Unit II

PROSPECTUS
PROSPECTUS

Meaning, Kinds, Registration - Share Capital –

Meaning, Kinds, Public Issue, Bonus Issue, Rights
Issue, Buy Back, Preference Shares – Meaning and
Redemption – Share Certificate and Share Warrant
– Dividends
Prospectus - Meaning
Section 2 (70) of the Act define “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.
PROSPECTUS- DEFINITION
A prospectus means any document described or issued
as prospectus and includes any notice, circular,
advertisement or other document inviting deposits from
the public or inviting offers from the public for the
subscription or purchase of any shares in or debentures
of a body corporate. (Section 2 (36))
WHAT IT EXACTLY MEANS ?

 In essence, it means that a prospectus is an invitation

issued to the public to take shares or debentures of
the company or to deposit money with the company.
“OFFER FOR SALE” - PROSPECTUS
When the complete share capital of a company is allotted to
an intermediary or an Issue House, which then issues then
shares to the public by means of an advertisement of its own,
a document by which such an offer for sale to the public is
made shall be deemed to be a prospectus by implication,
given that:

❖ The public offer is made within 6 months of the agreement

between the issue house and the primary company.
❖ At the date of offer to the public, the whole consideration in
respect of the shares has not been received by the company.

Section 64
OFFER TO THE PUBLIC
 A document is considered to be a
prospectus or not is defined by
“Offer to thePublic”.
 What is Public ?
❖ Friends and relatives of the
directors?
❖ Offer is made to only 2 people?
According to the amendment in the
Section 67 in the year 2000, public
can be defined as:
 Offer made to 50 or more persons,
even though specific 50 persons,
they are considered to be public.
 It is a general offer to persons other
than those receiving the offer, it is
deemed to have been made to the
public.
 Offer made to the public to
exchange securities for securities is
not a valid public offer.
ISSUE OF PROSPECTUS

 Guidelines of SEBI should be compiled along with the

proposed issue of shares to the public.
 A copy of prospectus signed by all directors should be
registered with theRegistrar. (expert’s consent, material
contract, statement of adjustment by the auditors, legal
advisor’s content)
 Issue prospectus within 90 days of registering with the
Registrar.
CONTENTS OF A PROSPECTUS
 In order to protect the investors and enable them to take informed
decisions, the governing body has specified the format of the
prospectus. It should contain:
1. Company’s name and address;
2. Names and addresses of the promoters of the firm;
3. Main objects of the firm, its past and present business;
4. Details of the Directors and Managers;
5. Details of the legal advisors, other experts;
6. Size of present value;
7. Consent of directors, bankers to the company etc. ;
8. Names of Regional and other stock exchanges where application
has been made for listing the issue;
9. Nature of the Product and industry details with future prospects;
10. Details of outstanding litigation and criminal charges, if any;
11. Credit Ratings obtained or not, risk involved;
Types of a prospectus

 There are mainly four types of a prospectus, as

discussed in The Companies
 Act, 2013, which are as under:

1. Abridged Prospectus: Mentioned in Section 2(1) of

the Act,
2. Deemed Prospectus: Mentioned in Section 25(1) of
the Act,
3. Shelf Prospectus: Mentioned in Section 31 of the
Act
4. Red Herring Prospectus (RHP): Mentioned in
Section 32 of the Act.
Abridged Prospectus: Section 2(1)

 It contains the main contents of a prospectus but

in brief
 It will be accompanied with the application form
issued by the companies while offering its
securities
 Abridged prospectus is issued only in case of
public offer is made by the company
Deemed Prospectus:Section 25(1)

A view to avoid a strenuous task of issuing prospectus with full

details companies resort to the practice of approaching issuing
houses. These issuing houses are entities or establishments who
market their share by giving their own advertisements such are
dais to be deemed prospectus.
Shelf Prospectus:Section31

A pubic company may raise funds from the public issuing

securities as and when it needs more fund for every such
issue fresh prospectus is to be made and issued the process
of preparing and registering prospectus is very time
consuming.
Thus instead of preparing a fresh prospectus for every issue
a company can prepare a shelf prospectus
Shelf prospectus can be made used for all issues made by
the company upto one year from the date of first offering
of securities under that prospectus
However information memorandum is to be filled with the
ROC every time a subsequent offer of securities is made
which contains latest information
RED-HERRING PROSPECTUS
⦿ A company may issue a red herring prospectus before the issue of a
prospectus.
⦿ “Red herring prospectus” means a prospectus which does not include
complete particulars of the quantum or price of the securities included
therein.
⦿ The company shall file red herring prospectus with Registrar of companies at
least three days before the opening of the subscription list and the offer.
⦿ A red herring prospectus shall carry the same obligation as are applicable to
a prospectus. In case there is any variation between red herring prospectus
and a prospectus shall be highlighted as variation in the prospectus.
⦿ Upon the closing of the offer of securities, the prospectus shall be filed with
the Registrar and the Securities and Exchange Board of India. This
prospectus shall state (a) total capital raised, (b) whether debt capital or share
capital, (c) closing price of the securities and (d) any other details not
included in red herring prospectus.
REQUIREMENTS OF
A PROSPECTUS

⦿it should be in writing

⦿it should be issued by or on behalf of a body
corporate
⦿it should be issued to public
⦿it should contain invitation to public for
making deposits or for subscription of shares
in or debentures of a body corporate
CONTENTS OF PROSPECTUS (Sec 26)

a) Information to be Stated in the Prospectus.

b) Reports –
i. Auditor’s report with final accounts
ii. Profits and Losses Reports for preceding 5 years
including Subsidiaries’.
iii. Auditor’s report regarding above.
iv. Project / Business Reports (Purpose of Issue)
c) Compliance Declaration - Securities Contracts
(Regulation) Act, 1956 & SEBI Act, 1992
d) Any other prescribed – matters & reports
Prospectus
1. Name and address of the Registered Office, CS, CFO, Auditors, Bankers, Trustees,
Underwriters, Legal Advisers
2. Security issue – Opening & Closing dates ; Allotment letters, Refunds time-frame
3. BOD Statements – Bank A/c to keep current issue
4. Underwriting details
5. Consent to the Issue from directors, auditors, bankers, expert’s opinion
6. Authority to make issue, details of resolution there of
7. Procedure & time schedule for allotment & issue
8. Capital Structure of Company
9. Main objects of the Issue, terms, etc.
10. Company – objects, location, business, schedule for implementation of project.
11. Regarding Project – Management perspective, gestation period, progress, deadlines, any
litigation
12. Minimum subscription, Premium amount, Issue otherwise than for Cash
13. Directors – appointments, remuneration, other interests in the company
14. Disclosures – Promoter’s contribution sources.
Mis-statements in Prospectus
Criminal liability for mis-statements (sec 34)
In case any deliberate concealment is made, directors will be
punished with a fine of Rs. 5,000 or imprisonment up to two years
or both. If it is fraud the fine will extend to Rs. 10,000 or 5 years
imprisonment or both.
Civil liability for mis-statements (sec 35)
remedies against the company
remedies against directors, promoters, experts
In case, misleading prospectus amounts to misrepresentation, the
aggrieved persons can repudiate the contract. They can claim
refund of their money. Damages can also be claimed from the
persons found guilty.
Punishment for fraud (sec 447)
Punishment for false statement (sec 448)
DEMATERIALISATION OF SHARES
(Sec 29)
Dematerialization is the process by which
physical certificates of an investor are
converted to an equivalent number of
securities in electronic form.
□ Benefits to hold in electronic form
□ Depository
□ Depository Participant
□ Method to avail the facility.
BEFORE DEMATERIALISATION OF
SHARES (Sec 29)
* DIS – Delivery Instruction Slip
Advantages of Opening a
Demat A/c
How to
Open a
Demat A/c
BOOK
BUILDING
• Book building is the process by which an
underwriter (usu. an investment bank )
attempts to determine the price at which
an initial public offering (IPO) will be offered.
KINDS OF SHARE CAPITAL

Kinds of Share
Capital

Equity Share Preference

Capital Share Capital

Participating
Cumulative or Redeemable
Uniform Differential or
Non-cumulati or
Voting Rights Voting Rights Non-participat
ve Irredeemable
ing

* Unless otherwise stated, all Preference shares are assumed to

be Cumulative, Non-participating & Redeemable
Types of equity share
capital
• Uniform voting rights, dividends
• Differential voting rights, dividends
Issue of equity shares with
differential
•
voting rights
The companies act 2013 permits company limited by
shares to issue equity shares with differential rights as
to dividend , voting or otherwise ,subject to rule o
companies 2014 ,which are as follow
• The Articles of Association of the company must
permit followed by approval of the shareholder
through an ordinary resolution passed in general
meeting.
• Shares with differential voting right shall not exceed
26%of the total post issue paid-up equity share capital.
– Other Conditions ----
Publication of Authorised,
Subscribed and Paid-up
• Where any notice/ ad/ other official publication/
capital
business (Section
letter/ billhead 60)a statement of
etc. contains
the amount of authorised capital of the company, it
shall also contain a statement of the amount of the
subscribed and the amount paid up.
• Authorised – Capital clause on MOA
• Issued Capital – issued as IPO (initial public offer
• Subscribed Capital – subscribed by s/h
• Called-up capital – value of total calls by company
• Paid-up capital – amt. paid by the s/h towards calls
made
Power of limited
company to alter
• Increase itsits shares
authorised (Section
capital.
• Consolidate 61)
into shares of a larger amount.
• Convert shares into stock/ stock into shares of
any denomination.
• Sub divide its shares into a smaller amount.
• Cancel shares and diminish the amount of its
share capital by that amount which was
cancelled.
Notice to be given to
Registrar for alteration of
• file a notice
Share Capital
with the(Section 64)
Registrar within 30 days
of alteration/ increase/ redemption, along
with an altered memorandum.
Issue of
• At par
Shares
• At discount
– A new issue cannot be made at a discount.
– Only to Rights issue, ESOP (Sweat equity)
– Debt restructuring (to repay creditors)
• At premium
– Premium amount to be kept in separate a/c –
Security Premium a/c (utilized for specific
purposes only)
ISSUE OF SECURITIES
• At Premium (Section 52)
• At a Discount (Section 53)
• Sweat Equity Shares (Section 54)
• Rights Issue [Section 62 (1) (a)]
• Employee Stock Option Scheme (ESO) [Section 62 (1)
(b)]
• Bonus Issue (Section 63)
• Buyback /Purchase of Own Shares (Sections 67, 70)
• Transfer and Transmission of Securities (Section 56)
Further issue of share
capital (Section 62)
A. Rights Issue
B.To directors/ employees under ESOP (Employee
Stock Option)– SWEAT EQUITY - special resolution
--- (conditions)
C.To others (special resolution), either for cash/
consideration other than cash, if price is determined
by the valuation report of a registered valuer – by
issue of prospectus to public
CONDITIONS -

1.Shall be offered to existing

equity shareholders’

2.Offer made limiting the time

to 15-30 days, if not accepted,
is deemed to be declined.

3.May renounce rights in

favour of another.

4.After expiry of the period, the

BoD may dispose of them.
RIGHTS
• ISSUE
A rights offering (rights issue) is a group of rights offered to
existing shareholders to purchase additional stock shares, known
as subscription warrants, in proportion to their existing holdings.
• These are considered to be a type of option since it gives a
company's stockholders the right, but not the obligation, to
purchase additional shares in the company.
• In a rights offering, the subscription price at which each share may
be purchased is generally discounted relative to the current
market price. Rights are often transferable, allowing the holder to
sell them in the open market.
• In a rights offering, each shareholder receives the right to
purchase a pro-rata allocation of additional shares at a specific
price and within a specific period (usually 16 to 30 days).
Issue of Bonus Shares (Section 63)

• Sources- free reserves, SPR, CRR

• Not be issued in lieu of dividend.
• No co. shall capitalise its profits/ reserves for this purpose unless
• CONDITIONS -
1. It is authorised by the Articles.
2. Authorised in general meeting.
3. Not defaulted in payment of interest/ principal in respect of fixed
deposit/ debt securities.
4. Not defaulted in respect of payment of employees’ statutory dues
(PF, gratuity, bonus.)
5. Party paid up shares are made fully paid up.
6. It complies with other prescribed conditions.
Advantages of Issuing Bonus
Shares:
• A. From the company’s viewpoint:
• By issuing bonus shares, shareholders are to be
satisfied when the company cannot pay dividend in cash
due to shortage of liquid funds, i.e., profit can be
distributed without distributing the liquid resources, viz.
cash.
• B. From the shareholder’s viewpoint:
• a) Shareholders need not pay tax on the bonus shares but
they are to pay them on the dividend so received in cash.
• (b) Shareholders, if they so desire, can convert the shares
into cash by disposing off the same at a higher price.
BUY BACK SHARES:-
• A buyback, also known as a share repurchase,
is when a company buys its own outstanding
shares to reduce the number of shares
available on the open market
• Companies buy back shares for a number of
reasons, such as to increase the value of
remaining shares available by reducing the
supply or to prevent other shareholders from
taking a controlling stake.
• A buyback allows companies to invest in
themselves.
• Another reason for a buyback is for compensation
purposes. Companies often award their
employees and management with stock rewards
and stock options. To make due on rewards and
options, companies buy back shares and issue
them to employees and management. This helps
avoid the dilution of existing shareholders
Buy Back of Shares #
Conditions:
• No company can purchase it own shares or other
specified securities as referred to above unless:
• (a) The buy-back is authorized by its Articles;
• (b) A special resolution has been passed in general
meeting of the company authorizing the buy- back;
• c) The buy-back does not exceed 25% of the total
paid-up capital and free reserves of the company
purchasing its own shares or other specified securities
• Buy-back option shall remain open for not less than 15
days and not more than 30 days
WHY DOES A COMPANY ISSUE
RIGHTS SHARES?
• A company may look to raise a large amount of capital for
expansion projects which may have a longer gestation period.
• A project where debt/loan funding may not be available/suitable
or expensive usually makes company to raise capital via this route.
• Companies looking to improve debt to equity ratio or looking to
buy a new company may opt for funding via rights issue route.
• Sometimes troubled companies may issue rights shares to pay off
debt to ease the financial strain.

• Eligibility: Shareholders as on a particular cut-off date are eligible

to participate in the Rights Issue of the Company.
• Letters of Offer shall be sent to all eligible shareholders specifying
the number of shares offered.
REDEMPTION OF PREFERENCE
SHARES:
• A company can redeem its redeemable
preference shares subject to the following
conditions:1.Shares are fully paid up2.Share
may be redeemed only-out of profits available
fora)dividend or b)proceeds of fresh issue of shares
Made for the purpose of redemption3.Shares
redeemed, a sum equal to the nominal account of
shares redeemed shall transferred4.)If premium is
payable on redemption, it must have been
provided for out of profits or co. security premium
account
SHARE CERTIFICATE & SHARE
WARRANT
DIVIDEND
As per Section 2(35) of Companies Act, 2013
defines the term as including any interim
dividend.
• Dividend is the share of profit distributed
among shareholders.
• It is a share of profits, whether at a fixed rate
or otherwise,
• Dividend can be paid on Equity or preference
shares OR both.
PROCESS OF
DIVIDEND