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PROSPECTUS AND ALLOTMENT OF SECURITIES
Public Offer and Private Placement [Section 23]
Type of Co. Public Issue Private Right Bonus Issue
(Section 23 to Placement Issue (No Funds
Section 41) (Section 42) raised)
23(1) Public Co. ✓ ✓ ✓ ✓
23(2) Private Co. × ✓ ✓ ✓
23(3) Such class of public companies may issue such class of securities for the purposes of
listing on permitted stock exchanges in permissible foreign jurisdictions or such other
jurisdictions, as may be prescribed.
23(4) The CG may exempt any class or classes of public companies referred in sub-
section (3) from any of the provisions of Chapter III, Chapter IV, section 89, section 90
or section 127 and a copy of every such notification shall, as soon as may be after it is
issued, be laid before both Houses of Parliament
Power of SEBI [Section 24]
(1) By making regulations, SEBI is empowered to administer provisions which relates to
issue & transfer of securities and non-payment of dividend;
- by listed companies or
- those companies which intend to get their securities listed on any recognised stock
exchange in India
(2) All other matters (including matters relating to prospectus, return of allotment, redemption
of preference shares) shall be administered by the CG, Tribunal or the RoC, as the case
may be.
Deemed Prospectus [Section 25]
(1) If Co. allots or agrees to allot securities to third party & such third partly offer all or any
of those securities to public then the document by which securities are offered to public
is treated as deemed prospectus
All legal provision applicable to prospectus also applies to deemed prospectus
(2) Presumption:- If any person accept that offer it will be treated as a subscriber
(3) In the below 2 cases, allotment is presumed to have been made with a view of offering
them to the public
(a) When all or any securities are offered by third person to public within 6 months
after allotment or agreement to allotment
Or
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(b)
Date on which third party made offer to Public, whole consideration of securities
was not received by the Co. from third person.
(4) Two additional disclosures in addition to section 26
→ Net amount received or to be received by Co. from third party
→ Time & Place at which contract for allotment may be inspected
(5) Section 26 apply as if persons making offer were named in prospectus as director of Co.
(6) Signing → In case of Co. - by 2 directors of Co.
In case of Firm - by not less than one – half of partners
Matters to be stated in Prospectus [Section 26]
(1) Prospectus – Dated & Signed by every director, proposed director or his authorised
attorney
(2) Prospectus shall state Info & report on Financial Info as specified by SEBI in consultation
with CG
(3) Unit then Info & Report of Financial info mentioned in regulation made by SEBI under
SEBI Act, 1992 shall apply
(4) Prospectus can be issued on formation or subsequently
(5) Co. to deliver prospectus to RoC on or before date of Publication
(6) Date of publication = Date indicated in prospectus
(8) Expert statement in Prospectus is allowed if
(a) Expert not involved in Formation/Promotion/Management of Co.
(b) Written Consent of Expert is taken
(c) Consent not withdrawn by Expert before delivery of Prospectus to ROC
(d) Prospectus must include the statement to this effect
(9) Disclosure on face of every Prospectus :-
(1) Copy of Prospectus has been delivered to RoC for filing
(2) List of all documents attached with Prospectus
(10)
From 91st day
Validity
Prospectus
Delivered If issued after 90th days
to RoC then Invalid Prospectus
Co. to issue prospectus
within 90 days
(11) If prospectus contravenes Sec 26 :-
(a) Co. & Every person Min 50 k – Max 3 lakhs
knowingly party to issue of prospectus
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Variation in Terms of Contract or Objects Stated in Prospectus [Section 27]
• The terms of a contract or objects for which the prospectus has been issued can be way
of special resolution passed through postal ballot.
• Details of the notice which has to be given to the shareholders are to be published in 2
newspapers (one English and one vernacular language) in Form PAS-1 indicating
clearly the justification for such variation.
• Advertisement shall be published simultaneously with dispatch of Postal Ballot
Notices to Shareholders. The notice shall also be placed on the website of the Co., if
any.
• Such Co. is not allowed to use any amount raised through prospectus for buying,
trading or otherwise dealing in equity shares of any other listed Co.
• Dissenting shareholders shall be given an exit offer by promoters or controlling
shareholders
Offer of Sale of Shares by Certain Members [Section 28]
• In consultation with board of directors, Members of a Co. may offer whole or part of
their holding of shares to the public
• Document by which the offer of sale to the public is made shall be treated as prospectus
issued by Co.
• The members whether individual or bodies corporate or both, whose shares are
proposed to be offered to the public, shall collectively authorise the Co. to take all
actions on their behalf for carrying out the transaction.
• They shall reimburse the Co. for all expenses made by it on this matter.
• The provisions of section 23 to 41 shall be applicable to an offer of sale referred to in
section 28 except for
(a) minimum subscription
(b) minimum application value
(c) any statement to be made by the Board of directors in respect of the utilization of
money; and
(d) any provision which cannot be compiled or gathered by the offer or, with detailed
justifications for not being able to comply with such provisions.
• The prospectus issued under section 28 shall disclose the name of the person or persons
or entity bearing the cost of making the offer of sale along with reasons.
Securities in Demat form [Section 29]
1. Following Co. shall issue securities in Dematerialised form by complying with
Depositories Act, 1996
a) Every Co. making Public Offer or
b) Co. as may be prescribed (i.e. Unlisted Public Companies)
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Advertisement of Prospectus [Section 30]
Where an advertisement of any prospectus is published, it shall be necessary to
mention following contents of its MOA:-
(a) Objects
(b) Liability of members
(c) Amount of share capital of the Co.,
(c) Names of the signatories to the memorandum,
(d) Number of shares subscribed by the signatories, and
(e) Capital structure of the Co.
Shelf Prospectus [Section 31]
Shelf Prospectus means prospectus through which one or more Public issues can be made
over a certain period without the issue of a further prospectus.
(1) Only those Co. can issue shelf prospectus which SEBI may Specify
(2) Co. to file Shelf Prospectus with RoC at the stage of First offer of securities
(3) Max validity Period of Shelf Prospectus = 1 Year
(4) Validity start from date of opening of first offer of securities
(5) In case of second or Subsequent offer
(a) No Further Prospectus is required
(b) Information memorandum (PAS-2) is required
(c) Content of Information Memorandum
(i) New Charges created
(ii) Change in financial position
(iii) Such other changes as maybe prescribed
(6) Time limit for Filing Info Memorandum - Within 1 month prior to the issue of
second/Subsequent offer
(7) If Co. received any advance before change, intimate the change to applicants and if
desires to withdraw their application then refund the advance money within 15 days
(8) Shelf Prospectus + Info. Memorandum shall be deemed to be Prospectus
Red Herring Prospectus [Section 32]
(1) Red herring Prospectus (RHP) means a prospectus which does not include complete
particulars of quantum/price of Securities
(2) Co. may issue RHP prior to issue of Final Prospectus
(3) Co. to file RHP with RoC atleast 3 days prior to opening of subscription list & offer
(4) Any variation in Red herring prospectus & final Prospectus shall be highlighted in the
final prospectus
(5) Upon the closing of Offer, Final Prospectus containing following details to be filed with
ROC & SEBI
(a) Total capital raised
(b) Closing price of securities
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(c)Any other details not in RHP
Issue of Application form [Section 33]
(1) Abridged Prospectus means a memorandum containing such salient features of a
prospectus
(2) Every application form for shares or debentures has to be accompanied with the
abridged prospectus except :-
(a) When application form is issued in connection with a bona fide invitation to a
person to enter into an underwriting agreement with respect to shares or
debentures
(b) In relation to shares or debentures which were not offered to the public; or
(c) Where offer is made only to existing members of the Co.
(3) On default, Co. is liable to penalty of Rs. 50,000 for each default
Criminal Liability for Mis-statements [Section 34]
(1) If Prospectus includes any statement which is untrue or misleading or Inclusion or
omission of any matter likely to mislead, every Person who authorises issue of
Prospectus liable for punishment under Section 447
(2) Exceptions:
(1) he proves that such statement or omission was immaterial
or
(2) he had reasonable grounds to believe & did upto the time of issue of prospectus
that
-Statement was true
or
- Inclusion/omission was necessary
Civil Liability for Mis-statements [Section 35]
(1) If subscriber has suffered any loss or damage as consequence of misstatement in
prospectus then
Co. Every Person i.e.
Director/Promoters/
Expert/Proposed
director/who
authorised issue of
prospectus
liable to pay the compensation to
every person who suffered loss
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(3) Above mentioned persons shall be personally liable w/o any limitation on
liability if prospectus has been issued for any fraudulent purpose.
(4) Exceptions under section 35
(1) (3)
(2)
Proposed Every misleading
Director Prospectus was issued w/o statement is from expert
his knowledge or consent referred u/s 26
and On becoming aware
Withdraw his he immediately issued
Consent before issue of public notice
prospectus
&
Prospectus issue without Prospectus was issued w/o
his authority/Consent his knowledge or consent
Punishment for Fraudulently Inducing Persons to Invest Money [Section 36]
Any person who, either knowingly or recklessly makes any statement, promise or forecast
which is false, deceptive or misleading, or deliberately conceals any material facts, to induce
another person to enter into, or to offer to enter into:
(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or
underwriting securities; or
(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any
of the parties from the yield of securities or by reference to fluctuations in the value of
securities; or
(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial
institution,
shall be liable for action under section 447.
Action by Affected Persons [Section 37]
A suit may be filed or any other action may be taken under section 34 or section 35 or section
36 by:
(a) Any person,
(b) Group of persons or
(c) Any association of persons
If affected by any misleading statement or the inclusion or omission of any matter in the
prospectus.
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Punishment for Personation for Acquisition, etc., of securities [Section 38]
Any person shall be liable for punishment under section 447, if:
(a) He makes or abets the making of an application in a fictitious name to a Co. for acquiring,
or subscribing for, its securities; or
(b) He makes or abets the making of multiple applications in different names or different
combinations of his name or surname for acquiring or subscribing for its securities; or
(c) otherwise induces, directly or indirectly a Co. to allot or register any transfer of any
securities to him or to any other person in a fictitious name.
Sub-section 2, provides that every Co. which issues a prospectus is required to reproduce
prominently the provisions of the sub- section (1) in the prospectus and every form of
application for securities.
Punishment for Fraud [Section 447]
Amount and nature Fine Imprisonment
of fraud Minimum Maximum Minimum Maximum
Fraud involving less – Up to ₹ 50 or/and – Up to 5
than 10 lakh rupees or lakh years
10% of turnover,
whichever is lower
(public interest not
involved)
Fraud involving at least Equal to 3 times of And 6 Months 10 Years
10 lakh rupees or 1% of amount of amount of
turnover, whichever is fraud fraud
lower (public interest
not involved)
Fraud in question Equal to 3 times of And 3 Years 10 Years
involves public interest amount of amount of
fraud fraud
Allotment of Securities [Section 39]
(1) Securities to Public cannot be allotted unless:-
(i) Minimum Subscription mentioned in Prospectus has been subscribed and
(ii) Application money on such subscription has been received by the Co.
(2) Amount payable on application shall not be less than 5% of the nominal amount of
security
(3) Whenever a Co. makes any allotment of securities, it shall file a return of allotment in
form PAS -3 with RoC within 30 days
(4) If Minimum Subscription not subscribed and Minimum Application money not received
within the period specified therein
- then repay application money within 15 days from closure of issue
- if not so repaid then directors who are officer in default shall jointly and severally
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liable to repay money with interest @ of 15 % p.a.
(5) Refund money shall be credited only to the bank account from which the subscription
was remitted.
Mandatory Listing [Section 40]
(1) Every Co. before making public offer
- must file Application with 1 RSE or More RSEs
- obtain permission for securities to be dealt in such RSEs
(2) Prospectus to state the name or names of RSE in which the securities shall be dealt with
(3) All monies received from Public for subscription shall be kept in Separate Bank A/c in
Scheduled Bank
(4) Such Money Can be utilised only for 2 Purposes: -
(1) Adjustment against allotment of Securities
(2) Repayment of Money, if unable to allot securities
(5) Payment of Underwriter Commission: -
(a) -Authorised by AOA
(b) - Source of Commission payment
(i) Proceeds of the issue
or
(ii) Profits of the Co.
or
(iii) Both
(d) - Maximum Rate of Commission
Shares Debentures
(equity/Preference) Lower of
Lower of 2.5% of Issue Price
(a) 5% of Issue Price Rate mentioned in AoA
(b) Rate mentioned in AoA
(d) Filing of copy of underwriter contract for payment of commission with RoC at the time
of delivery of Prospectus
(e) Prospectus shall disclose
- the name of the underwriters;
- the rate and amount of the commission payable to the underwriter; and
- the number of securities which is to be underwritten or subscribed by the underwriter
absolutely or conditionally.
(f) No commission shall be paid to any underwriter on securities, which are not offered to
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the public for subscription.
(6) If default is made in complying with this section
Defaulter Minimum Fine Maximum Fine
Company 5,00,000 50,00,000
Defaulting Officer 50,000 3,00,000
Global Depository Receipt [Section 41]
(1) Co. may issue GDRs in any foreign country after passing a special resolution
(2) GDRs can be issued by way of public offer or private placement
(3) GDRs may be issued against issue of new shares or shares held by shareholders of the
Co.
(4) Shares shall be allotted in the name of the overseas depository bank
(5) Until conversion of GDRs, the overseas depository shall be entitled to vote on behalf of
the holders of GDRs
(6) Only upon conversion of the depository receipts into underlying shares, holder of GDRs
may become a member of the Co. and shall be entitled to vote
Private Placement [Section 42]
(1) Section is applicable to both Public Co. & Private Co.
(2) For making Private Placement (PP), Co. needs to comply all provisions of Sec 42
(3) Applicable to Securities (Equity / Preference shares & Debentures)
(4) Offer to Maximum 200 Identified Persons aggregate in FY
(5) While computing limit of 200, Qualified Institutional Buyer (QIB) & Employees to
whom securities are offered under ESOP are not Counted
(6) Limit of 200 is security wise: -
for equity shares – 200
for Preference shares – 200
for Debentures - 200
(7) Limit of 200 is not applicable to
NBFCs & Housing Financing Co.
Follow RBI National Housing
Limit Bank Limit
(8) If any private Co. is issuing shares under private placement, then remember maximum
number of members in a private Co. cannot exceed 200.
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(9) Co. makes PP to Unidentified Persons Deemed Public offer
or
More than 200 persons
(10) For Private Placement offer
Non-Convertible Other
Debentures Securities
Within limit Exceeding limit
u/s 180 u/s 180 (1) Board Resolution
(100% of +
PUSC + Free (2) Special Resolution
Reserve + Securities (1) Board Resolution
Premium) +
(2) Special Resolution For every PP Offer
(only Once in a year)
Only Board Note: Issue to QIB - Only Once
Resolution in a year for that QIB
(11) Content of Explanatory statement annexed to notice given to Members for Special
Revolution
(a) Particulars of offer
(b) Date of passing of board Resolution
(c) Kinds of Securities offered
(d) Price at which securities are offered
(e) Basis for price
(f) Name & address of Valuation Expert
(g) Total amount to be raised
(12) When a Co. makes an offer or invitation to subscribe to securities, no offer or invitation
of any securities shall be made to a body corporate incorporated in, or a national of, a
country which shares a land border with India i.e. China, Bhutan, Nepal, Pakistan,
Bangladesh, and Myanmar., unless such body corporate or the national, as the case may
be, have obtained Government approval under the FEMA Rules, 2019 and attached the
same with the private placement offer cum application letter.
(13) Identified Persons cannot pay consideration in cash
(14) Money to be received from applicants bank A/c only However in case of Joint holder
money must be received from that person whose name appears first in the list
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(15) New Private Placement offer cannot be made by the Co. unless & until old Private
Placement offer is completed or withdrawn.
(16)
Allotment
Application
within 60 days If not allotted, Refund
Money received
Money within next 15 days
Note:- If money not refunded within 15 days, interest payable by Co. @12%p.a. from the
expiry of the sixtieth day
(17) Money to be kept in separate bank A/c of Scheduled bank & can be utilised for 2
purposes only
(a) Adjustment against allotment of Securities or
(b) Repayment of Money to Subscribers if co. unable to allot securities
(18) No Co. making Private Placement can issue public advertisements
(19) Return of Allotment (PAS – 3) to be filed with RoC within 15 days from date of
Allotment of Securities
(20) If Return of Allotment not filed - Co., its Promoters and directors for each default
Rs. 1000/day upto Maximum Rs. 25 Lakh
(21) Penalty for making offer or accepting money in contravention to section 42 :-
Liable Nature Description
of
penalty
Promoters and Fine Amount raised through the private placement
Directors OR
2 crores rupees,
whichever is lower
Company Refund All monies along with interest to subscribers
within a period of thirty days of the order
Important Definition
Prospectus means
- 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.