UNIVERSITY INSTITUTE OF LEGAL INSTITUTE
COMPANY LAW
PROSPECTUS OF A
COMPANY
SUBMITTED TO SUBMITTED BY
Ms. RITA GHIAL MEHNDI SINGHAL
UILS, PU SECTION E (264/19)
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TABLE OF CONTENTS
PARTICULARS PAGE NO.
Definition 3
Documents containing offer of securities for sale, deemed prospectus 3
Contents of prospectus (matters to be stated in prospectus) 4
Advertisement of prospectus 6
Shelf prospectus 6
Red herring prospectus 6
Remedies for misrepresentation 8
Bibliography 11
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PROSPECTUS
DEFINITION
A prospectus is an essential disclosure document that a company has to issue at the time of
issuing investment securities to the public. These formal documents provide detailed information
to prospective investors about mutual funds, bonds, stocks, and other investment offerings to the
public.
A public company, but not a private company, is entitled, by issuing a prospectus, to invite
applications for its shares or debentures. "Prospectus" is defined by Section 2(70) in the
following words: "'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 subscription or purchase of any securities of a body corporate”.
An abridged prospectus means a memorandum containing such salient features of a prospectus
as may be specified by SEBI by making regulations. [S.2(l)]
Application forms for securities cannot be issued unless they are accompanied by a
memorandum containing such salient features of a prospectus as may be prescribed. This is
known as abridged prospectus. The purpose is to reduce the expense-burden of a public issue.
The full "prospectus" has to be maintained in the office of the company.
DOCUMENTS CONTAINING OFFER OF SECURITIES FOR SALE, DEEMED
PROSPECTUS [S.25]
Where a company allots or agrees to allot any securities of the company with a view to those
securities being offered for sale to the public, any document by which the offer for sale is made
to the public is to be deemed for all purposes as a prospectus issued by
the company. All enactments and rules of law as to contents of prospectus and as to liability for
misstatement in and omissions from prospectus or otherwise relating to prospectus are to become
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applicable. This is subject to modifications specified in Section25(3) and (4). The original
allotment is presumed to have been made with a view of offering them to the public
where (1) shares are offered to the public within six months of allotment and (2) where at the
date of offer to the public the whole of the consideration has not been received by the company.
[S. 25(2)].
Section 26 which provides for matters to be stated in the prospectus is applicable to the offer for
sale with the following additional requirements: (fl) a statement of the net amount received or to
be received as consideration for the securities to which the offer relates; (b) the time and place at
which the underlying contract for allotment may be inspected; and (c) the persons making the
offer were named in the prospectus as directors of the company. [S.25 (3)]
Where the person making the offer is a company or firm, it is to be sufficient if the offering
document is signed on behalf of the company by its two directors or by not less than one-half of
the partners of the firm. [S. 25(4)]. The provisions of the Act relating to prospectus and the penal
provisions are attracted only when the prospectus has been issued. "Issued" means issued to the
public. "Public" includes any section of the public, whether selected as members or debenture
holders of a company concerned or as clients of the person issuing prospectus or in any other
manner.
CONTENTS OF PROSPECTUS (MATTERS TO BE
STATED IN PROSPECTUS) [S. 26]
Every prospectus issued by or on behalf of a company either on its formation or subsequently or
by or on behalf of a person engaged or interested in the formation of a public company has to be
dated and signed and has to state the following information: name of the company, the registered
address of the company, objectives and purpose of the company, the purpose of the issue of
prospectus, Purpose of the issue of prospectus, Nature and capital structure of the business,
Name, location, and the number of shares that signatories have subscribed, Qualification shares
of the directors, Details on redeemable preference shares and debentures, Remuneration of
directors and promoters, Minimum subscription for allotment, Date of opening and closing of the
issue, Information on underwriting commission and brokerage, Name and address of the
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company’s auditor, secretary, banker, and trustee, Particulars of material documents, Forecasted
rate of dividend and voting rights.
(2) Filing of copy with registrar—Sub-section (4) provides that no prospectus is to be issued by
or on behalf of or in relation to an intended company unless on or before the date of its
publication a copy has been delivered to the Registrar for registration. The copy should be signed
by every person who is named in the prospectus as a director or proposed director or by his duly
authorized attorney.
(3) Statement of independent expert. —A prospectus is not to include a statement purporting
to be made by an expert unless the expert is a person who is not and has not been engaged in the
formation, promotion or management of the company and has given his consent to the issue of
prospectus and has not withdrawn his consent before delivery of a copy to the Registrar. A
statement to that effect has to be included in the prospectus.
Delivery of copy to Registrar [S. 26(6)]. —The prospectus has to state on the face of it that a
copy has been delivered to the Registrar. The statement has also to specify the documents which
have been delivered along with the copy of the prospectus.
Registration of prospectus by Registrar [S. 26(7)]. —The Registrar is not to register a
prospectus unless the requirements of section with respect to registration have been complied
with and it is accompanied by consent in writing of all the persons named in the prospectus.
Date of issue after registration [S.26(8)]. —No prospectus is to be valid if it is issued more
than 90 days after the date on which a copy was delivered to the Registrar.
Penalty for contravention [S. 26(9)]. —If a prospectus is issued in contravention of the
provisions of the section, the company becomes punishable with fine of not less than Rs 50,000
but extending up to Rs3,00,000. Every person who is knowingly a party to such a prospectus is
punishable with imprisonment for a term which may extend to three years or with fine of not less
than Rs 50,000but extending up to Rs 3,00,000 or both.
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ADVERTISEMENT OF PROSPECTUS [S. 30]
Where an advertisement of a company's prospectus is published in any manner, it is necessary to
specify in it the contents of the company's memorandum as regards the objects, liability of
members and the amount of the company's share capital, the names of signatories to the
memorandum and the number of shares subscribed by them and its capital structure.
SHELF PROSPECTUS [S. 31]
The shelf prospectus is outlined under Section 31 of the CA, 2013. A shelf prospectus offers
securities for subscription in one or more issues over a specific period of time without the need
for a fresh prospectus to be issued. This is done especially in projects where the issue size is
substantial, and large sums of money are required to be raised in order to save on the expense of
filing a new prospectus every time.
Any company may file a shelf prospectus with the Registrar at the stage of the first offer of
securities, and the validity period of such prospectus shall not exceed one year, which shall begin
from the date of opening of the first offer of securities under the prospectus and in respect to
subsequent offers of securities issued during the period of validity of that prospectus in
accordance with the guidelines issued by SEBI. A fresh prospectus is not required to be issued
for the offer of securities.
RED HERRING PROSPECTUS
A red herring prospectus is defined under Section 32 of the CA, 2013. A red herring prospectus
does not provide detailed information about the quantum, or quantity, and price of the securities
offered. It is used for the book-building process. The process through which an issuer seeks to
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identify the price at which an initial public offering (IPO) will be offered is known as book
building. An issuer often creates a book for institutional investors to make offers for the quantity
of shares and the estimated amount of money they will pay. The issuer examines the data and
estimates the final price for the security using an average value.
A company that intends to offer securities to the public can issue a red herring prospectus before
issuing the original prospectus. It must be filed with the Registrar at least three days prior to the
opening of the subscription list and offers.
A red herring prospectus is subject to the same obligations as a prospectus, and any difference
between the red herring prospectus and the prospectus must be identified as ‘deviations in the
prospectus’. Following the close of the offer of securities, the prospectus must state the total
capital raised, whether by debt or share capital, and the closing price of the securities, as well as
any other details not included in the red herring prospectus, and must be filed with the Registrar
and the SEBI.
REMEDIES FOR MISREPRESENTATION
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The fear of heavy liability and criminal sanctions has controlled the directors' tendency of "using
extravagant terms and flattering description". The law allows the following remedies for
misrepresentation.
1. Damages for deceit—Those who issue a prospectus with fraudulent statements are liable to
pay damages to anyone who purchased shares on the faith of the prospectus. In Derry v Peek1,
the prospectus of a company stated that the company had been authorized to use steam power in
moving its trams. The authority was in fact subject to the approval of the Board of Trade, which
refused its approval. Yet the directors were held to be not guilty of fraud, because they were
honest, whereas fraud requires a statement which the maker knows to be false, or does
not believe it to be true or is too reckless as to its truth. The company may also be sued for
damages provided that the fraudulent statement was made by its officers within the scope of their
authority, though in that case as laid down by the House of Lords in Houldsworth v City
of Glasgow Bank2, the contract of allotment must first be rescinded. But the provisions
of Section 75, Indian Contract Act, 1872"entitles the Court to award damages in lieu of
rescission".
2. Compensation under Section 35.— Section 62 of the Indian Companies Act,
1956 and section 35 of the Companies Act, 2013 provide that the following persons shall be
liable for fraudulent statements : (1) every person who is a director at the time of the issue of the
prospectus; (2) every person who has authorized himself to be named as a director in the
prospectus; (3) every promoter of the company; (4) every person who has authorized the issue of
the prospectus; (5) every person who is an expert referred to in Section 26(5). Their liability is
joint and several. The person who is made liable may recover contribution from others equally
guilty. They are liable to compensate the investor for any loss sustained by him by reason of any
statement. Subject to the special defenses allowed under the section, they are liable for
every untrue statement.
A person sued under the section is entitled to the following special defenses: (1) That he
withdrew his consent to be a director before the prospectus was issued and that it was issued
without his authority or consent. (2) That the prospectus was issued without his knowledge or
1
(1889) LR 14 AC 337 (HL)
2
(1880) LR 5 App Cas 317: 42 LT 194 (HL)
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consent and on becoming aware he forthwith gave reasonable public notice to that effect.
(3) That he was ignorant of the untrue statement and on becoming aware of it, he withdrew his
consent by a reasonable public notice. This must obviously be done before allotment. (4) That
"he had reasonable ground to believe and did up to the time of allotment believe the statements
to be true". In Derry v Peek, the directors were held not liable because they honestly believed
their statement to be true. But under Section 62 of 1956 Act and present Section 35 mere honesty
was and is not enough, the honest belief must be based upon reasonable grounds. Thus, where a
prospectus was issued by the directors under the assurance given by the promoters that
everything was alright, they were held liable for untrue statements because to put faith upon
promoters is not reasonable." (5) That the untrue statement was contained in the report of an
expert and he had reasonable ground to believe and did up to the time of allotment believe the
expert to be competent and, if it was in some public official document, that it was a correct and
fair representation of the document. The points from (3) to (5) are not
there in the new section. But they will become applicable as a matter of common law.
3. Rescission for misrepresentation—The shareholder can also sue the company for rescission
of the contract. Under this remedy the contract is cancelled and the money given by the
shareholder refunded. Under Section 75, Contract Act, a person who lawfully rescinds a contract
is entitled to compensation for any damage which he has sustained through non-fulfilment of the
contract. The right is lost in the following circumstances:
(a) By affirmation. —If the allottee with full knowledge of the misrepresentation upholds the
contract, he cannot afterwards rescind. Affirmation may be express or implied. An implied
affirmation takes place by the shareholder's conduct, where, for example, he endeavors to sell his
shares, attends meetings of the company, receives dividends or pays calls."
(b) By unreasonable delay. —"Any man who claims to retire from a company on the ground
that he was induced to become a member by misrepresentation, is bound to come at the earliest
possible moment after he becomes aware of the misrepresentation." An action after five months
was held to be too late.3
3
Christenville Rubber Estates Ltd., re, (1911) 81 Lj Ch 63: 106 LT 260: 1911 WN 216
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(c) By commencement of winding up—The right of rescission is lost on the commencement of
the winding up of the company. "But where a shareholder has started active proceedings to be
relieved of his shares, the passing of the winding up order during their pendency would not
prevent his getting the relief."" 4
WHO CAN SUE UNDER SECTIONS 34 ,35 AND 36 [S. 37]
A suit may be filed or any other action can be taken under Sections 34, 35 or 36 by any person or
group of persons or any association of persons affected by any misleading statement or for the
inclusion or omission of any matter in the prospectus.
BIBLIOGRPAHY
4
Shiromani Sugar Mills Ltd v. Debi Prasad, AIR 1950
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BOOKS
1. Avtar Singh, Company Law, EBC, 17th Edn.
WEBSITES
1. www.indiafilings.com (last visited 27th March, 2023)
2. www.blog.ipleaders.in (last visited 27th March, 2023)
3. https://economictimes.indiatimes.com (last visited 27th March, 2023)
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