Module 2

Company Formation
Company Formation
• Company formation is a lengthy process and there are several
stages involved in this.
• The various stages are:
• Promotion
• Incorporation or Registration
• Capital Subscription
• Commencement of Business
• Out of the above-mentioned stages only the first two are
necessary for a formation of a private company and of a public
company with no share capital.
• These can commence businesses soon after they receive the
COI.
Promotion
• The entire process by which a company is brought into existence
• It starts with the conceptualization of the birth of a company and the
determination of the purpose for which it is to be formed
• The persons who conceive the idea of a company and invest the initial
funds are known as the promoters of the company
• The promoters enter into preliminary contracts with vendors and make
arrangements for the preparation, advertisement and circulation of
prospectus and placement of capital
• However, a person who merely acts in his professional capacity on behalf of
the promoter (eg lawyer, CA) for drawing up the agreement or other
documents or prepares the figures on behalf of the promoter and who is paid
by the promoter is not a promoter
Promoter
• The idea of carrying on a business which can be profitably undertaken
is conceived either by a person or by a group of persons who are called
promoters.
• After the idea is conceived, the promoters make detailed investigations
to find out the weaknesses and strong points of the idea, to determine
the amount of capital required and to estimate the operating expenses
and probable income.
Promoter - Definition
• According to section 2(69) of the Companies Act, 2013 the term
‘Promoter’ can be defined as the following:
1.A person who has control over the affairs of the company, directly or indirectly
as a shareholder, director or otherwise; or
2.A person who has been named as such in a particular or is identified by the
company in the annual return referred to in section 92; or
3.A person in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act:
 Module 2

Company Formation
Promoter - Definition
• According to L.J. Brown. “The term promoter is a term not of law but
of business, usefully summing up in a single word a number of
business operations familiar to the commercial world by which a
company is generally brought into existence.”

• According to Justice C. Cockburn. “Promoter is one who undertakes

to form a company with reference to a given object and to set it going,
and who takes the necessary steps to accomplish that purpose.”
Promoter - Functions
1. To conceive an idea of forming a company and explore its
possibilities
2. To conduct the necessary negotiation for the purchase of business in
case it is intended to purchase as existing business. In this context,
the help of experts may be taken, if considered necessary
3. To collect the requisite number of persons (i.e. seven in case of a
public company and two in case of a private company) who can sign
the ‘Memorandum of Association’ and ‘Articles of Association’ of
the company and also agree to act as the first directors of the
company
Promoter - Functions
4. To decide about the following:
i. The name of the Company,
ii. The location of its registered office,
iii. The amount and form of its share capital,
iv. The brokers or underwriters for capital issue, if necessary,
v. The bankers,
vi. The auditors,
vii. The legal advisers.
Promoter - Functions
5. To get the Memorandum of Association (MoA / MA) and Articles of
Association (AoA / AA) drafted and printed
6. To make preliminary contracts with vendors, underwriters
7. To make arrangement for the preparation of prospectus, its filing,
advertisement and issue of capital
8. To arrange for the registration of company and obtain the certificate
of incorporation
9. To defray preliminary expenses
10. To arrange the minimum subscription
Legal Position of a Promoter
• The promoter is neither a trustee nor an agent of the company because
there is no company yet in existence. The correct way to describe his
legal position is that he stands in a fiduciary position towards the
company about to be formed.
• Lord Cairns has correctly stated the position of promoter in Erlanger
V. New Sembrero Phosphate Co. (1878)
• “The promoters of a company stand undoubtedly in a fiduciary position. They
have in their hands the creation and moulding of the company. They have the
power of defining how and when and in what shape and under what
supervision, it shall start into existence and begin to act as a trading
corporation.”
Legal Position of a Promoter
From the fiduciary position of promoters, the two important results
follow:
• A promoter cannot be allowed to make any secret profits. If it is found that
in any particular transaction of the company, he has obtained a secret profit
for himself, he will be bound to refund the same to the company
• The promoter is not allowed to derive a profit from the sale of his own
property to the company unless all material facts are disclosed. If he
contracts to sell his own property to the company without making a full
disclosure, the company may either repudiate/rescind the sale or affirm the
contract and recover the profit made out of it by the promoter

• A promoter who wishes to sell his own property to the company must make
a full disclosure of his interest.
Legal Position of a Promoter
• The disclosure may be made:
(i) To an independent Board of Directors, or
(ii) In the Articles of Association of the company, or
(iii) In the prospectus, or
(iv) To the existing and intended shareholders directly
• If the promoter fails to discharge the obligation demanded of his fiduciary
position the company may rescind the contract or may in the alternative
choose to take advantage of the contract and sue the promoter for damages
for breach of his duty to the company
• Secret profits on the sale of property can be recovered from a promoter only
when the property was bought and sold to the company while he was acting
as a promoter
Rights of Promoter
1. Right of Indemnity
• Where more than one person act as the promoters of the company, one
promoter can claim against another promoter for the compensation and
damages paid by him. Promoters are severally and jointly liable for any untrue
statement given in the prospectus and for the secret profits.
2. Right to receive the legitimate preliminary expenses
• A promoter is entitled to receive the legitimate preliminary expenses which he
has incurred in the process of formation of the company such as cost of
advertisement, fee of solicitor and surveyors.
• The right to receive the preliminary expenses is not a contractual right. It
depends upon the discretion of the directors of the company. The claim for
expenses should be supported by vouchers.
Rights of Promoter
3. Right to receive the Remuneration
• A promoter has no right against the company for his remuneration unless there
is a contract to that effect.
• In some cases, articles of the company provide for the directors paying a
specified amount to promoters for their services but this does not give the
promoters any contractual right to sue the company. This is simply an
authority vested in the directors of the company.
Rights of Promoter
The remuneration may be paid in any of the following ways:
i. A commission may be paid to the promoter on the purchase price of the
business or property taken over by the company through him
ii. The promoters may be granted by the company a lumpsum amount
iii. The promoters may be given fully or partly paid shares in consideration of their
services rendered
iv. The promoter may be given a commission at a fixed rate on the shares sold
v. The promoter may purchase the business or other property and sell the same to
the company at an inflated price, he must disclose this fact
vi. The promoters may take an option to subscribe within a fixed period for a
certain portion of the company’s unissued shares at par
Whatever be the nature of remuneration, it must be disclosed in the prospectus if
paid within the preceding two years from the date of prospectus.
Duties of Promoter
1. To disclose the secret/hidden profit
• The promoter should not make any secret profit. If he has made any secret
profit, it is his duty to disclose all the money secretly obtained by way of
profit. He is empowered to deduct the reasonable expenses incurred by him.
2. To disclose all the material facts
• The promoter should disclose all the material facts. If a promoter contracts to
sell the company a property without making a full disclosure, and the property
was acquired by him at a time when he stood in a fiduciary position towards
the company, the company may either repudiate the sale or affirm the contract
and recover the profit made out of it by the promoters.
Duties of Promoter
3. The promoter must make good to the company what he has obtained
as a trustee
• A promoters stands in fiduciary position towards the company. It is the duty of the
promoter to make good to the company what he has obtained as trustee and not what
he may get at any time.
4. Duty to disclose private arrangements
• It is the duty of the promoter to disclose all the private arrangement resulting him
profit by the promotion of the company.
5. Duty of promoter against the future allottees
• When it is said the promoters stand in a fiduciary position towards the company then
it does not mean that they stand in such relation only to the company or to the
signatories of memorandums of company and they will also stand in this relation to
the future allottees of the shares.
Liabilities of Promoter
1. Liability to account in profit
• As we have already discussed that promoter stands in a fiduciary position to the
company. The promoter is liable to account to the company for all secret profits made
by him without full disclosure to the company. The company may adopt any one of
the following two courses if the promoter fails to disclose the profit.
• The company can sue the promoter for an amount of profit and recover the same with interest.
• The company can rescind the contract and can recover the money paid.
2. Liability for mis-statement in the prospectus
• Section 62(1) holds the promoter liable to pay compensation to every person who
subscribes for any share or debentures on the faith of the prospectus for any loss or
damage sustained by reason of any untrue statement included in it. Sec. on 62 also
provides certain grounds on which a promoter can avoid his liability. Similarly Sec.
63 provides for criminal liability for mis-statement in the prospectus and a promoter
may also become liable under this section.
• The promoter may also be imprisoned for a term which may extend to two years or
may be punished with the fine upto Rs. 5,000 for untrue statement in the prospectus.
(Sec. 63).
Liabilities of Promoter
3. Personal liability
• The promoter is personally liable for all contracts made by him on behalf of
the company until the contracts have been discharged or the company takes
over the liability of the promoter.

4. Liability at the time of winding up of the company

• In the course of winding up of the company, on an application made by the
official liquidator, the court may make a promoter liable for misfeasance or
breach of trust. (Sec. 543).
• Further where fraud has been alleged by the liquidator against a promoter, the
court may order for his public examination. (Sec. 478).
Kinds of Promoters
1. Professional Promoters
• Professional Promoters are the specialists in the promotion of a company.
• When the business starts, they give up companies to the shareholders.

2. Occasional Promoters
• They take interest in promoting only some companies and they doesn’t involve in
promotion on regular basis and take up promotions of some company and then go
back to their previous profession.

3. Financial Promoters
• Some financial institutions take up the promotion of the company when the financial
situation or environment is favorable.
Steps involved during the Promotion of a Company

1. Discovery of an Idea
2. Investigation
3. Planning
4. Financing
5. Approval of Name
6. Signatories to MoA / AoA
7. Preparing necessary Documents
8. Registration
 Law with regard to Start Ups
1. Business Structure Formalization

• There is a need for understanding and applying proper business structure because
of the different business structure have different business applications while
carrying out the business.
• There are different forms of business structure such as a proprietorship,
partnership, limited liability partnership, and private limited company.
• There are different basic legal details such as registration, legal status, taxation,
member liability, number of members allowed
Law with regard to Start Ups
2. Licensing Business

• Every business needs licenses according to the type of business carried out.
• Before launching a startup the appropriate licensing issuing process must start
to stay away from the legal battles at the inception.
• All the licenses vary from business to business. For example:- if an e-
commerce company has to be started than GST, registration, and professional
taxes would be applied. The common licensing applied for most of the
business under the law is the shop and establishment act, 1953.
Law with regard to Start Ups
3. Taxation And Accounting Laws

• The government scheme of startup India launched provided many tax

exemptions for startups. Different business needs different tax policy to be
applied according to the tax and business structure applied.
• For tax exemptions in a startup, the first 7 years' lifespan has can be availed for
tax benefits. The organization must be registered as the limited liability
partnership, company. The total turnover for the starting years must not be
more than 25 crores annually.
• Every firm or business needs to maintain proper accounts and tax audits to
adhere to the taxation rules applied and adhered to in the country.
 Law with regard to Start Ups
4. Labour Laws
• As every business firm has employees or labour which helps in proper and efficient
functioning daily.
• Many laws related to labours like minimum wages act, gratuity, Provident funds, paid
holidays to workers, maternity benefits, harassment at workplace, payment of bonus
• Even the government has provided an exemption from labour inspection for a startup if they
apply all the major 9 labour laws of the country regularly for worker's benefit:
• The Industrial Disputes Act, 1947
• The Trade Unit Act, 1926
• The Inter-State Migrant Workmen (Regulation of Employment and Service) Act, 1979
• The Payment of Gratuity Act, 1972
• The Employees Provident Funds and Miscellaneous Provisions Act, 1952
• The Employees State Insurance Act, 1948.
• Building and Other Constructions Workers (Regulation of Employment and Conditions of Service) Act,
1996
• The Industrial Employment (Standing Orders) Act, 1946
• The Contract Labour (Regulation and Abolition) Act, 1970
• Proper employee's and worker's policies may help in increasing the morale and efficiency in the working of
the workers.
Law with regard to Start Ups
5. Intellectual Property Rights Protection
• Startups many times come up with unique unusual ideas that can be protected in this
world using certain laws.
• Our innovative product, improved process or procedure of making something in a
better way can be counted as our innovative property rights.
• The startup scheme for intellectual property rights is related to the startup India
program.
• This scheme would make sure the protection and commercialization of intellectual
property and manage the trademark, copyright, and designs involved in the business
startup. Under these regulations for new startups, the government has reduced the
patent fees by 80% The panel would also have the duty to inform people in the
market about the procedure of filing for patents or any other intellectual property.
Law with regard to Start Ups
6. Foreign Investments
• For encouraging foreign investment in the startup there are regulations for foreign
venture capital investors (FVCI). Schedule 6 of the foreign exchange management act
(FEMA), 2000

7. Business Contract Management

• The proper legal contract is judged under the Indian contract act, 1872. For making a
valid contract the conditions in Section 10 of the Contract Act must be fulfilled. The
first contract in business is the employment contract which should be effectively
made.
• The non-disclosure agreements would also prove beneficial for the startup as for
setting up the startup host has to share ideas about the working to investors, suppliers,
customers and from this, there is a huge possibility of misuse of ideas. So the
nondisclosure contracts help in preventing the information from getting spread.
 Law with regard to Start Ups
8. Winding Up Of Business
• When a business has started the laws must be known about the windup because no
one knows when the worst would come. The winding-up process is a systematic
process with 3 modes of winding-up which are fast track exit, court or tribunal route,
and voluntary closure.
• In the fast track exit, the company should not have any assets/liabilities left and no
past business must be entertained in the process of winding up and the company
name can be removed afterward from the registrar of companies (ROC).
• In the voluntary closure, all the accounts must be settled by the company that is the
shareholders and the creditors must be on the same line.
• In the court or tribunal closure, the prolonged court proceedings are involved and are
a hectic procedure with the stakeholders.
 Pre-Incorporation Contracts Provisional Contracts

A contract entered into by the promoters on behalf

Any contract made by a company before the date
of a proposed company i.e. before incorporation of
at which it is entitled to commence business
a company

A Pre-Incorporation contract is governed by A Provisional Contract is governed by Companies

Specific Relief Act, 1963. Act, 2013.

A provisional contract becomes binding on the

A Pre-Incorporation contract is not binding unless
company when it obtains the certificate of
the company adopts the contract.
commencement.
Memorandum of Association
• The Memorandum of Association or MOA of a company defines
the constitution and the scope of powers of the company. In simple
words, the MOA is the foundation on which the company is built.
• The Memorandum of Association or MOA is the legal document
that has to be filed with the registrar of companies at the time of
incorporation of the company.
• As per section 2 of the Companies Act, 2013 memorandum means the
memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previous company law
or of this Act.
Format of Memorandum of Association (MOA)
• According to Section 4 of the Companies Act, 2013, companies must
draw the MOA in the form given in Tables A-E in Schedule I of the
Act. Here are the details of the forms:
• Table A: Form for the memorandum of association of a company limited by
shares.
• Table B: Form for the memorandum of association of a company limited
by guarantee and not having a share capital.
• Table C: Form for the memorandum of association of a company limited by
guarantee and having a share capital.
• Table D: Form for the memorandum of association of an unlimited company.
• Table E: Form for the memorandum of association of an unlimited company
and having share capital.
Different parts of Memorandum of Association

1. Name Clause

2. Situation/ Registered State Clause

3. Object clause

4. Liability clause

5. Capital Clause

6. Subscriber Clause
Name Clause
• The name of the company should be stated in this clause.
• A company name should be which is not identical in any manner to
any existing company also, there are some words which are strictly
prohibited to be used in names of company in any manner.
• The Word “Private/PVT Limited” should be in end of any private
company. And the word “Limited” should be in the end of every
public limited Company.
• An section 8 or not for profit company are not required to use the
word “Private Limited/ pvt. Limited or Limited” at the end of their
company name.
Situation/ Registered State Clause
• In this clause the state name of company’s registered office is
mentioned.
• The Company should intimate the location of registered office to the
registrar within thirty days from the date of incorporation in case the
permanent address of company is not given.
• It is one of important aspects as all the correspondence for company
will be sent on this.
• Once a company has been registered, it should have a proper
registered office until, the company is closed.
Object clause
• Every company have specific business which they will run after a company
is incorporated.
• This clause states all the business which this proposed company will
commence after incorporation that to in detail.
• Now as per The Companies Act, 2013 only Main objects and other objects
which are ancillary to main objects are covered.
• Any business run apart from this can lead to closure of business. Again,
there are some business which are required approval from different
authorities like for loan and capital funding, Reserve Bank of India (RBI) is
required. For commencing insurance business approval from Insurance
Regulatory and development authority of India (IRDAI).
Liability clause
• This clause states the liability of the members of the company.
• The Liability can be limited or unlimited which means at the time of
winding up of company, a company with limited liability, members are
required to pay amount up to the value of nominal value of shares
taken by them but in case of unlimited members are required to pay
without any limit for the debt or payment which a company is required
to pay.
Capital Clause
• This clause states the Authorized Capital of the company and total number
of shares along with value of per share.
• This is the limit a company can raise its capital maximum amount.
• For example, if company authorized capital is 10 Lakhs and paid up at the time of
incorporation is 1 Lakh, company can raise its capital up to 9 lakhs. But nothing more
than 9 lakhs.

• There is no limit for amount of authorized capital a company can have in

India as per The Companies Act, 2013.
Subscriber Clause

• It contains the names and addresses of the first subscribers.

• The subscribers to the Memorandum must take at least one share.

• The minimum number of members is two (2) in case of a private

company, seven (7) in case of a public company and one (1) in case of
One Person Company as per The Companies Act, 2013.
Alteration of MOA
• As per section 13 of The Companies Act, 2013 Memorandum of
Association (MOA) can be altered anytime but there are certain
conditions which have to be complied before alteration.
• Section 13 of The Companies Act, 2013 governs the process and
conditions for alteration in Memorandum of Association (MOA).
• Different forms are filed to Registrar according the changed MOA
clause and all have to be filled within the time prescribed under the
required forms and sections.
Doctrine of Ultra Vires
• A Memorandum of Association of a company is a basic charter of the
company. It is a binding document which describes the scope of the
company among other things. If a company departs from its MOA such
an act is ultra vires.
• The Doctrine of Ultra Vires is a fundamental rule of Company Law.
• It states that the objects of a company, as specified in its Memorandum
of Association, can be departed from only to the extent permitted by
the Act.
• Hence, if the company does an act, or enters into a contract beyond
the powers of the directors and/or the company itself, then the said
act/contract is void and not legally binding on the company.
Doctrine of Ultra Vires
• The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is
applicable only to the acts performed in excess of the legal powers of
the doer. This works on an assumption that the powers are limited in
nature. Since the Doctrine of Ultra Vires limits the company to the
objects specified in the memorandum, the company can be:
• Restrained from using its funds for purposes other than those specified
in the Memorandum
• Restrained from carrying on trade different from the one authorized.
• The company cannot sue on an ultra vires transaction. Further, it
cannot be sued too. If a company supplies goods or offers service or
lends money on an ultra vires contract, then it cannot obtain payment
or recover the loan.
Different parts of Memorandum of Association

1. Name Clause

2. Situation/ Registered State Clause

3. Object clause

4. Liability clause

5. Capital Clause

6. Subscriber Clause
Articles of Association
• Every company needs a set of rules and regulations to manage its internal
affairs. The AOA specifies the internal regulations of the company.
• The AOA contains the bye-laws of the company. Therefore, the director and
other members must perform their functions as regards the management of
the company, its accounts, and audits in accordance with the AOA.
• An Article of Association brings clarity in the relationship between the
shareholders and the company and among the shareholders themselves. The
Article of Association contains the rules regarding the share capital, transfer
of shares, voting rights of the shareholders, the appointment of directors,
accounts, an audit of the company
Format of Article of Association (AOA)
• Table F: Form for the Article of association of a company limited by shares.
• Table H: Form for the Article of association of a company limited
by guarantee and not having a share capital.
• Table G: Form for the Article of association of a company limited by
guarantee and having a share capital.
• Table J: Form for the Article of association of an unlimited company not
having share capital.
• Table I: Form for the Article of association of an unlimited company and
having share capital.
Details Contained In The Article of Association

1. Classes of shares, their values and the rights attached to each of them.
2. Calls on shares, transfer of shares, forfeiture, conversion of shares
and alteration of capital.
3. Directors, their appointment, powers, duties.
4. Meetings and minutes, notices.
5. Accounts and Audit.
6. Appointment of and remuneration to Auditors.
7. Voting, poll, proxy.
Details Contained In The Article of Association

8. Dividends and Reserves.

9. Procedure for winding up.
10. Borrowing powers of Board of Directors and managers.
11. Minimum subscription.
12. Rules regarding use and custody of common seal.
13. Lien on shares.
Alteration of Articles of Association
• The alteration of the Articles should not sanction anything illegal.
They should be for the benefit of the company. They should not lead to
breach of contract with the third parties.
• A company may alter its Articles with a special resolution. Due
importance and care should be given to ensure that the alteration of
AoA does not conflict with the provisions of the Memorandum of
Association or the Companies Act.
• A copy of every special resolution altering the Articles must be filed
with the Registrar within 30 days of its passing.
Alteration of Articles of Association
1. The proposed alteration should not contravene the provisions of the Companies Act.
2. The proposed alteration should not contravene the provisions of the Memorandum of
Association.
3. The alteration should not propose anything that is illegal.
4. The alteration should be Bonafede for the benefit of the company.
5. The proposed alteration should in no way increase the liability of existing members.
6. Alteration can be made only by a special resolution.
7. Alteration can be done with a retrospective effect.
8. The Court does not have any power to order the alteration of the Articles of Association.
 MoA AoA
Objectives • It defines the objectives of a company. • Lays down the rules and regulation for
• Specifies the conditions for the internal management of the
Incorporation. company.
• Contains the bye-laws of the company

Relationship • Defines the relationship of the • Defines the relationship of the

company with the outside world. company and its members.
Alteration • Can be altered only under special • Can be altered by passing a Special
circumstances. Resolution in the AGM.
• Usually requires the permission of the
Regional Director/Registrar.
Ultra Vires • Acts beyond the scope of the MoA are • Acts which are ultra vires to the AoA
ultra vires and void. can be ratified by a special resolution
of the shareholders. But such acts
should not be ultra vires of the MoA.
Prospectus
• The term ‘prospectus’ refers to a mandatory document which contains an
invitation to subscribe for shares, issued by all the companies. It is a legal
document, wherein the offer their securities for the public for purchase.
• It must be in written format, i.e. an oral invitation to offer, for the purchase
of shares will not be regarded as a prospectus. It includes the red-herring
prospectus, shelf prospectus, abridged prospectus or any other circular or
notice, that invites the public to subscribe for its shares.
• Prospectus is the key document of the body corporate, on which the
investment decisions of the prospective investors relies.
• So, it is mandatory for the companies to make disclosure of all the material
facts and also prohibits variations in the terms and conditions of the
contracts, as any misstatement or concealment of facts can cause heavy loss
to the investing public.
Prospectus
[Link] issuance of prospectus to the public, a copy of the prospectus should be
delivered to the registrar that is signed by company’s directors, proposed directors and
authorized attorney.
[Link] should be issued within ninety days from the day on which a copy has delivered to the
registrar.
[Link] shall mention on its face that a copy of it delivered to the registrar and specify the
documents that is attached to prospectus.
[Link] date mentioned in it shall be the date of issuance of it.
Objectives of Issuing Prospectus
1. To bring to the notice of the public that a new company has been
formed.

2. To preserve authentic record of the terms and allotment on which the

public have been invited to buy its shares or debentures.

3. To secure that the directors of the company accept responsibility for

the statements in the prospectus.
Requirements of a Correct Prospectus
1. It must not be exaggerated

2. It must contain full and honest disclosures

3. Material facts must be disclosed and should not to be concealed.

4. There must not be false details and untrue statements.

Contents of Prospectus
• General information:
[Link] history of the company.
[Link] and address of the company.
[Link] of the project, company, stock exchange etc.
[Link] and address of managers/trustees.
• Capital Structure:
[Link] capital of company.
[Link] of present issue.
Contents of Prospectus
• Terms of present issue:
[Link] procedure, terms of payment, authority of issue.
[Link]-availability of prospectus.
[Link] benefits to company and shareholders.
• Particulars of the Issue:
[Link] of issue.
[Link] of the project.
[Link] of the project.
• Company, Management:
[Link]’s history, objects and present business.
[Link] of managers/managing directors.
[Link] or services.
Contents of Prospectus
• Financial Performance:
[Link] and loss account.
[Link] policy.
[Link] equity and liabilities.
• Payment Details related to:
[Link]/ Refund
[Link]
[Link]
[Link]
Types of Prospectus
1. Shelf Prospectus
• According to section 31 of the Companies Act, a shelf prospectus can be
issued by a public company if its securities are issued over more than one
issue.
• It is issued at the time of first offer of company’s securities.
• This company will provide a time limit for the validity of this prospectus,
which cannot exceed a year.
• During this period of time, there is no requirement to issue a new prospectus
for a new offering, because shelf prospectus will be valid for this new offer.
• An information memorandum is filed by the company along with the filing of
shelf prospectus before to the issue of subsequent offer of securities.
• Information memorandum shall contain any new changes created and changes
in the financial position of the company during the period of the issuance of
first issuance of securities and subsequent issuance if securities.
 Types of Prospectus
2. Red herring Prospectus
• Red herring prospectus does not contain the information regarding quantum (quantity of
shares to be issued) and/or price of the share.
• This prospectus is issued prior to the issue of main prospectus, and the purpose is to
declare the offer at least 3 days before the opening of actual offer.
• The front page of the prospectus displays a bold red disclaimer stating that information in
the prospectus is not complete and may be changed, and that the securities may not be sold
until the registration statement, filed with the market regulator, is effective.
• Potential investors may not place buy orders for the security, based solely on the
information contained within the preliminary prospectus.
• Those investors may, however, express an "indication of interest" in the offering, provided
that they have received a copy of the red herring at least 72 hours prior to the public sale.
• After the registration statement becomes effective, and the stock is offered to the public,
indications of interest may be converted to purchase orders, at the buyer's discretion.
• The final prospectus must then be promptly delivered to the buyer.
Types of Prospectus
3. Abridged Prospectus

• Abridged prospectus is a compact or summarized form of prospectus that

contains all the information of the prospectus, making it quick and easy for
investors to understand.
• The original prospectus that a company files to the exchange regulator is too
large. Reading the entire prospectus may be too much time consuming for an
investor. Instead, they go through the abridged prospectus, which gives them the
basic idea about the company.
• No share application form can be issued by a company unless an abridged
prospectus is attached to it.
Types of Prospectus
4. Deemed Prospectus
• A main company may hire an issuing house or another company to issue its
securities into the market. The issuing house/hired company submits a
document that is known as deemed prospectus, on behalf of the main company
• 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.
Consequences of misstatements in Prospectus
The persons, responsible for preparing false and misleading prospectus
will face civil and criminal liabilities.
1. Civil liability
In case, misleading prospectus amounts to misrepresentation, the
aggrieved persons can repudiate the contract. They can claim refund of their
money. Damages can also be claimed from the persons found guilty.
2. Criminal liability
In case any deliberate concealment is made, directors will be punished
with a fine of Rs. 5,000 or imprisonment up to two years or both. If it is fraud
the fine will extend to Rs. 10,000 or 5 years imprisonment or both.
Statement in Lieu of Prospectus
• The Statement in Lieu of Prospectus is a document filed with the
Registrar of the Companies (ROC) when the company has not issued
prospectus to the public for inviting them to subscribe for shares.
• The statement must contain the signatures of all the directors or their
agents authorized in writing.
• It is similar to a prospectus but contains brief information.
• The Statement in Lieu of Prospectus needs to be filed with the
registrar if the company does not issues prospectus or the company
issued prospectus but because minimum subscription has not been
received the company has not proceeded for the allotment of shares.
 STATEMENT IN LIEU OF
BASIS FOR COMPARISON PROSPECTUS
PROSPECTUS

Meaning Prospectus refers to a legal-document Statement in lieu of prospectus is a

published by the company to invite document issued by the company
general public for subscribing its when it does not offer its securities for
shares and debentures. public subscription.

Objective To encourage public subscription. To be filed with the registrar.

Used when Capital is raised from general public. Capital is raised from known sources.

Content It contains details prescribed by the It contains information similar to a

Indian Companies Act. prospectus but in brief.

Minimum subscription Required to be stated Not required to be stated

Prospectus
• A prospectus is defined as a legal document describing a company’s
securities that have been put on sale. The prospectus generally
discloses the company’s operations along with the purpose of the
securities being offered.
• Prospectus is an invitation issued to the public to offer for
purchase/subscribe shares or debentures of the company. In other
words, any advertisement offering shares or debentures of the
company for sale to the public is a prospectus. A company secures
capital by the issue of prospectus inviting deposits or offers for shares
and debentures from the public.
Key Differences Between Prospectus and Statement in Lieu of Prospectus

1. A legal document published by the company to invite the general public for subscribing its shares
and debentures is called Prospectus. A document published by the company when it does not offer
its securities for public subscription is called Statement in lieu of prospectus.
2. The prospectus is issued with a view to encouraging public subscription. On the other hand,
Statement in lieu of Prospectus is issued in order to be filed with the registrar of companies.
3. The company publishes prospectus to raise funds from the general public. Conversely, when the
funds are to be raised from known sources, the statement in lieu of prospectus is used.
4. A prospectus contains all the relevant details, prescribed by the Indian Companies Act, 2013. On
the contrary, Statement in lieu of Prospectus contains similar details as given in a prospectus, but in
short.
5. Minimum Subscription required to be stated in a prospectus but not in a statement in lieu of
prospectus because the document is not concerned with an offer to issue securities at a stated price
to subscribe.
Contents of Prospectus
The contents of the prospectus have been specified in Schedule II of the
Companies Act. The important contents in the prospectus include the following.
1. Name and address of the company
2. Objects of the company
3. Full particulars of the signatories to the Memorandum and number of shares taken
by them.
4. The names, addresses and occupations of the directors, managing directors or
managers etc.
5. The number and classes of shares.
6. The minimum subscription.
7. The qualification shares of a director and the remuneration of the directors.
Contents of Prospectus
8. The amount payable on application, on allotment and on calls.
9. The names of the underwriters.
10. The estimated amount of preliminary expenses.
11. The names and addresses of the auditors of the company.
12. Particulars about reserves and surpluses.
13. Voting rights of the different classes of shares.
14. Reports of the auditors regarding profits and losses of the company.
15. A similar report by the Chartered Accountant regarding the Profits and
Losses and Assets and Liabilities of the Company.
Types of Prospectus
[Link] Prospectus - As per Section 25(1) of the Companies Act, 2013, a
document will be deemed to be a prospectus if the company agrees to allot
or offer securities to the public.
[Link] Prospectus - It is defined as the brief summary of the
prospectus, which includes all useful and materialistic information filed
before the registrar. As per Section 33(1) of the Companies Act, 2013, an
abridged prospectus must be included with the documents for the purchase
of securities issued by a company.
[Link] Herring Prospectus - It is the prospectus that is required to be filed
before the registrar prior to the offer. The prospectus generally lacks
information such as the particular price or quantum of securities being
offered.
[Link] Prospectus - It is defined as the prospectus issued by a company,
bank or financial institution for more than one class of securities.
• 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.
• 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.
Statement in Lieu of Prospectus

When the prospectus is not issued by the company a statement in lieu of

prospectus, must be filed with the Registrar at least three days before
the allotment of shares. The contents of the statement in lieu of
prospectus are very much similar to the prospectus. The statement must
be signed by all the directors or their agents authorized in writing. These
provisions do not apply to a private company.