Unit-4 CL

COMPANY LAW
UNIT-4 PROSPECTUS
SYNOPSIS
 Definition
 Meaning
 Object and content
 Types of prospectus
 Abridged prospectus
 Shelf prospectus
 Red herring prospectus
 Misstatements in prospectus
 Consequences
PROSPECTUS MEANING
The prospectus is a legal document, which outlines the company’s financial securities for sale to the
investors.
A prospectus provides detailed information about the company’s financials, business operations,
management, risks, and other relevant information that investors need to know before investing in
the company’s securities.
In the context of company law, a prospectus is regulated by the Companies Act, which sets out the
requirements and guidelines for preparing and issuing prospectuses.
The Companies Act lays down the mandatory disclosures that must be made in a prospectus to
ensure transparency and investor protection.
A prospectus must be registered with the regulatory authority before it can be used for offering
securities to the public.
According to the companies act 2013, there are four types of the prospectus, abridged prospectus,
deemed prospectus, red herring prospectus, and shelf prospectus.
PROSPECTUS DEFINITION
The prospectus is a legal document for market participants and investors to pursue, detailing the
features, prospects, and promise of a financial product.
It is mandated by the law to be supplied to prospective customers.
Example-
 In an IPO, the prospectus tells potential shareholders about the company’s plans and business
model.
 For insurance and investment fund customers, a prospectus lists out the objective of the
product, inclusions, and exclusions, fees, etc.
 For an ETF, a prospectus informs likely investors of the fund’s goals, history, portfolio, fees
and costs, and other financial details.
PROSPECTUS AND ITS IMPORTANCE
The company provides prospectus with capital raising intention. Prospectus helps the investors to
make a well-informed decision because of the prospectus all the required information of the
securities which are offered to the public for sale.
Whenever the company issues the prospectus, the company must file it with the regulator. The
prospectus includes the details of the company’s business, financial statements.
 To notify the public of the issue
 To put the company on record with regards to the terms of the issue and allotment process
 To establish accountability on the part of the directors and promoters of the company
TYPES OF PROSPECTUS
According to Companies Act 2013, there are four types of prospectus.
Deemed Prospectus –
 Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1).
 When a company allows or agrees to allot any securities of the company, the document is
considered as a deemed prospectus via which the offer is made to investors.
 Any document which offers the sale of securities to the public is deemed to be a prospectus
by implication of law.
Red Herring Prospectus –
 Red herring prospectus does not contain all information about the prices of securities offered
and the number of securities to be issued.
 According to the act, the firm should issue this prospectus to the registrar at least three before
the opening of the offer and subscription list.
 The RHP contains all the relevant information about the company’s shares or debentures,
except for the final offer price. It is filed with the ROC and circulated to potential investors
for their consideration.
Shelf prospectus –
 Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is
issued when a company or any public financial institution offers one or more securities to the
public.
 A company shall provide a validity period of the prospectus, which should not be more than
one year. The validity period starts with the commencement of the first offer.
 There is no need for a prospectus on further offers. The organization must provide an
information memorandum when filing the shelf prospectus.
Abridged Prospectus –
 Abridged prospectus is a memorandum, containing all salient features of the prospectus as
specified by SEBI.
 This type of prospectus includes all the information in brief, which gives a summary to the
investor to make further decisions.
 A company cannot issue an application form for the purchase of securities unless an abridged
prospectus accompanies such a form.
 Rule 3 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: This rule
outlines the requirements for the contents of an Abridged Prospectus, including the
information to be included in the prospectus and the procedures for filing and circulation of
the Abridged Prospectus.
PROSPECTUS AND ITS CONTENTS

The prospectus contents are specified in the Companies Act. The prospectus must touch over the
following content points:
 Details of the company, such as name, registered office address, and objects
 Details of signatories to the Memorandum and their shareholding particulars
 Details of the directors
 Details of shares offered and the class of the issue as well as voting rights
 Minimum subscription amount
 The amount payable on application, on allotment, and on further calls
 Underwriters of the issue
 Auditors of the company
 Audited reports regarded profit and losses of the company
MISSTATEMENTS IN PROSPECTUS AND THEIR CONSEQUENCES

Section 34 of the Companies Act 2013 makes persons who are responsible for any false statements
or misstatements in a prospectus issued by a company liable to punishment.
The sections opines that any person who is responsible for the issue of a prospectus which contains
false statements or misstatements recklessly shall be liable to punishment which may extend up to
five years of imprisonment and a fine three times the value of the securities issued by the company
or the fraud committed, whichever is higher.
Under Section 34, a person found guilty of making false statement in a prospectus will be liable for
the prescribed punishment.
The general principles for liability for false statement in prospectus as per Companies Act 2013 are
given below:
Criminal Liability: A person who authorizes the issue of a prospectus which includes any false
statement or misstatement made recklessly or fraudulently shall be liable for criminal prosecution
and punishment which may extend to five years of imprisonment and fine extending up to three
times the amount of value of the securities issued by the company or the fraud committed,
whichever is higher.
The person found liable for making false statements may also be liable for a penalty extending up to
one-half of the amount of fraud committed.
Strict Liability: Under Section 34, there is a general principle of strict liability. That is, any person
found to be responsible for misstatement or false statement in the prospectus, whether or not the
prospectus is published, shall be liable.
This principle has been held to be applicable to promoters, directors, promoters of a company,
advisers who help in preparing the prospectus and persons who authorize the issue of prospectus.
Direct Liability: Under Section 34, direct liability for misstatement or false statement lies on any
person found to be responsible for the issue of a prospectus. The concept of direct liability implies
that anyone found to be responsible for misstatement, false statement, or fraud in the prospectus is
liable and shall be prosecuted irrespective of whether that person is a promoter, director, or other
company personnel.
Civil Liability: Under Section 35, persons who have caused false statement or fraud by any means
in a prospectus shall be liable in civil action also.
Such actions against persons can form the basis of claims for damages, rescission (cancellation of
contract) or restitution.

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COMPANY LAW

PROSPECTUS AND ITS CONTENTS

MISSTATEMENTS IN PROSPECTUS AND THEIR CONSEQUENCES

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