PPT- 05, Unit- IV

Company Law
(Prospectus )
Prospectus -

 Whether you are starting a new company, raising money through

issuing of shares or buying shares of any company, you are required
to have the necessary knowledge about the prospectus of a company.
  It is based on the prospectus of a company that an investor decides
whether or not to become a shareholder of that company.
 As a prospectus decides the fate of the company and shareholders,
concealment of any material facts or untrue statement would attract
civil or criminal liability towards the company.
What is a prospectus under Company Law ?

 A prospectus is a formal document given out by a company, when

such a company wants to sell its securities to the public, containing all
the necessary details about the sale, including the company’s
financial position, the number of shares offered, types of securities
being offered, etc.
 As per Sec- 2 (70), The Prospectus can be defined as:
 any document described or published as a prospectus”
 It includes notices, circulars, advertisements, or any document
acting as an invitation to offers from the public.
 Shelf prospectus and red herring prospectus are also considered as
a prospectus.
Essentials for a document to be called as a prospectus-

 For any document to be considered as a prospectus, it should

satisfy following conditions.
 The document should invite the subscription to public share or
debentures, or it should invite deposits.
 Such an invitation should be made to the public.
 The invitation should be made by the company or on the behalf
company.
 The invitation should relate to shares, debentures or such other
instruments.
Public Offer and Private Placement
[ Sec- 23 ]

 A public company may issue securities to public through prospectus

( to be referred to as “Public Offer” by complying with the provisions
of Part- I of Chapter 3 on Prospectus and Allotment of Securities).
[ Sec.23-41]
 It may also be done through private placement by complying with
the provisions of Part- II of Chapter 3 [ Sec. 42].
 It may also be done through Rights Issue and Bonus Issue by
complying with the provisions of the Act and in case of public listed
company by complying with the provisions of the SEBI Act, 1992.
Explanation to the Sec. 23-

 An Explanation to the section says that a public offer includes initial

public offer or further public offer of securities to the public by a
Company, or an offer for sale of securities to the public by an existing
shareholder, through issue of prospectus.
Public offer and Private Placement-
Contents of prospectus ( Matters to be
stated in prospectus) [ Sec. 26]

 For filing and issuing the prospectus of a public company, it must be signed
and dated and contain all the necessary information as stated under 
section 26 of the Companies Act,2013:-
 Name and registered address of the office, its secretary, auditor, legal
advisor, bankers, trustees, etc.
 Date of the opening and closing of the issue.
 Statements of the Board of Directors about separate bank accounts where
receipts of issues are to be kept.
 Statement of the Board of Directors about the details of utilization and
non-utilisation of receipts of previous issues.
Consent of the directors, auditors, bankers to the issue, expert opinions.

Authority for the issue and details of the resolution passed for it.

Procedure and time scheduled for the allotment and issue of securities.

The capital structure of the company in the prescribed manner.

The objective of a public offer.

The objective of the business and its location.

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.
 Minimum subscription and what amount is payable on the premium.
 Details of directors, their remuneration and extent of their interest in
the company.
 Reports for the purpose of financial information such as auditor’s
report, report of profit and loss of the five financial years, business
and transaction reports, statement of compliance with the provisions
of the Act and any other report.
Filing of copy with the registrar :

 As stated under sub-section 4 of section 26 of the Companies Act,

2013, the prospectus is not to be issued by a company or on its behalf
unless on or before the date of publication, a copy of the prospectus
is delivered to the registrar for registration.
 The copy should be signed by every person whose name has been
mentioned in the prospectus as a director or proposed director or by
his duly authorized attorney.
Delivery of copy of the prospectus to the registrar :

 As per section 26(6) of the Companies Act 2013, the prospectus

should mention that its copy has been delivered to the registrar on its
face. The statement should also mention the document submitted to
the registrar along with the copy of the prospectus.
Registration of prospectus:

 Section 26(7) states about the registration of a prospectus by the

registrar. According to this section, when the registrar can register
a prospectus when:
 It fulfils the requirements of this section, i.e., section 26 of the
Companies Act, 2013; and
 It contains the consent of all the persons named in the prospectus in
writing.
Issue of prospectus after registration:

 Under Sec. 26(8)- If a prospectus is not issued within 90 days from

the date from which a copy was delivered before the registrar, then it
is considered to be invalid.
 Contravention of section
 If a prospectus is issued in contravention of the provision under
section 26 of the Companies Act 2013, then the company can be
punished under section 26(9). The punishment for the contravention
is:
 Fine of not less than Rs. 50,000 extending up to 3,00,000.
 If any person becomes a party of such prospectus after knowing the
fact that such prospectus is being issued in contravention of section
26 then he is punishable with the following penal provisions.
 Imprisonment up to a term of 3 years, or
 Fine of more than Rs. 50,000 not exceeding Rs. 3,00,000.
Variation in terms of contract or objects
in prospectus: Sec- 27

 (1) A company shall not, at any time, vary the terms of a contract referred
to in the prospectus or objects for which the prospectus was issued,
except subject to the approval of, or except subject to an authority given
by the company in general meeting by way of special resolution:
 Provided that the details, as may be prescribed, of the notice in respect
of such resolution to shareholders, shall also be published in the
newspapers (one in English and one in vernacular language) in the city
where the registered office of the company is situated indicating clearly
the justification for such variation:
 Provided further that such company shall not use any amount raised
by it through prospectus for buying, trading or otherwise dealing in
equity shares of any other listed company.
 (2) The dissenting shareholders being those shareholders who have
not agreed to the proposal to vary the terms of contracts or objects
referred to in the prospectus, shall be given an exit offer by promoters
or controlling shareholders at such exit price, and in such manner and
conditions as may be specified by the Securities and Exchange Board
by making regulations in this behalf.
Advertisement of prospectus:
Sec-30
 Where an advertisement of any prospectus of a company is published in
any manner, it shall be necessary to specify therein the contents of its
memorandum as regards the objects, the liability of members and the
amount of share capital of the company, and the names of the signatories
to the memorandum and the number of shares subscribed for by them,
and its capital structure.
 Types of the prospectus as follows.
 Red Herring Prospectus
 Shelf Prospectus
 Abridged prospectus > Deemed Prospectus
Shelf Prospectus : Sec- 31

 Shelf prospectus can be defined as a prospectus that has been issued by

any company 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 provisions related to shelf prospectus has been discussed
under section 31 of the Companies Act, 2013.
 The regulations are to be provided by the Securities and Exchange Board
of India for any class or classes of companies that may file
 a shelf prospectus at the stage of the first offer of securities to the
registrar.
 The prospectus shall prescribe the validity period of the prospectus and it
should be not be exceeding one year. This period commences from the
opening date of the first offer of the securities. For any second or further
offer, no separate prospectus is required.
 While filing for a shelf prospectus, a company is required to file an
information memorandum along with it.
 Reference- Securities and Exchange Board of India (Issue and Listing of Non-
Convertible Securities) Regulations, 2021
Information Memorandum [Section 31(2)]

 The company which is filing a shelf prospectus is required to file the

information memorandum. 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.
 When any company or a person has received an application for the
allotment of securities with advance payment of subscription before any
changes have been made, then he must be informed about the changes. If
he desires to withdraw the application within 15 days then the money must
be refunded to them
Red herring prospectus : (Sec-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.
 The applicant or subscriber has right under Section60B(7) to
withdraw the application on any intimation of variation within 7 days
of such intimation and the withdrawal should be communicated in
writing.
Abridged Prospectus :

 The abridged prospectus is a summary of a prospectus filed before

the registrar. It contains all the features of a prospectus. 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.
 Section33(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:

 A deemed prospectus has been stated under 

section 25(1) of the Companies Act, 2013.
 When any company to offer securities for sale to the public,
allots or agrees to allot securities, the document will be
considered as a deemed prospectus through which the offer is
made to the public for sale. The document is deemed to be a
prospectus of a company for all purposes and all the provision
of content and liabilities of a prospectus will be applied upon it.
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