Company law 2013 act goldnPROSPECTUS.ppt

Prospect

1. PROSPECTUSPROSPECTUS
Deptt. of Commerce
Government College, Dera Bassi

2. DEFINITIONDEFINITION
Section 2(70) of the Act defines a prospectus asSection 2(70) of the Act defines a prospectus as
“ “any document described or issued as a prospectus any document described or issued as a prospectus
and includes a red herring prospectus referred to and includes a red herring prospectus referred to
sec.32 or shelf prospectus referred to in section 31 or sec.32 or shelf prospectus referred to in section 31 or
any notice, circular, advertisement or other document any notice, circular, advertisement or other document
inviting deposits from the public or inviting offers from inviting deposits from the public or inviting offers from
the pubic for the subscription or purchase of any shares the pubic for the subscription or purchase of any shares
in, or debentures of a body corporate .”in, or debentures of a body corporate .”
The definition of prospectus now specifically The definition of prospectus now specifically
provides that “Red Herring or Shelf Prospectus” will provides that “Red Herring or Shelf Prospectus” will
also be treated as prospectus. The scope of definition also be treated as prospectus. The scope of definition
has been broadened to include securities instead of has been broadened to include securities instead of
only shares or debentures. only shares or debentures.

3. In other words, a prospectus means any invitation In other words, a prospectus means any invitation
issued to the public inviting it to deposit money issued to the public inviting it to deposit money
with the company or to take shares or debentures with the company or to take shares or debentures
of the company. Such invitation may be in the form of the company. Such invitation may be in the form
of a document or a notice, circulation, of a document or a notice, circulation,
advertisement etc. advertisement etc.
Any document to be called a prospectus must have Any document to be called a prospectus must have
the following ingredients:the following ingredients:
(a)(a)There must be an invitation offering to the public;There must be an invitation offering to the public;
(b)(b)The invitation must be made by or on behalf of the The invitation must be made by or on behalf of the
company or in relation to an intended company ;company or in relation to an intended company ;
(c)(c)The invitation must be to subscribe or purchase;The invitation must be to subscribe or purchase;
(d)(d)The invitation must relate to shares or debentures. The invitation must relate to shares or debentures.

4. DEEMED PROSPECTUSDEEMED PROSPECTUS
Requirement of prospectus are very rigorous Requirement of prospectus are very rigorous
under the companies Act. In order to avoid the under the companies Act. In order to avoid the
issued of prospectus, one practice was to issue issued of prospectus, one practice was to issue
shares to another person. Such another person shares to another person. Such another person
(often called Issue House), would then make (often called Issue House), would then make
further offer of sale of these shares to public by further offer of sale of these shares to public by
advertisement etc. This was one of the ways to advertisement etc. This was one of the ways to
avoid rigours of prospectus.avoid rigours of prospectus.
Section 25 of the companies Act lays down Section 25 of the companies Act lays down
that any document by witch the offer or sale of that any document by witch the offer or sale of
securities to the public is made shall for all securities to the public is made shall for all
purposes be treated as prospectus.purposes be treated as prospectus.

5. A company is deemed (presumed) to have A company is deemed (presumed) to have
allotted or agreed to allot shares or debentures allotted or agreed to allot shares or debentures
to issue House for further sale if (a) such issue to issue House for further sale if (a) such issue
House makes offer for sale of debentures or House makes offer for sale of debentures or
shares within 6 months after the shares within 6 months after the
shares/debentures were allotted to them orshares/debentures were allotted to them or
agreed to be allotted to them or (b) On the date agreed to be allotted to them or (b) On the date
of offer of issue House, whole consideration in of offer of issue House, whole consideration in
respect of shares or debentures was not received respect of shares or debentures was not received
by the company. In short, the ‘offer of sale’ by by the company. In short, the ‘offer of sale’ by
issue house will not be considered as issue house will not be considered as
‘prospectus’ only when (a) company receives full ‘prospectus’ only when (a) company receives full
consideration in respect of shares/debentures consideration in respect of shares/debentures
and (b) The ‘offer for sale’ Is made at least 6 and (b) The ‘offer for sale’ Is made at least 6
months after the shares were allotted to it. months after the shares were allotted to it.
[section25(2)].[section25(2)].

6. SHELF PROSPECTUS(SEC. 31)SHELF PROSPECTUS(SEC. 31)
Sometimes, securities are issued in stages Sometimes, securities are issued in stages
spread over a period of time, particularly in spread over a period of time, particularly in
respect of infrastructure projects where issue respect of infrastructure projects where issue
size is large as huge funds have to be collected. size is large as huge funds have to be collected.
In such case, filling of prospectus each time will In such case, filling of prospectus each time will
be very expensive. So a provision of ‘shelf be very expensive. So a provision of ‘shelf
prospectus’ has been made vide section 31 of prospectus’ has been made vide section 31 of
the companies Act, 2013. The advantage is that the companies Act, 2013. The advantage is that
at each stage of offer of securities during at each stage of offer of securities during
validity of shelf prospectus, filling of prospectus validity of shelf prospectus, filling of prospectus
is not required.is not required.

7. The term ‘shelf prospectus’ means a The term ‘shelf prospectus’ means a
prospectus in respect of which the securities prospectus in respect of which the securities
or class of securities included therein are or class of securities included therein are
issued for subscription in one or more issues issued for subscription in one or more issues
over a certain period without the issue of a over a certain period without the issue of a
further prospectus.further prospectus.
The company shall also file information The company shall also file information
memorandum on new charges created, if any memorandum on new charges created, if any
change in financial position with the registrar change in financial position with the registrar
of companies prior to the issue of a second or of companies prior to the issue of a second or
subsequent offer under shelf prospectus. subsequent offer under shelf prospectus.
[sec.31(2)][sec.31(2)]

8. ABRIDGED PROSPECTUSABRIDGED PROSPECTUS
Section 33 of the companies Act provides Section 33 of the companies Act provides
that every form of application issued for the that every form of application issued for the
purchase of any securities of a company shall purchase of any securities of a company shall
be accompanied by an abridged prospectus. be accompanied by an abridged prospectus.
According to the companies Act, “abridged According to the companies Act, “abridged
prospectus” means a memorandum containing prospectus” means a memorandum containing
such salient features of a prospectus as may be such salient features of a prospectus as may be
specified by the securities and Exchange Board specified by the securities and Exchange Board
by making regulations in this behalf.by making regulations in this behalf.
1.1.Variation in term of contract or objects in Variation in term of contract or objects in
prospectus.prospectus.
2.2.Public offer of securities to be in dematerialized Public offer of securities to be in dematerialized
form.form.

9. Advertisement Of ProspectusAdvertisement Of Prospectus
Section 30 of the companies Act Section 30 of the companies Act
provides that where an advertisement of provides that where an advertisement of
any prospectus of a company is published, any prospectus of a company is published,
it shall specify the contents of it shall specify the contents of
memorandum as regards to the objects, memorandum as regards to the objects,
the liability of members and the amount of the liability of members and the amount of
share capital, the names of the signatories share capital, the names of the signatories
and the number of shares subscribed by and the number of shares subscribed by
them and also its capital structure.them and also its capital structure.
Offer to the public.Offer to the public. A document A document
will be treated as a prospectus only when will be treated as a prospectus only when
it invites offers from the public.it invites offers from the public.

10. WHEN PROSPECTUS IS NOT WHEN PROSPECTUS IS NOT
REQUIRED TO BE ISSUED (SEC.26)REQUIRED TO BE ISSUED (SEC.26)
The issue of a prospectus by a company is not The issue of a prospectus by a company is not
necessary in the following case.necessary in the following case.
(1)When an offer is made in connection with a (1)When an offer is made in connection with a
bonafide invitation to a person to enter into a bonafide invitation to a person to enter into a
underwriting agreement with respect to shares underwriting agreement with respect to shares
or debentures.or debentures.
(2)When the shares or debentures are not (2)When the shares or debentures are not
offered to the public.offered to the public.
(3)Where the offer is made only to exiting (3)Where the offer is made only to exiting
members or debentures holder of the company members or debentures holder of the company
with or without a right to renounce. e.g. when with or without a right to renounce. e.g. when
shares are placed privately to less than 50 shares are placed privately to less than 50
persons.persons.

11. (4)Where the shares or debentures (4)Where the shares or debentures
offered are in all respects uniform with offered are in all respects uniform with
shares or debentures previously issued shares or debentures previously issued
and dealt in or quoted on a recognised and dealt in or quoted on a recognised
stock exchange.stock exchange.
(5)Where invitation to the public for (5)Where invitation to the public for
subscription to the shares or debentures subscription to the shares or debentures
of a company is made in the form of of a company is made in the form of
newspaper advertisement.(sec.30).newspaper advertisement.(sec.30).
(6) A private company is not required to (6) A private company is not required to
issue prospectus.[sec.2(35)]issue prospectus.[sec.2(35)]

12. LEGAL REQUIREMENTS IN LEGAL REQUIREMENTS IN
RELATION TO A PROSPECTUSRELATION TO A PROSPECTUS
1.1.Dating of prospectus (sec 26)Dating of prospectus (sec 26)
A prospectus issued by a company must A prospectus issued by a company must
be dated. Section 26 further provides be dated. Section 26 further provides
that the date on the prospectus shall, that the date on the prospectus shall,
unless contrary is provide, be taken as unless contrary is provide, be taken as
the date of the publication of the the date of the publication of the
prospectus. This ensures a prospectus. This ensures a prime facie prime facie
evidence of the date of its publication. evidence of the date of its publication.
However, this evidence may be rebutted However, this evidence may be rebutted
by a contrary evidence.by a contrary evidence.

13. 22. Registration of prospectus . Registration of prospectus
(sec.27(7))(sec.27(7))
A.A.Nature.Nature.
B.B.Time limit. Time limit.
C.C.Signatures.Signatures.
D.D.Date of issue of prospectus.Date of issue of prospectus.
E.E.Contents.Contents.
F.F.Enclosures.Enclosures.
G.G.Registration.Registration.
H.H.Penalty for non-registration of prospectus.Penalty for non-registration of prospectus.
I.I.Opening of subscription list.Opening of subscription list.

14. When Registrar can refuse When Registrar can refuse
registration(sec.26)registration(sec.26)
The registrar can refuse to register a The registrar can refuse to register a
prospectus if: prospectus if:
A.A.It is not dated;It is not dated;
B.B.It does not comply with the requirements of It does not comply with the requirements of
as to the matter and repots to be set out in as to the matter and repots to be set out in
it;it;
C.C.It contains statements or repot of experts It contains statements or repot of experts
engaged or interested in the formation or engaged or interested in the formation or
promotion or management of the company. promotion or management of the company.

15. CONTENTS OF PROSPECTUSCONTENTS OF PROSPECTUS
A prospectus is the most important document A prospectus is the most important document
since the intending investors base their decisions on since the intending investors base their decisions on
the facts and figures furnished in the prospectus. It the facts and figures furnished in the prospectus. It
is the window through which a prospective investor is the window through which a prospective investor
can look into the soundness of a company’s venture. can look into the soundness of a company’s venture.
In order to protect the interests of the investing In order to protect the interests of the investing
public against the frauds of the promoters, the public against the frauds of the promoters, the
companies Act requires every company issuing a companies Act requires every company issuing a
prospectus to observe a large number of regulation. prospectus to observe a large number of regulation.
Failure to observe them is made punishable with Failure to observe them is made punishable with
fine or imprisonment or both. Hence, utmost care fine or imprisonment or both. Hence, utmost care
should be taken in drafting a prospectus.should be taken in drafting a prospectus.

16. (A)MATTER IN PROSPECTUS(A)MATTER IN PROSPECTUS

Names and address. Names and address.

Dates of the opening and closing. Dates of the opening and closing.

A statement.A statement.

Detail about underwriting.Detail about underwriting.

Consent of the directors.Consent of the directors.

The authority for the issue. The authority for the issue.

Procedure and time. Procedure and time.

17. 
Capital structure.Capital structure.

Main objects.Main objects.

Main objects and present business.Main objects and present business.

Particulars.Particulars.

Minimum subscription.Minimum subscription.

Detail of directors.Detail of directors.

disclosuresdisclosures

18. (B)REPORTS IN PROSPECTUS (B)REPORTS IN PROSPECTUS
The prospectus must set out the The prospectus must set out the
following reports for the purposes of following reports for the purposes of
the financial information namely: the financial information namely:

Reports by the auditors.Reports by the auditors.

Reports relating to profits and losses. Reports relating to profits and losses.

Reports made by the auditors upon Reports made by the auditors upon
the profits and loses of the business.the profits and loses of the business.

19. (C) DECLARATION (C) DECLARATION
The prospectus shall make a declaration The prospectus shall make a declaration
about the compliance of the provisions of this about the compliance of the provisions of this
Act and a statement to the effect that nothing Act and a statement to the effect that nothing
in the prospectus in contrary to the provisions in the prospectus in contrary to the provisions
of this Act, the securities Contracts of this Act, the securities Contracts
(Regulation) Act, 1956 (42 of 1956) and the (Regulation) Act, 1956 (42 of 1956) and the
Securities and Exchange Board of India Act, Securities and Exchange Board of India Act,
1992 (15 of 1992) and the rules and 1992 (15 of 1992) and the rules and
regulation made there under.regulation made there under.
The prospectus shall also state such other The prospectus shall also state such other
matters and set out such other reports, as matters and set out such other reports, as
may be prescribed.may be prescribed.

20. BOOK BUILDINGBOOK BUILDING
Book Building is defined to mean a process by Book Building is defined to mean a process by
which demand for the securities proposed to be which demand for the securities proposed to be
issued by a body corporate is elicited and built-up issued by a body corporate is elicited and built-up
and the price for such securities is assessed for the and the price for such securities is assessed for the
determination of the quantum of such securities to determination of the quantum of such securities to
be issued by mean of a notice, circular, be issued by mean of a notice, circular,
advertisement, document or information advertisement, document or information
memorandum or other document.memorandum or other document.
thus, in case of a public issue through the thus, in case of a public issue through the
process of book-building, though the total size of the process of book-building, though the total size of the
issue is known, the number of shares is not known. issue is known, the number of shares is not known.
It is because the price at which shares will be It is because the price at which shares will be
allotted is not known, it’s determined through the allotted is not known, it’s determined through the
process of book-building only.process of book-building only.

21. LIABILITY FOR MIS-STATEMENTS IN LIABILITY FOR MIS-STATEMENTS IN
PROSPECTUSPROSPECTUS
Golden rule as to the framing of prospectus. A Golden rule as to the framing of prospectus. A
prospectus constitutes the basis of the contract between prospectus constitutes the basis of the contract between
the company and the person who purchase securities. the company and the person who purchase securities.
The persons who are behind the company have all the The persons who are behind the company have all the
knowledge or means of knowledge as to the present knowledge or means of knowledge as to the present
position and future prospects of the enterprise and the position and future prospects of the enterprise and the
investing public has none. It is but fair that the former investing public has none. It is but fair that the former
should not only disclosed all the matters within their should not only disclosed all the matters within their
knowledge relating to the enterprise, which might affect knowledge relating to the enterprise, which might affect
the investing mind but should state them accurately, the investing mind but should state them accurately,
correctly and unambiguously. A prospectus must, correctly and unambiguously. A prospectus must,
therefore, tell the truth the whole truth and nothing but therefore, tell the truth the whole truth and nothing but
truth. Also it must not conceal any fact which ought to truth. Also it must not conceal any fact which ought to
be disclosed. be disclosed.

22. What is an untrue statement?What is an untrue statement?
It is necessary to find out as to what It is necessary to find out as to what
constitutes an untrue statement. Whether a constitutes an untrue statement. Whether a
statement is untrue or not is to be judged by statement is untrue or not is to be judged by
the context in which it appears and the totality the context in which it appears and the totality
of impression it would create. A statement may of impression it would create. A statement may
be false, not only because of what it states but be false, not only because of what it states but
also because of what it conceals or omits. If also because of what it conceals or omits. If
taking the whole prospectus together, there taking the whole prospectus together, there
was really a misrepresentation of fact, the was really a misrepresentation of fact, the
contract may be set aside, though each contract may be set aside, though each
statement by itself is literally true. This leading statement by itself is literally true. This leading
case on this point iscase on this point is
Greenwood v. leather shod wheel Co.(1900) Greenwood v. leather shod wheel Co.(1900)

23. Who can be sued?Who can be sued?
Where a person Where a person
has bought shares has bought shares
on the faith of a on the faith of a
prospectus which is prospectus which is
mis-leading because mis-leading because
of a mis-statement of a mis-statement
in or an omission in or an omission
from the prospectus, from the prospectus,
he may have a legal he may have a legal
remedy against in or remedy against in or
any of the following:any of the following:
Liability for
mis-statement
In a prospectus
Civil
liability
Criminal
liability

24. Civil liability [sec.35(1)]Civil liability [sec.35(1)]

A person has subscribed for securities of a A person has subscribed for securities of a
company action on any statement includedcompany action on any statement included
or the inclusion or omission of any matter, in the or the inclusion or omission of any matter, in the
prospectus which is misleading and has prospectus which is misleading and has
sustained any loss or damage as a consequence sustained any loss or damage as a consequence
thereof, the company and every person who-thereof, the company and every person who-
(a)(a)Is a director of the company at the time of the Is a director of the company at the time of the
issue of the prospectus;issue of the prospectus;
(b)(b)Has authorized himself to be name and is Has authorized himself to be name and is
named in the prospectus as a director of the named in the prospectus as a director of the
company, or has agreed to become such company, or has agreed to become such
director, either, immediately or after an interval director, either, immediately or after an interval
of time; of time;
(c)(c) Is a promoter of the company;Is a promoter of the company;

25. (d) Has authorized the issue of the prospectus; and(d) Has authorized the issue of the prospectus; and
(e) Is an expert referred to in sec. 26(5).(e) Is an expert referred to in sec. 26(5).
shall, be liable to pay compensation to every shall, be liable to pay compensation to every
person who has sustained such loss or damage.person who has sustained such loss or damage.
Thus a person who has subscribed for Thus a person who has subscribed for
securities on the faith of the misleading securities on the faith of the misleading
prospectus has remedies against-prospectus has remedies against-
(a)(a)The company andThe company and
(b)(b) the directors, promoters, experts and every the directors, promoters, experts and every
personperson who authorized the issue of prospectus. who authorized the issue of prospectus.
Remedies against the company. A person who Remedies against the company. A person who
has been induced to subscribe for shares may (1) has been induced to subscribe for shares may (1)
rescind the contract to take the securities ; rescind the contract to take the securities ;
(2)claim damages. (2)claim damages.

26. Criminal LiabilityCriminal Liability
Sec.34 of the Companies Act, 2013 provides for Sec.34 of the Companies Act, 2013 provides for
criminal liability for misstatement in prospectus. It criminal liability for misstatement in prospectus. It
provides that where a prospectus, issued, circulated or provides that where a prospectus, issued, circulated or
distributed under this Chapter, includes any statement distributed under this Chapter, includes any statement
which is unture or misleading in form or context in which is unture or misleading in form or context in
which it is included or where any inclusion or omission which it is included or where any inclusion or omission
of any matter is likely to mislead, every person who of any matter is likely to mislead, every person who
authorizes the issue of such prospectus shall be liable authorizes the issue of such prospectus shall be liable
under sec. 447.under sec. 447.
In addition to penal provisions for untrue statement in In addition to penal provisions for untrue statement in
prospectus , now in case of prospectus containing prospectus , now in case of prospectus containing
statement which are misleading in form or context or statement which are misleading in form or context or
where any inclusion or omission of any matter is likely where any inclusion or omission of any matter is likely
to mislead, the persons who have to mislead, the persons who have authorised the issue authorised the issue
of the said prospectus shall also be criminally liable.of the said prospectus shall also be criminally liable.

27. Issue and allotment of shares in Issue and allotment of shares in
fictitious names[sec.38]fictitious names[sec.38]
Benami shareholding and shareholding in Benami shareholding and shareholding in
the name of fictitious or non existing persons the name of fictitious or non existing persons
are common. The object is avoid tax. Section are common. The object is avoid tax. Section
38 makes it an offence to make application 38 makes it an offence to make application
for shares in the name of, or to induce the for shares in the name of, or to induce the
allotment or transfer of shares to fictitious allotment or transfer of shares to fictitious
persons. The punishment in such cases is persons. The punishment in such cases is
imposed u/s 447 imposed u/s 447
(improvement for 6 months which may (improvement for 6 months which may
extend to 10 years or five equivalent to three extend to 10 years or five equivalent to three
times the amount of fraud) times the amount of fraud)