PANJAB UNIVERSITY

UNIVERSITY INSTITUTE OF LEGAL STUDIES

COMPANY LAW PROJECT

ON
PROSPECTUS

SUBMITTED BY: SUBMITTED TO:

ARSHITA KALIA MS. ISHANI ARORA
ROLL NO. - 29/19
SECTION – A
SEMESTER - 8
B.A.L.L.B. (HONS.)

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INDEX

1. ACKNOWLEDGEMENT……………………………………………..3
2. WHAT IS A PROSPECTUS?................................................................4
3. TYPES OF PROSPECTUS……………………………………………6
4. REGISTRATION OF PROSPECTUS………………………………..7
5. CONTENTS OF PROSPECTUS……………………………………...8
6. MIS-STATEMENTS IN PROSPECTUS…………………………….10
7. BIBLIOGRAPHY…………………………………………………......13
8. WEBLIOGRAPHY……………………………………………………13

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ACKNOWLEDGEMENT

I would like to thank my Company law teacher, Miss Ishani Arora, for her able guidance and
support in the completion of my project work on the topic ‘Prospectus’. I came to know about
a lot of new things about the topic and now I am well versed with the intricacies of the topic.

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WHAT IS A PROSPECTUS?

The term prospectus is defined in section 2 (70) of the Companies Act 2013. The 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 security of a body corporate. Where a company intends to issue a public appeal
for subscription of its shares or debentures, it is essential for that company to issue a prospectus.

Following are the essential ingredients of a prospectus:

1) there must be an invitation offering to the public,

2) the invitation must be made by or on behalf of the company or in relation to an intended

company,

3) the invitation must be to subscribe or purchase,

4) the invitation may relate to shares or debentures.

In Pramatha Nath Sanyal v. Kali Kumar Dutt1, the company inserted an advertisement and a
newspaper stating, “ some shares are still available for sale according to the terms of the
prospectus of the company which can be obtained on application.” It was held that the
advertisement constituted a prospectus as it invited the public to purchase the shares.

Prospectus must be “issued to the public”

The prospectus of a company may be said to be an advertisement through which the company
invites the public to purchase its shares or debentures. The firms for purchase of shares or
debentures cannot be issued by the company unless an advertisement in the form of prospectus
is issued and published in the newspapers. the documents to be a prospectus must be issued to
the public and the provisions of the act are not attracted unless the prospectus is issued to the
public. In Nash v. Lynde2, several copies of a document marked strictly confidential and
containing particulars of a proposed issue of shares Vasant accompanied by application form
by the Managing Director of the company to a core director, who sent a copy to a solicitor who
intern gave it to a client who passed on to a relation. This document was passed privately

1
AIR 1925 Cal. 714
2
1929 AC 158

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through a small group of friends of directors and was held to be not issued to the public and
therefore was not a prospectus.

Section 42 of the Companies Act 2013 makes it clear that the term public includes any section
of the public whether selected as members or debenture holders of the company concerned.
However, an issue shall not be deemed to be public if :

1) It is directed to a specific person,

2) It is not calculated to result in the shares or debentures becoming available to other
persons.

The prospectus need not be issued in the following circumstances even though the shares are
offered and the application forms issued to public by the company:

1) Where a person is a bonafide inviting to enter into an underwriting agreement with

regard to shares or debentures.
2) where shares or debentures are not offered to the public.
3) where the shares or debentures offered are in all respects uniform with shares or
debentures already issued and coated at a recognised stock exchange.
4) where the shares or debentures are offered to the existing holders of shares or
debentures respectively.
5) where a prospectus is published as a newspaper advertisement, it is not necessary to
specify the contents of the memorandum, or the names etc of the signatories to the
memorandum or the number of shares subscribed for by them.

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TYPES OF PROSPECTUS

There are four types of prospectus under the Companies Act 2013. These are as follows:

1) Red Herring prospectus

2) Shelf prospectus
3) Abridged prospectus
4) Deemed prospectus

RED HERRING PROSPECTUS:

A red herring prospectus is defined under Section 32 of the Companies Act, 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. It is a process through which an
issuer seeks to identify the price at which an initial public offering will be offered. 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. 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.

SHELF PROSPECTUS:

Section 31 of the Companies Act, 2013 talks about shelf prospectus. 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

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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. A company filing a shelf
prospectus must file an information memorandum with the Registrar within one month prior to
the issue of a second or subsequent offer of securities, containing all updated charges in the
facts, the company’s financial position that changed between the previous offer of securities
and the succeeding offer of securities, or any other changes. Prior to applying any changes, a
company or any other person shall inform applicants of the changes, and if they express
willingness to withdraw their application, the company or other person shall reimburse money
received as a subscription within fifteen days. When an information memorandum is submitted
with the shelf prospectus at the time of the offer for securities, it is considered a prospectus.

ABRIDGED PROSPECTUS:

Section 2(1) of the CA, 2013 outlines an abridged prospectus. It means a memorandum
containing the salient features of a prospectus as per the regulations specified by the Securities
and Exchange Board. Section 33 mandates the issuance of application forms for securities
along with an abridged prospectus.

DEEMED PROSPECTUS:

Section 25 talks about Deemed prospectus. Where a company allots or agrees to allot any
security of the company by offering for sale to the public any document by which offer for sale
to the public is made, shall, for all purposes, be deemed to be a prospectus issued by the
company. Every prospectus must be dated. This provides prima facie evidence of the date of
its Publication. The date on the prospectus shall unless contrary is proved be taken as the date
of the publication of the prospectus.

REGISTRATION OF PROSPECTUS

Section 27(7) provides about registration of the prospectus. A copy of the prospectus has to
be filed with the registrar of companies before its Publication. The copy sent for registration
must be signed by every person who is named as director or proposed director of the company
or by his agent authorised in writing. where the prospectus is issued in one or more language
copies of it as it and each language should be delivered to start. It must company the following
documents:

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1) The consent of the expert if his report is to be published in the prospect.
2) a copy of every contract relating to the appointment or remuneration of managerial
personnel.
3) copy of every material contract not being a contract entered into in the ordinary course
of business of the company entered into within 2 years of the date of issue of
prospectus.
4) written statement relating to the adjustments if any in respect of figures of any profits
or losses and Assets and liabilities.
5) the consent in writing of the person, if any, named in the prospectus as auditor, legal
advisor, attorney, issue house banker or broker of the company to act in that capacity.
6) the consent of the director in respect of new directors if any names there in.
7) a copy of the underwriting agreement, if any, should also be filed along with the
prospectus.

CONTENTS OF PROSPECTUS

Section 26 requires that if the prospectus includes a statement purporting to be made by an

expert his consent in writing should be obtained and this fact be stated in the prospectus. It
should also state that the consent was not withdrawn. The expert should not be the one who is
himself engaged or interested in the formation, promotion or management of the company.
another words he should be unconnected with the formation or management of the company.

The prospectus must also contain a statement that a copy has been delivered for registration
indicating the requisite documents delivered there with full stop it must be issued with the 90
days of its registration either by newspaper advertisement or otherwise.

Section 26 further cast a statutory duty upon the company to disclose certain matters. These
are specified in part 1 of chapter 3 of the act. Following other matters are to be stated in the
prospectus:

1) The main objects of the company, including the details about the signatories to the
memorandum of association of the company.
2) The number and classes of shares and in the interest of the shareholders in the property
and the profits of the company.

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3) Names addresses, descriptions and occupations of the directors.
4) The time of the opening of the subscription list.
5) Where the shares are offered to the public, the minimum subscription amount which
in the opinion of the directors of the memorandum must be raised by the issue of
shares to the public for subscription to provide for the purchase price of an property
acquired or to be acquired, preliminary expenses, under its Commission etc.
6) The amount payable on application and allotment on each share and if any prospectus
was issued within 2 years the details of the shares subscribed for an allotment.
7) The names of the underwriters if any and the opinion of the directors that the resources
of the underwriters are sufficient to discharge their obligations.
8) The amount or rate of the underwriting Commission.
9) The names and addresses of the auditors of the company if any.
10) In case of existing companies the length of time during which the company has been
carrying on its business and if the company proposes to acquire business which has
been carrot on for less than 3 years the length of time during which such business has
been done.
11) Particulars of shares and debentures issued as fully or partly paid up in the presiding
to years otherwise than and cash and the construction for such issue and of any shares
issued or to be issued at a premium.
12) Particulars about vendors from home any property has been or is to be acquired by the
company and the price where of is to be paid out of the proceeds of the issue.
13) The amount paid or benefit given within two preceding years to the promoters of the
company.
14) Particulars as to the interests of every director or Promoter in the promotion or
property of the company within 2 years of the date of prospectus.
15) Where the shares are more than one class the rights of voting and the rights as the
capital and dividend attached to the several classes of shares.
16) The following reports must also be set out in the prospectus:
1. Report by the auditors of the company relating to profits and losses and Assets and
liabilities of the company for each of the five financial years before the issue of the
prospectus. Such a report must also state separately the profits and losses of the
companies subsidies and also combined profits and losses.

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2. If the company proposes to acquire any business, a report should be made by a chartered
accountant whose name should be disclosed upon the profits and losses of the business for
each of the five years before the date of prospectus and Assets and liabilities of the business.
3. Reports about the business and translation to which the proceeds of the security are to be
applied directly or indirectly.

MIS-STATEMENTS IN PROSPECTUS

Any omission from a prospectus of those matters which are required to be stated as per section
26 shall render the director or any other person responsible for the issue of prospectus liable to
find not less than 50000 rupees which me extend to 3 lakh3. In addition to this the director or
the official concerned may also incur civil or criminal liability for non disclosure. However,
in the event of omission to the close the nature and extent of a directors or promoters interest
in the promotion of property acquired for to be acquired by the company no director or other
person shalinker liability unless it is proved that he had knowledge of the matters not disclosed.
Section 34 talks about the criminal liability for miss-statements in the prospectus whereas
section 35 talks about the civil liability.

Any person who has been induced to invest money in a company relying on a fraudulent
statement in the prospectus can show the director or the person responsible for issuing it and
claim damages. In order to prove a fraud the agreed investor has to prove that the falls
representation was made by the company knowingly or without belief in truth or recklessly
whether it is False or true.

Statements included in the prospectus shall be themed to be unt room if the statement is
misleading in the form and content in which it is included. It also provides that where the
omission from a prospectus of any matter is calculated to mislead, the prospectus shall be
deemed in respect of such a mission to be a prospectus and which any untrue statement is
included.

Regarding the liability for fraudulent misstatements in the prospectors firstly the agri party has
to prove that the person making the suggestion new that what he is dating in the prospectus is

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Section 26 (8), The Companies Act, 2013

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not true or did not believe it to be true or it is an active concealment of some material fact.
However, if a person making the statement honestly believes it to be true he is not guilty of
fraud even if the statement is not actually true.

Secondly the false representation must relate to some existing facts which are material to the
contract of purchasing shares.

Thirdly in order to succeed in an action for fraud in prospectus it is necessary that the plan
should have taken the shares or debentures directly from the company by allotment and not
from any intermediate agency or open market.

Fourthly, in the absence of a contractual relationship A person who makes a statement o's a
duty of care to anyone whom he knows or has reasonable grounds for expecting will reply on
his statement. if he fails in that duty of care and the party which is misled suffers loss he shall
be liable for the negligence. The person liable for misstatements are in numerator and section
35 (1) of the act. does a person who has subscribed for any shares or debentures on the faith
of an untrue statement in the prospectus answer stained any laws or damages may so for
compensation any of the following or all of the following:

(a) is a director of the company at the time of the issue of the prospectus;

(b) has authorised himself to be named and is named in the prospectus as a director of
the company, or has agreed to become such director, either immediately or after an
interval of time;

(c) is a promoter of the company;

(d) has authorised the issue of the prospectus; and

(e) is an expert referred to in sub-section (5) of section 26.

Section 35 (2) Provides that a person other than expert shall not be liable to pay compensation
for any misstatement in the prospectus in the following circumstances:

1) If he proved that having consented to become a director of promoter he withdrew his

consent before the issue of prospectus and that it was issued without his consent or
authority.

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2) A directory also escapes liability if he proves that the prospectus was issued without his
knowledge or consent and on becoming aware of its issue he promptly gave a public
notice to that effect.
3) A director may initially be ignorant about the untrue statements made in the prospectus.
but after the issue of prospectus and before allotment if he becomes aware of the untrue
statement and withdraws his consent by a reasonable public notice he shall not be liable.
4) If a director proves that as regards every untrue statement not supporting to be made on
the authority of an expert or of a public Official Document or statement he had
reasonable ground to believe that the statement was true then he would escape The
liability.
5) The director shall also be protected if he proves that as regards the untrue statement for
porting to be made by an expert it was a correct and fairy presentation of the statement
therefore he had reasonable ground to believe that the set expert was competent and
that the expert has complaint with the provisions of the act.
6) The director shall not be liable if he proved that as regards every untrue statement
reporting to be a statement made by an official person or from a public Official
Document it was correct and fair extract from the document.

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BIBLIOGRAPHY

● The Companies Act, 2013

● N. V. Paranjape, The New Company Law, 2013 (Central Law Agency, Allahabad,
2014)

WEBLIOGRAPHY
● Blog.ipleaders.in
● Cleartax.in
● Legalserviceindia.com

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