Prospectus

Unit 2
 Prospectus

• 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.
• It has been defined under section 2(70) so as to mean 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 securities of a body corporate.
 Matters to be stated in the prospectus

• According to Section 26(1),every Prospectus shall 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:
• Provided that until the SEBI specifies the information and reports on financial
information under this sub-section, the regulations made by the Securities and
Exchange Board under the Securities and Exchange Board of India Act, 1992, in
respect of such financial information or reports on financial information shall apply.
Types of prospectus
 Shelf Prospectus
• Shelf Prospectus means a prospectus in respect of which the securities or class of securities
included therein are issued for subscription in one or more issues over a certain period
without the issue of a further prospectus.
• In simple terms Shelf Prospectus is a single prospectus for multiple public. Issuer is permitted
to offer and sell securities to the public without a separate prospectus for each act of offering
for a certain period.
• Under the Act any class or classes of companies, as the Securities and Exchange Board
(SEBI) may provide by regulations in this behalf, may file a shelf prospectus with the
Registrar. Such prospectus is to be submitted at the stage of the first offer of securities which
shall indicate a period not exceeding one year as the period of validity of such prospectus.
The validity period shall commence from the date of opening of the first offer of securities
under that prospectus, and in respect of a second or subsequent offer of such securities issued
during the period of validity of that prospectus, no further prospectus is required.
 cont...
• An information memorandum is required to be filed by a company filing a shelf prospectus
which shall contain all material facts relating to new charges created, changes in the
financial position of the company as have occurred between the first offer of securities or the
previous offer of securities and the succeeding offer of securities and such other changes as
may be prescribed, with the registrar before the 2nd issue.
• According to Rule 10 of the Companies (Prospectus and Allotment of Securities) Rules,
2014, the information memorandum shall be prepared in Form PAS-2 and filed with the
Registrar along with the fee as provided in the Companies (Registration Offices and Fees)
Rules, 2014 within one month prior to the issue of a second or subsequent offer of securities
under the shelf prospectus.
 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. In simple terms a red herring prospectus
contains most of the information pertaining to the company’s operations and prospects, but does
not include key details of the issue such as its price and the number of shares offered.
• According to section 32 a company proposing to make an offer of securities may issue a red
herring prospectus prior to the issue of a prospectus. Such company proposing to issue a red
herring prospectus shall file it with the Registrar at least three days prior to the opening of the
subscription list and the offer.
• A red herring prospectus shall carry the same obligations as are applicable to prospectus and any
variation between the red herring prospectus and a prospectus shall be highlighted as variations
in the prospectus.
• Upon the closing of the offer of securities under this section, the prospectus stating therein the
total capital raised, whether by way of debt or share capital, and the closing price of the
securities and any other details as are not included in the red herring prospectus shall be filed
with the Registrar and the Securities and Exchange Board.
 Abridged Prospectus
• According to section 2(1) of the Act “abridged prospectus” means a memorandum
containing such salient features of a prospectus as may be specified by the Securities and
Exchange Board by making regulations in this behalf.
• Section 33 of the Act provides that no form of application for the purchase of any of the
securities of a company shall be issued unless such form is accompanied by an abridged
prospectus. A copy of the prospectus shall, on a request being made by any person before
the closing of the subscription list and the offer, be furnished to him
• Nothing aforesaid shall apply if it is shown that the form of application was issued—
(a) in connection with a bona fide invitation to a person to enter into an underwriting
agreement with respect to such securities; or
(b) in relation to securities which were not offered to the public.
• The penal provisions provide that a company which makes any default in complying with
the provisions shall be liable to a penalty of fifty thousand rupees for each default.
 Offer for Sale -Deemed Prospectus

• Public Offer includes or an offer for sale (OFS) of securities to the public by an
existing shareholder, through issue of a prospectus.
• Under section 25 of the Act where a company allots or agrees to allot any
securities of the company with a view to all or any of those securities being
offered for sale to the public, any document by which the offer for sale to the
public is made shall, for all purposes, be deemed to be a prospectus issued by the
company.
• In simple terms any document by which the offer or sale of shares or debentures
to public is made shall for all purposes be treated as prospectus.
 Misstatement in Prospectus (sec.34)
• The prospectus is trusted by the members of the general public for subscribing or
purchasing the securities and other instruments from the corporation and any
misstatement by the prospectus can lead to punishment.
• Misstatement in a prospectus occurs when a untrue or misleading statement is
included and issued in the prospectus. Any deletion and inclusion of any matter
which misleads the public is also a misstatement under Section 34 of this Act.
• For instance, and statement which gives the incorrect location of the company’s
office is misstatement in the prospectus or any statement offering shares misleads the
public is a misstatement in a prospectus
 Who is Liable for Misstatements in Prospectus?

• A person who has signed and given consent to the prospectus is liable for misstatement.
• Persons who had the management of the whole, or substantially whole of the affairs of the
company can be held liable for misstatement in prospectus if they have signed the prospectus and
had given consent for the same. Managers, Company Secretaries, and Directors will come under
this category.
• However, the mere signing of the declarations in the prospectus will not result in liability for
misstatement if the person signing is neither a manager of the company nor draw salary from the
company.
• In the Matter of Sahara India Commercial Corporation Ltd., SEBI 31 Oct. 2018. Here, SEBI
considered the submission of the Company Secretary that he signed the prospectus on behalf of
the directors under their power of attorney and concluded that he was not liable for misstatement
as the director of the company.
 Violation of requirement u/s. 26:-(sec26(9))

• If a prospectus issued violates the provisions of section 26 of the Companies Act,

2013 then,
• The company shall pay a fine not less than Rs.50000 which can be extended to Rs.
300000.
• Imprisonment for a maximum term of three years or with a fine not less than Rs.
50000 and maximum of Rs. 300000 or with both can be imposed to every person of
the company who is a party to the issue of the prospectus.
A misstatement in the prospectus can invoke criminal liability: (sec. 34)

• A person who authorizes the issue of a prospectus which has untrue or misleading
statements is liable for punishment under Sec. 34.
• Such a punishment is for fraud as set out in Sec. 447. “Fraud” under Sec. 447
includes an act, omission, concealment of any fact with an intent to deceive, gain
undue advantage, or to injure the interests of the company or its shareholders or its
creditors or any other person.
• It is not necessary that such an act involve any wrongful gain or wrongful loss.
Abuse of position committed by a person is also considered fraud under this section.
 Punishment for fraud(Sec. 447):

• If the fraud involves an amount of ten lakh rupees or more, or one per cent. of the turnover of
the company (whichever is lower) the person who is found guilty of fraud shall be
punishable with imprisonment for a minimum term of six months which may extend to ten
years. Such a person shall also be liable to a fine of an amount not less than the amount
involved in the fraud and the fine may extend to three times of such amount.
• If the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of
the company (whichever is lower) and does not involve public interest, the imprisonment
may extend to five years or with fine which may extend to fifty lakh rupees or with both.
• If the fraud in question involves public interest, the term of imprisonment shall not be less
than three years.
 Civil liability
• Civil liability for misstatements in prospectus will arise when a person has sustained any loss
or damage by subscribing securities of a company based on a misleading prospectus (sec.
35). In such instances the following persons shall be liable under sec 447 and will have to
pay compensation to persons who have sustained such loss or damage:
a) director of the company at the time of the issue of the prospectus;
b) person who has agreed to be named as a director in the prospectus and is named as a
director of the company, or has agreed to become such director;
c) is a promoter of the company;
d) has authorised the issue of the prospectus; and
e) is an expert who has been engaged or interested in the formation or promotion or
management of the company.
 Prohibition of the Company and directors from dealing with securities following misstatement

• In the Matter of Taksheel Solutions Limited, the SEBI (25 Oct. 2013) found that the
Red Herring Prospectus/Prospectus had several missing vital pieces of information
which resulted in misstatement. SEBI had earlier prohibited the company, its
promoters/directors and independent directors from buying, selling, or dealing in
securities in any manner. The Board noted that the company had the duty to make
true and correct disclosures and statements in the Prospectus to help the applicants
take an informed investment decision. The Board further observed that the
Prospectus failed to disclose a related party transaction too. Therefore, the Board
confirmed the interim order of prohibition on the Company and its
Promoters/Directors in dealing with securities. However, the Board vacated the
prohibition on the independent directors who had resigned from the Company and
had undergone the restraint for more than twenty-one months.
 Suspension of the auditor for false certificate attached to the Prospectus

• In The Institute of Chartered Accountants of India v. Mukesh Gang, Chartered

Accountant, Referred Case. No.2 of 2011, the High Court of Andhra Pradesh noted that
the prospectus is a special document and a false certificate is issued by the auditor would
amount to his failure to discharge his statutory duties. The court added that he must be
presumed to be aware of the consequences that flow from such gross negligence of a
false certification because the public subscribe to the shares based on the invitation
(Prospectus). The court further observed that as per Section 65 of the Companies Act,
1956 untrue statements in the prospectus will result in liability for the loss or damage
sustained by a person while subscribing for shares or debentures based on such
statements in the Prospectus. Here, the court found that the certification by the statutory
auditor has resulted in misleading the general public into subscribing to the shares of the
company by placing faith on such a certificate. Therefore, the court suspended the
respondent from practising as a Chartered Accountant for a period of three years under
Section 21(5) of the Chartered Accountants Act, 1949.
 Exceptions from liability for misstatements in Prospectus

• A person shall not be criminally liable under sec. 34 if he proves that: the statement or
omission was immaterial or he had reasonable grounds to believe that the statement was true
or the inclusion or omission was necessary and believed in it up to the time of issue of the
prospectus.
• Likewise, a person shall not be liable under sub-section (1) of sec. 35 (civil liability), if he
proves that:
a) he withdrew his consent to become a director of the company before the issue of the
prospectus, and that it was issued without his authority or consent; or
b) the prospectus was issued without his knowledge or consent, and
c) on becoming aware of its issue, he gave a reasonable public notice that it was issued
without his knowledge or consent.