, prospects and the declaration of a financial product.

• Company prospectus is released by the corporate to inform the investors or the

public that various securities and instruments are available for them. Mutual
funds, stocks, bonds and other types of investments are informed in these
documents which have been offered by the company to the public.
ESSENTIALS OF A DOCUMENT TO BE
CALLED PROSPECTUS
• Invitation of subscription must be made to the public of share or
debentures or inviting deposits by the document.
• The invitation must be made to the public or the purchasers.
• Such invitation must be invited by the company or on the behalf of
the company.
• The invitation must be associated with debentures, shares or such
other instruments.
DISCLOSURES TO BE MADE IN A
PROSPECTUS
• General Information: The general information contained in a
prospectus will be related to the name and address of the company’s
head office, officers, company secretary, directors, bankers, legal
advisers. It accounts for the primary objective and business operated
by the company. It describes the company’s capital structure in a
specified manner. Further, it contains information about the issue
opening and closing date, procedure and terms for allotment. It lists
out the objective of the public offer and terms and conditions of the
issue. It also contains the consent of all the officers.
• Financial Information: The financial information includes reports
provided by company’s auditors in connection to the profitability,
liquidity, assets and liabilities, etc. as well as the report relating to the
business in which the capital raised from the public will be utilized.

• Statutory Information: The prospectus should include an official

declaration concerning the compliance of the Companies Act and also
that the prospectus does not contain anything which violates the
provisions of the law.
TYPES OF PROSPECTUS
• Shelf Prospectus-
• 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 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 company which is filing a shelf prospectus is required to file the
information memorandum. It should contain all the facts regarding the
new charges created, what changes have undergone in the financial
position of the company since the first offer of the security or between
the two offers.
• Red herring prospectus
• Red herring prospectus is the prospectus which lacks the complete
particulars about the quantum of the price of the securities. A company may
issue a red herring prospectus prior to 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 prior to the opening of the subscription list or the offer. The obligations
carried by a red herring prospectus are 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 right under Section60B(7) to withdraw

the application on any intimation of variation within 7 days of such
intimation and the withdrawal should be communicated in writing.
• Abridged Prospectus
• 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.
• Deemed Prospectus
• Deemed prospectus is a document from which the investors are made
an offer when the company allows or agrees to allot securities of the
company. 
COMPANIES REQUIRED TO ISSUE
PROSPECTUS
• Every public listed company who wants to offer shares or debentures
or other such instruments of the company to the public must issue a
prospectus before offering the shares.

• Every private company who were at first private company but

converts itself to a public company and wants to offer their shares or
debentures to the public must first issue a prospectus.
MISSTATEMENT IN A PROSPECTUS
• Misstatement in a prospectus occurs when a untrue or misleading
statement is included and issued in the prospectus.
• A prospectus is said to be misleading or untrue in two following cases:
• 1. A statement included in a prospectus shall be deemed to be untrue,
if the statement is misleading in the form and context in which it is
included.
• 2. Omission from prospectus of any matter to mislead the investors.
CRIMINAL LIABILITY FOR
MISSTATEMENT IN PROSPECTUS
• When any statement within the prospectus includes misleading or untrue
information is distributed then everyone who authorized the issue of the
prospectus is liable under sec 447 of this act.
• The people who can be sued are:
• The company who issues the prospectus.
• Every Director and promoter of the company.
• Every person whose name appeared in the prospectus as a proposed Director of
the company.
• Every person who authorized the issue of the prospectus.
• Any expert such as an engineer, a chartered accountant, a company secretary, a
cost accountant, etc.
DEFENCES AVAILABLE UNDER
CRIMINAL LIABILITY
• 1. Person proves that statement or omission was immaterial;

• 2. Person has reasonable ground to believe and did believe that

statement was true; or

• 3. Person has reasonable ground to believe and did believe that the
inclusion or omission was necessary.
Remedies for criminal liability
• 1. any person who found to be guilty of fraud involving an amount of
at least Rs 10 laksh or 1% of turnover of company, whichever is
lower , shall be punishable with imprisonment for 6months – 10 years
and shall also be liable to fine which shall not be less than amount
involved in fraud, but which may extend to 3 times the amount
involved in fraud.
• If amount is less than 10 lakh or 1% of turnover of the company , any
person guilty of such fraud shall be punishable with imprisonment for
a term which may extend to 5 years or with fine which may extend to
rs 20 lakh or with both.
CIVIL LIABILITY FOR MISSTATEMENT
• Section 62 of the Companies Act deals with the civil liability and makes the
actual person responsible to pay every single individuals who has contributed
for any share or debentures and could have grieved any damages by believing
the prospectus where false and misleading information has been published.
Every person and the company is liable who-

• Is a director when prospectus was issued

• Named as the director or authorized himself or has agreed to become a director
• The promoter of the corporation
• Has authorized the issue of the prospectus
DEFENCES AVAILABLE UNDER CIVIL
LIABILITY
• 1. He has withdrawn his consent or never gives his consent;

• 2. The prospectus was issued without his knowledge or consent and

when he become aware, gave a reasonable public notice that
prospectus was issued without his knowledge or consent.
REMEDIES FOR MISSTATEMENTS IN
PROSPECTUS
• There are two remedies available against company:

• Revocation of the Contract- The person who purchased the securities

can cancel the contract. The money will be refunded to him, which he
paid to the company.
• Damages for Fraud- After revocation, the shareholders can claim
damages from the company by filing a case in the court.
• Remedies against the Directors, promoters and the authorized
persons who issued the prospectus:

• Damages for misstatement- Compensation will be given to the

shareholders for the loss by the directors, promoters and the
authorized persons.
• Damages for non-disclosure- Fine of Rs. 50000 ad recovering the
damages must be given by the people who mislead the purchasers
from the one that is chargeable for the damages.
• There are two remedies available against company:

• Revocation of the Contract- The person who purchased the securities

can cancel the contract. The money will be refunded to him, which he
paid to the company.
• Damages for Fraud- After revocation, the shareholders can claim
damages from the company by filing a case in the court.