The promoters of a public company will have to take steps to raise the necessary

capital for the company, after having obtained the Certificate of Incorporation.
A public company may invite the public to subscribe to its shares or debentures.
Prospectuses are to be issued for this purpose. To issue a prospectus is very
essential for a public company. If the promoters of the company are confident
of raising the required capital privately from their friend or relatives, they need
not issue a prospectus. In such a case, a statement in lieu of prospectus must be
filed with the Registrar. A private company is not allowed to issue a prospectus
since it cannot invite the general public to subscribe to its shares and
debentures. It is not required to file a statement in lieu of prospectus.

DEFINITION OF PROSPECTUS
Section 2(36) defines a prospectus an “any document described as issued as a
prospectus and includes any notice, circular, advertisement or other document
inviting deposits from the public or inviting orders from the public for the
subscription or purchase of any share in, or debentures of, a body corporate”.
In simple words, a prospectus may be defined as an invitation to the public to
subscribe to a company’s shares or debentures. By virtue of the Amendment Act
of 1974, any document inviting deposits from the public shall also come within
the definition of prospectus. The word “Prospectus” means a document which
invites deposits from the public or invites offers from the public to buy shares
or debentures of the company.
One may note that under Section 67 an offer or invitation to any section of the
public, whether
selected as members or debenture holders of the company or as clients of the
person making the invitation, will be deemed to be an invitation to the public.
The term “subscription of purchase of shares” means taking or agreeing to take
shares for cash. Any document to be called a prospectus must have the following
ingredients:
I. There must be an invitation offering to the public;
II. The invitation must be or on behalf of the company or in relation to an
intended company;
III. The invitation must be to subscribe or purchase.
IV. The invitation must relate to shares or debentures.

OBJECTS OF PROSPECTUS
The main objects of a prospectus are as follows:
1. To bring to the notice of public that a new company has been formed.
2. To preserve an authentic record of the terms of allotment on which the public
have been invited to but its shares or debentures.
3. The secure that the directors of the company accept responsibility of the
statement in the prospectus.

REQUIREMENTS REGARDING ISSUE OF PROSPECTUS

The relevant requirements regarding issue of prospectus are given below:
1. Issue after Incorporation
Section 55 of the Act permits the issue of prospectus in relation to an intended
company. A prospectus may be issued by or on behalf of the company.
a) by a person interested or engaged in the formation company or
b) through an offer for sale by a person to whom the company has allotted
shares.
2. Dating of Prospectus
A prospectus issued by a company shall be dated and that date shall be taken as
the date of publication of the prospectus (Section 55). Date of issue of the
prospectus may be different from the date of publication.
3. Registration of Prospectus
A copy of every prospectus must be delivered to the Registrar for registration
before it is issued to the public. Registration must be made on or before the date
of its publication. The copy sent for registration must be signed by every person
who is named in the prospectus as a director or proposed director of the
company or by his agent authorized in writing. Where the prospectus is issued
in more than one language, a copy of its as issued in each language should be
delivered to the registrar. This copy must be accompanied with the following
documents:
a) If the report of an expert is to be published, his written consent to such
publication;
b) a copy of every contract relating to the appointment and remuneration of
managerial personnel;
c) a copy of every material contract unless it is entered in the ordinary course of
business or two years before the date of the issue of prospectus;
d) a written statement relating to adjustments; if any, made by the auditors or
accountants in their reports relating to profits and losses, assets and liabilities
or the rates of dividends, etc.; and
e) written consent of auditors, legal advisers, attorney, solicitor, banker or
broker of the company to act in that capacity.
A copy of the prospectus along with specific documents must been filed with the
Registrar. The prospectus must be issued within ninety days of its registration.
A prospectus issued after the said period shall be deemed to be a prospectus, a
copy of which has not been delivered to the Registrar for registration. The
company and every person who is knowingly a party to the issue of prospectus
without registration shall be punishable with fine which may extend to five
thousand rupees (Section 60).
4. Expert to be unconnected with the Formation of the Company
A prospectus must not include a statement purporting to be made by an expert
such as an engineer, valuer, accountant etc. unless the expert is a person who
has never been engaged or interested in the formation or promotion as in the
management of the company (Section 57).
A statement of an expert cannot be including in the prospectus without his
written consent and this fact should be mentioned in the prospectus. Further,
this consent should not be withdrawn before delivery of the prospectus for
registration Section (58).
5. Terms of the contract not to be varied
The terms of any contract stated in the prospectus or statement in lieu of
prospectus cannot be varied after registration of the prospectus except with the
approval of the members in the general meeting (Section 61).
6. Application Forms to be Accompanied with the Copy of Prospectus
Every from of application for subscribing the shares or debentures of a company
shall not be issued unless it is accompanied by a copy of prospectus except when
it is issued in connection with a bona fide invitation to a person to enter into an
underwriting agreement with respect to shares or debentures or in relation to
shares or debentures which were not offered to the public.

CONTENTS OF PROSPECTUS
We know that a prospectus is issued to the public to purchase the shares or
debentures of the company. Every person wants to invest his money in some
sound undertaking. The soundness of a company can be known from the
prospectus of a company. Thus, the prospectus must disclose the true nature of
company's activities which enable the public to decide whether or not to invest
money in the company. In fact, the public invest money in the company on the
faith of the representation contained in the prospectus. Therefore, everything
should be stated with strict accuracy, and the complete and true position of the
company should be disclosed to the public.
Section 56 lays down that every prospectus issued (a) by or on behalf of a
company, or (b) by on behalf of any person engaged or interested in the
formation of a company, shall:
1. State the matters specified in Part I of Schedule II, and.
2. Set out the reports specified in Part II or Schedule II both Part I and II shall
have effect subject to the provisions contained in Part III of that Schedule II.
Part I of Schedule II
1. The main objects of the company with names, descriptions, occupations and
addresses of the signatories to the Memorandum of association, and number of
shares subscriber by them.
2. The number and classes of shares, and the nature and extent of the interests
of the shareholders in the property and profits of the company.
3. The number of redeemable preference shares intended to be issued with
particulars as regards their redemption.
4. The number of shares fixed by the articles of company as the qualification of
a director.
5. The names, addresses, description and occupation of directors, managing
director or manager or any of those proposed people.
6. Any provisions in the articles or any contract relating to appointment,
remuneration and compensation for loss of office of directors, managing
director or manager.
7. The amount of minimum subscription.
8. The time of the opening of the subscription list cannot be earlier than the
beginning of the fifth day after the publication of prospectus.
9. Amount payable on application and allotment on each share shall be stated.
If any allotment was previously made within two preceding years, the details of
the shares allotted and the amount; if any, paid thereon.
10. Particulars about any option or preferential right to be given to any person
to subscribe for shares or debentures of the company.
11. The number, description and amount of shares and debentures which,
within the last two years, have been issued or agreed to be issued as fully or
partly paid up than in cash.
Part II of Schedule II
General Information
1. Names and address of the Company Secretary, Legal Adviser, Lead Managers,
Co-managers, Auditors, Bankers to the company. Bankers to the issue and
Brokers to the issue.
2. Consent of Directors, Auditors, Solicitors/Advocates, Managers to issue,
Registrar of Issue, Bankers to the company, Bankers to the issue and Experts.
3. Expert’s opinion obtained, if any.
4. Change, if any, in directors and auditors during the last 3 years, and reasons
thereof.
5. Authority for the issue and details of resolution passed for the issue.
6. Procedure and time schedule for allotment and issue of certificates.
II. Financial Information
1. Report by the Auditors
A report by the auditors of the company as regards (a) its profits and losses and
assets and liabilities of the company and (b) the rates of dividend, if paid by the
company during the preceding 5 financial years.
If no accounts have been made up in respect of any part of the period of 5 years
ending on a date 3 months before the issue of the prospectus, the report shall,
in addition, deal with either the combined profits and losses and assets and
liabilities of its subsidiaries or each of the subsidiary, so far as they concern the
members of the company.
Statutory and other Information
Statutory and other information minimum subscription, underwriting
commission and brokerage; date of allotment, closing date, date of refund,
option to subscribe, material contracts and inspection of documents, etc. are
required to set out in the prospectus.
Part III of Schedule II
Part III of the schedule consists of provisions applying to Part I and II of the said
schedule.
A. Every person shall, for the purpose of this schedule, be deemed to be a vendor
who has entered into any contract, absolute or conditional, for the sale or
purchase of any property to be acquired by the company, in any case where (a)
the purchase money is not fully paid at the date of the issue of the prospectus
(b) the purchase money is to be paid or satisfied, wholly or in part, out of the
proceeds of the issue offered for subscription by the prospectus; (c) the contract
depends for its validity or fulfillment on the result of that issue.
B. In the case of a company which has been carrying on business for less than 5
financial years, reference to 5 financial years means reference to that number
of financial years for which business has been carried on.
C. Reasonable time and place at which copies of all balance sheets and profit
and loss accounts on which the report of the auditors is based, and material
contracts and other documents may be respected.
“Term year” wherever used herein earlier means financial year.
MIS-STATEMENT IN THE PROSPECTUS
A prospectus is an invitation to the public to subscribe to the shares or
debentures of a company. Every person authorizing the issue of prospectus has
a primary responsibility to seed that the prospectus contains the true state of
affairs of the company and does not give any fraudulent picture to the public.
People invest in the company on the basis of the information published in the
prospectus. They have to be safeguarded against all wrongs or false statements
in prospectus. Prospectus must give a full, accurate and a fair picture of material
facts without concealing or omitting any relevant fact. This is known as the
‘Golden Rule’ for framing prospectus as laid down in New Brunswick etc. Co. V.
Muggeridge [(1860) 3 LT 651]. The true nature of company’s venture should be
disclosed. The statements which do not qualify to the particulars mentioned in
the prospectus or any information is intentionally and wilfully concealed by the
directors of the company, would be considered as mis-statement.

If there is any misstatement of a material fact in a prospectus as if the prospectus

is wanting in any material fact, this may arise
1. Civil Liability
2. Criminal Liability
1. Civil Liability
A person who has induced to subscribe for shares (or debentures) on the faith
of a misleading prospects has remedies against the company, directors,
promoters, and experts. Every person who is a director and promoter of the
company, and who has authorized the issue of the prospectus [Section (2)].
a) Compensation
The above persons shall be liable to pay compensation to every person who
subscribes for any shares or debentures for any loss or damage sustained by him
by reason of any untrue statement included therein.
2. Criminal Liability
Every person who authorized the issue of prospectus shall be punishable for
untrue statement with imprisonment for a term which may extend to 2 years or
with fine which may extend to Rs. 5,000/- or with both [Section 63(1)].
Penalty for Fraudulently inducing Persons to Invest Money [Section 68] Any
person who either knowingly or recklessly makes any statement, promises or
forecast which is false, deceptive or misleading or by any dishonest concealment
of material facts, induces or attempts to induce another person to enter into;
• Any agreement with a view to acquiring, disposing of, subscribing for, or
underwriting shares or debentures;
• An agreement to secure to any of the parties from the yield of shares or
debentures; or by reference to fluctuation in the value of shares or debentures;
shall be punishable for a term which may extend to 5 years of with fine which
may extend to Rs. 10,000/- or with both.
Defence against Criminal Liability
Any person made criminally liable can escape the same as proving that
• the statement was true [Section 63(i)]. statement was immaterial; or
• he had a reasonable ground to believe and did upto the time of the issue of
prospectus that the statement was true [Section 63(i)].

STATEMENT IN LIEU OF PROSPECTUS (SECTION 70)

A company having a share capital which does not issue a prospectus or which
has issued a prospectus but has not proceeded to allot any of the shares offered
to the public for subscription, shall not allot any of its shares or debentures,
unless at least three days before the allotment of shares or debentures, this has
been delivered to the Registrar for registration a ‘statement in lieu of
prospectus’ signed by every person who is named therein as a director or a
proposed director of the company or by his agent authorized in writing, in the
form and containing the particulars set out in Part I of Schedule III and setting
out the reports specified in Part II of Schedule III subject to the provisions
contained in Part III of that Schedule (Section 70).
A private company on becoming a public company shall deliver to the Registrar
a statement in lieu of prospectus in the form containing the particulars specified
in Part I of Schedule IV with report set out in Part II of Schedule IV subject to the
provisions contained in Part III of that Schedule [Section 44(2) (b)].
If the company acts in contravention of the provisions, the company and every
director who is at fault shall be punishable with fine which may extent to Rs.
1,000/-.
If the ‘statement in lieu of prospectus’ include any untrue statement, any person
who authorized the delivery of the statement in lieu of prospectus shall be,
punishable with imprisonment up to two years or with fine which may extent to
Rs. 5,000/- or with both. He can avoid liability if he proves either that the
statement was immaterial or that he had reasonable ground to believe that the
statement was immaterial or that he had reasonable ground to believe that the
statement was true. The civil and criminal liability for mis-statements or
misrepresentations is the same as in the case of a prospectus.

MINIMUM SUBSCRIPTION (SECTION 69)

When shares are offered to the public the amount of minimum subscription has
to be mentioned in the prospectus. It means the amount which, in the opinion
of the directors, is enough to meet the purchase price of any property,
preliminary expenses and working capital. No allotment shall be made until at
least so much amount has been subscribed for. If the minimum subscription has
not been received within 120 days, of the issue of the prospectus, the money
received from the applicants must be repaid without interest. If the money is
not paid back within 130 days, the directors become personally liable to pay it
with interest, unless they can show that default was not due to any negligence
or misconduct or their part.

Golden Rule in Prospectus

It is the duty of those who issue the prospectus to be truthful in all respects. This
golden rule was enunciated by Kinderseley, V.C. And has come to be known as
the “golden legacy”. Those who issue a prospectus hold out to the public great
advantages which will accrue to the persons who will take shares in the
proposed undertaking. Public is invited to take shares on the faith of the
representation contained in the prospectus.