Prospectus

Public Offer & Private placement

A public company
may issue securities :

A private company
may issue securities :

- to public through
prospectus (referred as
public offer)
- through private
placement
- through rights issue or
bonus issue in
accordance with this act
and SEBI

- by way of rights issue or

bonus issue
- through private placement

Meaning : Prospectus
Any document described or issued as a
prospectus and includes:
- a red herring prospectus or
- shelf prospectus 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.

Considerations :

Prospectus to be in writing
Invitation to Public
How many persons constitute public ?
Dating of Prospectus
Signing of Prospectus
- by the proposed directors/agents authorised
- by the existing directors/agents authorised

The Golden Rule :Prospectus

The Golden Rule as to framing of
prospectus
- disclosure of information
- so as investor can look into soundness of the
companys venture
- purpose of raising capital/project proposed
- financial performance (last 5 years)
- perception towards risk factors

Matters to be stated/Reports to be set out

Types:
(i) Red herring prospectus
(ii) Shelf prospectus
Statement in lieu of prospectus:
Where a public company does not invite public to
subscribe for its shares, but arranges to get money
from private sources, it need not issue a prospectus to
the public.

(i) Red Herring Prospectus

Red herring prospectus" means

a prospectus which does not include complete
particulars of the quantum or price of the
securities included therein.
A company :
- May issue prior to the issue of a prospectus.
- shall file it with the Registrar at least three days prior
to the opening of the subscription list and the offer.
Also a red herring prospectus shall carry the same

obligations as are applicable to a prospectus and any

variation between the red herring prospectus and
a prospectus shall be highlighted as variations in
the prospectus.

(ii) Shelf Prospectus

It means a prospectus issued by any financial

institution or bank for one or more issues of the
securities or class of securities specified in that
prospectus.
- In Companies Act, 1956, only Public Financial
Institutions, Public sector Banks or Scheduled Banks
with main object as financing were allowed to issue
Shelf Prospectus
- The 2013 Act extends the facility of shelf prospectus by
enabling SEBI to prescribe the classes of companies
that may file a shelf prospectus.

Contents :Prospectus
As per The Companies Act,2013 (Sec.26)
(i) Section 26: Matters to be stated in prospectus
(ii) Money raised through a prospectus cannot be used
for dealing in equity shares of another company.
(iii) Section 27: Variation in terms of Contract or
Objects in Prospectus
(If a company changes terms of the prospectus
or objects for which money is raised, it shall
provide dissenting shareholders an exit
opportunity. )

A prospectus may be issued :

- By or behalf of a public company either with
reference to its formation or subsequently, or
- by or on behalf of any person who is or has been
engaged or interested in the formation of a public
company.

MATTERS TO BE STATED IN PROSPECTUS

Information in Prospectus:
i) General Information: Names and addresses of
the registered office of the company, company secretary, Chief
Financial Officer, auditors, legal advisers, bankers, trustees,
underwriters.

ii)Terms of Issue: Dates of the opening and closing

of the issue, and declaration about the issue of allotment letters
and refunds within the prescribed time

iii) Bank Account Details: a statement by the BOD

about the separate bank account where all money received out
of the issue are to be transferred and disclosure of utilised and
unutilised money out of the previous

iv) Underwriter details

v) Consent of the directors, auditors, bankers to the issue,
experts opinion, if any, and of such other persons
vi) The authority for the issue and the details of the
resolution passed there for
vii) Procedure and time schedule for allotment and issue of
securities
viii) Capital structure Details
ix) Particulars of issue : main objects of public offer, terms of
the present issue and such other particulars as may be
prescribed

x) Project Details : main objects and present business of the

company and its location, schedule of implementation of the project

xi) particulars relating to

- management perception of risk
- gestation period of the project
- extent of progress made in the project
- deadlines for completion of the project and
- any litigation or legal action pending or taken
by a Government Department or a statutory body
during the last five years immediately preceding the
year of the issue of prospectus against the promoter of
the company

xii) minimum subscription, amount payable by way of

premium, issue of shares otherwise than on cash
xiii) Company management :details of directors including
their appointments and remuneration, and such particulars of
the nature and extent of their interests in the company as may
be prescribed and

xiv) Disclosures in such manner as may be prescribed

about sources of promoters contribution.

Reports with Prospectus:

Every prospectus shall set out following reports for the
purpose of financial information:
i. Reports by the auditors
ii. Reports relating to profits and losses for each of the five
financial years immediately preceding the financial year
iii. Reports of subsidiaries
iv. Reports on business transactions to which proceeds shall
be applied
Note : Where company has not completed five financial years then such report for
all financial years is required.
Reports by auditors should not be on accounts that are more than 180 days old.

iv)Reports about the business or transaction

to which the proceeds of the securities are
to be applied directly or indirectly.

Declaration of Compliance:
Every prospectus shall make 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 this Act, the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange
Board of India Act, 1992 and the rules and regulations
made there under.

Other matters in Prospectus

i) Delivery of Prospectus with Registrar:
ii) A copy of prospectus shall be delivered to the
Registrar for registration signed by every person
who is named as a director or proposed director of
the company or by his duly authorised attorney on
or before the date of its publication and only then it
shall be issued by or on behalf of a company or in
relation to an intended company.

Statement of an Expert:
I. Expert to be unconnected with formation or
management of company
II. Experts consent should have a statement issued
by him.
III.The registrar shall not register a prospectus all
requirements has been complied with and the
prospectus is accompanied by the consent in
writing of all the person named in the prospectus.
IV.Prospectus shall not be valid if it is issued more
than ninety days after the date on which a copy
thereof delivered to the Registrar.

Caution:
Non compliance with the contents, the company shall be
punishable with
fine which shall not be less than fifty thousand rupees
but which may extend to three lakh rupees to the
company
imprisonment for a term which may extend to three
years or with fine which shall not be less than fifty
thousand rupees but which may extend to three lakh
rupees, or with both to every person who is knowingly a
party to issue

Misstatements in Prospectus/
Consequences
In case of misstatement of a material
fact, there may arise :
(I)Civil Liability
(II)Criminal Liability

(I) Civil Liability

A. Remedies against the company
1. Rescission of the contract
Conditions for rescission :
(i) statement must be a material misrepresentation of fact (differs from
opinion) e.g wrong profits,directors
(ii) statement must have induced the shareholder to take the shares) e.g
(iii) statement must be untrue (dividend declared) e.g
(iv) the deceived shareholder is an allottee and he must have relied on
the statement in the prospectus e.g. (shares from the market)
(v) the omission of material fact must be misleading before rescission is
granted (approval for racing land)
(vi) proceedings must start as son as the allottee comes to know.
2. Damages for deceit
Cannot keep the shares and claim for the damages

B. Remedies against the Directors,

promoters, Experts
The persons liable are :
- directors
- authorised as directors in prospectus
- promoters
- persons authorised to issue prospectus

1. Liability for damages for misstatement in

prospectus
Defences of Directors, promoters, etc.
a. Withdrawal of consent
b. Absence of consent (public notice reqd.)
c. Ignorance of untrue statement (public notice)
d. Reasonable ground for belief (resignation of
any director )
e. Statement of expert
Right of Contribution

2. Liability for damages for non-compliance

with sec.16 (matters to be reported)
3. Liability under general law
- deceived can drag all to the court for fraud

(II) Criminal Liability

A. Punishment for fraud (Sec 447)
The persons who is guilty of fraud is punishable
with:
- imprisonment for a term which shall not be less
than 6 months which may extend to 10 years
- liable to which shall not be less than the amount
involved in fraud and may extend to 3 times the
amount involved in the fraud.
- If fraud involves public interest, the term of
imprisonment shall not be less than 5 years.

(B) Punishment for false statement (Sec 448)

If any return, report, certificate, financial statement,
prospectus, statement or other document, any person
makes a statement :
- which is false in material particulars, knowing to be
false or
- which omits any material fact, knowing it to be
material,
he shall be liable under sec.447

(C) Punishment for fraudulently inducing persons to invest

money (Sec 36)
Any person either knowingly or recklessly makes any statement,
promise or forecast which is false, deceiving or misleading or
deliberately conceals any material facts to induce another person
to enter into or to offer to enter into:
- any agreement with a view to acquire, dispose or subscribe for or
underwriting securities or
- any agreement , the purpose of which is to secure a profit to any
of the parties from the yield of securities or reference to fluctuation
in value of securities or
- any agreement for obtaining credit facilities from any bank or
financial institution
he shall be liable under sec.447