PROSPECTUS

MEANING
In general parlance, ‘prospectus’ refers to an information booklet or offer document on the basis
of which an investor invests in the securities of an issuer company.
As per S. 2 (70) of the Companies Act 2013,
‘Prospectus’ means:
• any document described or issued as a prospectus,
and includes:
• a red herring prospectus referred to in S. 32, or
• shelf prospectus referred to in S. 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.

A document shall be called a prospectus if it satisfies two things:

1. It invites subscriptions to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.

In Rattan Singh vs. Moga Transport Co. Ltd. (1959), the learned judge held that, in all cases, the
determination of the question of an offer being made to the public depends upon the facts and
language of the notice, and the particular circumstances of each case.

TYPES OF PROSPECTUS

Shelf Prospectus (S. 31)

• Shelf prospectus is covered under S. 31 of the Companies Act, 2013. It 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 prospectus shall prescribe the validity period of the prospectus and it should be not be
exceeding one year.
• While filing for a shelf prospectus, a company is required to file an information
memorandum along with it.
Information Memorandum [Section 31(2)]
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. It should be filed with the registrar within three months before the
issue of the second or subsequent offer made under the shelf prospectus as given under
Rule 4CCCA of section 60A(3) under the Companies (Central Government’s) General
Rules and Forms, 1956.
• After the information memorandum has been filed, if any offer or securities is made, the
memorandum along with the shelf prospectus is considered as a prospectus.

Red herring prospectus (S. 32)

• 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.

Abridged Prospectus (S. 33)

• 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.
It contains all the features of a prospectus.
• S. 33(1) of the Companies Act, 2013 also states that when any form for the purchase of
securities of a company is issued, it must be accompanied by an abridged prospectus.
• It contains all the useful and materialistic information so that the investor can take a rational
decision and it also reduces the cost of public issue of the capital as it is a short form of a
prospectus.

Deemed Prospectus (S. 25)

• S. 25 (1) provides that all documents containing offer of shares or debentures for sale shall
be included within the definition of the term ‘prospectus’ and, shall be deemed as
prospectus by implication of law.
• All enactments and rules of law as to the contents of prospectuses and as to the liability in
respect of statements and omissions from prospectuses shall apply in respect of such
documents.
• Further, S. 25 provides that unless the contrary is proved, an allotment of, or an agreement
to allot shares or debentures shall be deemed to have been made with a view to the shares
or debentures being offered for sale to the public, if it is shown:
i. that the offer of the shares or debentures for sale to the public was made within 6
months after the allotment or agreement to allot; or
ii. that at the date when the offer was made, the whole consideration to be received by
the company in respect of the shares or debentures had not been received by it.
• In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where
a rights issue is made to the existing members with a right to renounce in the favour of
others, it becomes a deemed prospectus if the number of such others exceeds fifty.
CONTENTS OF PROSPECTUS

According to section 26(1) of the Act read with Companies (Prospectus and Allotment of
Securities) Rules, 2014 (hereinafter referred to as “Rules”), the following are the matters to be
included in a prospectus:

• Requirements as regards to date, sign, and contents to be included [S. 26(1)]

i. S. 26 of the Companies Act, 2013, as amended by the Companies (Amendment) Act,
2017 requires a prospectus to be dated and signed and to state such information and set
out such reports on financial information as may be specified by the Securities and
Exchange Board in consultation with the Central Government.

Information to be stated:
1. Name and registered address of the office, its secretary, auditor, legal advisor,
bankers, trustees, etc.
2. Date of the opening and closing of the issue.
3. Consent of the directors, auditors, bankers to the issue, expert opinions.
4. Authority for the issue and details of the resolution passed for it.
5. Procedure and time scheduled for the allotment and issue of securities.
6. The capital structure of the in the manner which may be prescribed.
7. The objective of a public offer.
8. The objective of the business and its location
9. Particulars related to risk factors of the specific project, gestation period of the
project, any pending legal action and other important details related to the project.
10. Minimum subscription and what amount is payable on the premium.
11. Details of directors, their remuneration and extent of their interest in the company,
etc.
Reports to be set out:
1. Auditor’s report
2. Report of profit and loss of the five financial years
3. Business and transaction reports
4. Any other report.
ii. There shall be included a declaration about the compliance of the provisions of this Act
and a statement to the effect that nothing in the prospectus is contrary to the provisions of
:
a) The Companies Act, 2013
b) Securities Contract (Regulation) Act, 1956
c) Securities and Exchange Board of India Act, 1992
d) Rules and Regulations made under above three statutes.

• The provisions of Section 26(1) shall not apply [S. 26(2)]

a) If prospectus issued to existing members or debenture-holders of a company;
b) If prospectus issued relating to shares or debentures which are in all respects uniform
with shares or debentures previously issued and for the time being dealt in or quoted on
a recognised stock exchange.

• Date of publication of prospectus [Explanation to S. 26(3)]

The date indicated in the prospectus shall be deemed to be the date of its publication.

• Filing of signed copy with Registrar [S. 26(4)]

A prospectus shall not be issued unless a signed copy of such prospectus has been delivered
to the Registrar for filing.

• Statement of independent expert [S. 26(5)]

A prospectus issued under section 26(1) shall not include a statement purporting to be made
by an expert unless the expert is a person:
a) who is not engaged or interested in the formation or promotion or management of the
company, or
b) who has given written consent to the issue of the prospectus, or
c) who has not withdrawn the consent before the delivery of a copy of the prospectus to
the Registrar for filing.
• 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 Rs 3,00,000.
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
50,000 but extending up to Rs 3,00,000 or both.

LIABILITY FOR MIS-STATEMENTS

The 'Golden Rule' for framing of a prospectus was laid down in New Brunswick & Canada
Rly. & Land Co. v. Muggeridge. It stated that public is invited to take shares on the faith of
the representation contained in the prospectus. Everything must, therefore, be stated with strict
and scrupulous accuracy. Nothing false should be stated as fact. No material fact should be
omitted the existence of which might hold out as inducement to take shares. In a word, the true
nature of the company’s venture should be disclosed.

Following are the provisions regarding liability for misstatements in a prospectus:

a. Criminal Liability (S. 34)
S. 34 of the Act states that where a prospectus includes any statement which is untrue or
misleading, every person who authorizes the issue of such prospectus shall be liable under
S. 447 of the Act. As per S. 447 of the Companies Act, 2013, any person who is found to
be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less
than six months but which may extend to ten years and shall also be liable to fine which
shall not be less than the amount involved in the fraud, but which may extend to three times
the amount involved in the fraud. Provided that where the fraud in question involves public
interest, the term of imprisonment shall not be less than three years.
This penalty shall however not apply to a person if he proves that such statement or
omission was immaterial or that he had reasonable grounds to believe at the time of issue
that the statement was true or the inclusion or omission was necessary.

b. Civil Liability (S. 35)

Where a person has subscribed for securities of a company acting on any statement
included, or the inclusion or omission of any matter, in the prospectus which is misleading
and has sustained any loss or damage as a consequence thereof, the company and every
person who authorised the issue of prospectus shall be liable to pay compensation to every
person who has sustained such loss or damage.
However, no person shall be liable for any civil liability if he proves that prospectus was
issued without his consent or knowledge, and that on becoming aware of its issue, he
forthwith gave a reasonable public notice that it was issued without his knowledge or
consent.

c. Punishment for Fraudulently inducing persons to invest money(S. 36)

Any person who makes any statement which is false or deliberately conceals any material
facts, to induce another person to enter into any agreement for
i) acquiring, disposing, subscribing, or underwriting securities; or
ii) securing a profit to any of the parties
iii) for obtaining credit facilities from any bank or financial institution;
shall be liable for action under S. 447 of the Act.

d. Liabilities for making an Application in a Fictitious Name (S. 38)

Any person who makes or abets an application in a fictitious name to a company for
acquiring its securities or otherwise induces a company to allot securities to him, or to any
other person in a fictitious name, shall be liable for action under S. 447 of the Act.
The Act further mandates that this provision be prominently reproduced in every
prospectus, abridged prospectus and in every form of application issued by it for securities.

e. Class Action Suits (S. 37)

This section enables any person, group of persons or any association of persons who have
been affected by any misleading statement or the inclusion or omission of any matter in
the prospectus to file a suit or initiate any other action under S. 34, 35 or 36 of the Act.