CONCEPTS OF THIS CHAPTER

!•
tf
• Sec 26- Contents & Requireme nts Sec 34 & 35-Crimlnal & Civil Liability
In Prospectus ! for Misstatement in Prospectus
-·-·---·-·--·-·-----·-·-----·---·-·---~---·---·---·--·-·-·--·---·---·---·---·-·--
• Sec 30- Advertisement of ! • Sec 39- Allotment of Securities
'
Prospectus , LOR Questions
• Sec 31- Shelf Prospectus
I
i•
Sec 40 - Securities to be dealt with In Q9
i St ock Excha nges Q 12
--·---·---·-·--·---·-·---------·---J---·---·-·--·------·----·--·------·-·--
- • . Sec32- Red herring Prospectus ___!_• Sec 42- Private Placement ___________ Q 18
• Sec 33- AbrldQed Prospectus - -•-
'---==-=c...:..===-'-'-===~ i•- Sec-25-
-- Deemed
- - -Prospectus
~~ - - - - -~ - - - - - - - - - -•

QUICK REVIEW OF IMPORTANT CONCEPTS

Modes for Issue of Securities

-~-~~-':-~!~.!.~.!:'e -----·-·--·---·----·--·---·_!··Public Company .,__ Private Company _

Public Offe r {including IPO, FPO or OFS) Yes No *For a listed company or
Private Place me nt Yes Yes a company proposed to
Rights issue/ Bonus Issue Yes Yes be listed.
Compliance with SEBI rules & regu lations Yes* No
Prospectus

Process for Variation in terms of Contract or Objects of Prospectus

Special Resolution to be passed Dissenting shareholders shall be

through Postal Ballot and Contents Publishing in Newspaper given an exit offer by promoters
of Notice or controllin,g shareholders
• If a company raised money • The resol utlon notice must be • SEBI wil l specify the exit price,
through a prospectus and has published in newspape rs-one in manne r, a nd cond itions
unutllized funds, English a nd o ne in the local through regulations.
• It cannot cha nge contract terms ve rnacular. • Dissenting shareholde rs are
from the prospectus, • The newspape rs must be from the those who oppose changes to
• It ca nnot change the stated city of the company's registered contract te rms or objectives In
objectives without a special office. t he prospectus.
resolution via postal ballot, • The notice must clearly justify the
proposed variation.
• The special resolution notice must
include prescribed details.
Punishment for Issuing Prospectus in Contravention
{I) Company
!
{ii) Any pe rson knowingly a party to issue of such prospectus 'I: 50,000 . 1' 3 Lakh

Advertisement of Prospectus
Where an advertisement of any prospectus of a company is published in any manne r, it sha ll be necessary to
specify the rein the contents of its memorandum as regards the following:
► the objects, !►the capital st ructure of the company.
► the liability o f members and the amount of share capital o f the company,
► the names of the signatories to the memorandum,

Chapter 3 Prospectus and Allotment of Securities

► the number of shares subscribed for by the signator ies, and

Shelf Prospectus, Red Herring Prospectus and Abridged Prospectus

Shelf Prospectus Red Herrin£ Prospectus i Abridged Prospectus

Prospectus in respect of which Prospectus w hich does not a memorandum containi ng
t he securities or class of incl ude complete particulars of such salient features of a
securities are issued for the quantum or price of t he prospectus as may be specified
subscription in one or more securities included therein by the SEBI by making
issues over a certain period regulations in this behalf
without the issue of a further
prospect us

Securities to be Dealt with in Stock Exchani:es

• Filing of an application w ith recognised stock exchange

• Prospectus to state name of stock exchange
• Mainta ining of separate bank account
• Condition purporting to w aive compl iance shall be void

Penalty
Company !
Defaulting Officer
• Minimum: at S Lakh ! • Minimum : at 50,000
• M aximum: ~ SOl akh • Maximum:~ 3 Lakh

Payment of Commission

Authorisation ! The payment of such commission shall be authorized in the company's AOA
' The commission may be paid out of proceeds of the issue or the profit of t he company
i
Source
! or both
----·------·---·---·---·---·------·----·--·---·---·-·--·---·-·-----------------·-·---·--·-·---·---·-·-
: The prospectus o f the company shall disclose the following particulars- the na me of
Disclosure of i the underwr iters; t he rate and amount of the commission payable to the underwriter;
particuhirs i and the number of securities which is to be underwritten or subscribed by t he
! underwr iter absolutely or conditionally
----·---·-·-·-·---·---·-·➔-·---·--·-·---·---·-·--·---·---·-·--·---·-·---·-----·-----·-----·-·---·--·-·---·---·-·-
When no commission I There shall not be paid commission to any [Link] on securities which are not
is to be paid __________ .J offered_to t he public for subscription--·-·---------------·-----·-·---·---·---·--·-·-·-
Copy of payment of ! A copy o f the contract for t he payment of commission is delivered to the Registrar at
commission to be
delivered to Rei:istrar ·
.i
the time of d elivery of the prospectus for registration

Rate of commission Following are the rates of commission:

► in case of shares
• shall not exceed 5% of the price at wh ich th e shares are issued, or
• a rate author ised by the Articles, !' • whichever is less
).. in case of debentures
• shall not exceed 2.5% of the p rice at which the debentu res are issued, or
• as specified in the compa ny's Articles, I•
•
whichever is less
Allotment of Securities
1. Once Minim um amount has been subscribed and application money has been paid and received by t he
company whi ch should not be less than 5% or such other% or amount as specified by SEBI the secur ities
will be allotted.
2. Minim um amount not subscribed and ap plication money not r eceived withi n 30 days from dat e of issue of
prospectus, or and application money not received amount received shal l be returned within 15 days from
the closure of Issue
3. Where company makes an allotment of securities It shall file a return of allot ment w ith the Regist rar
4. In case of default Company shall pay penalty of ~1000 for each day duri ng v,hich such default continues, or

Chapter 3 Prospectus and Allotment of Securities

 Rs 1 l akh whichever is less .
Liability in case of Mis-Statements in Prospectus
Civil Liability
• loss or damage is an essential condition • Civil Procedure Code, 1908 applicable
• Offence against the counterparty
Criminal liability
• Mens rea (guilty mind) is an essential condition !! •Criminal Procedure Code, 1973 applicable
• Offence is regarded committed ; • Against the State

Punishment for Fraud (Sec 447)

(i) Fraud involving less than 10 lakh rupees Up to '\'50 lakh or/
.
--·---·---·-· Quantum of Fraud ---·-·-----·------·---·-·J:i·i:!~-·-·---·--·-·--'·············- -·-·- 'mprisonment ·-- -··
Up to 5 years
or 1% of turnover, whichever is lower and
(publ ic interest not involved)
(ii) Fraud involving at least 10 lakh rupees Minimum fine equal to amount and Mi nimum 6 mont hs;
or 1% of turnover, w hichever is lower o f fraud; and Maximum fine 3 and
(public interest not involved) ti mes of amount of fraud , Maximum 10 Years
(iii) Fraud at (ii) involves public interest Minimum fine equal to amount ] and M inimum 3 years; and
o f fraud; and Maxim um fine 3 : Maximum lOYears
ti mes of amount of fraud '

Private Placement
Raising capital by selling securities to a small group of select investors. Unlike a public issue, securities are not
so ld on the open market.
Key Features
• Offer or invitat ion to subscribe is made only to select persons.
• Conducted through a pr ivate placement offer -cum-application.
Eligibi lity & Limitations
• Offer only to Board -identified persons ("identified persons" ).
• Maximum 200 investors in a financial year.
• Exclusions: Qualified institutional buyers & employees under ESOP.
Application & Payment
• Subscr iption through private placement application.
• Payment via cheque, demand draft, or banking channel (no cash).
Utilization & Compliance
• Funds cannot be used until allotment & return of allotment is filed.
• Return of allotment must be filed with the Registr ar within 15 days.
• Offer letter issued only after filing relevant Board/Special Resolution.
• Non-compliant private placement is deemed a public offer.
Allotment & Repayment
• Securities must be allotted w ith in 60 days of receiving funds.
• If not al lotted within 60 days, repayment due wit hin 15 days.
• Failure to repay incurs 12% annual interest from the 60th day.

Question & Answers

Sec 26- Contents & ftQqulrements in Prospectus

Question 1

The Board of Directors of Plum limited proposes to issue a prospectus inviting offers from the public for
subscribing to the equity shares of the company. State the reports which shall be included in the
prospectus for the purposes of providing financial information under the provisions of the Companies
Act, 2013. {RTP May '22, RTP Nov 20, PYP Nov '19 , 4 Marks, SM}

Chapter 3 Prospectus and Allotment of Securities

 ~
Answer 1
As per section 26(1) of the Companies Act., 2013, every p rospectus issued by or on behalf of a public
company either with refere nce to its formation or subsequently, or by or on behalf of any person w ho is or
has been engaged or interested in the formation of a public company, shall be d ated and signed and sha ll
state such information and set out such reports on financial information as may be specified by the
Secu ri ties and Exchange Board in consu ltation w ith the Central Government.
Provided that until the Securiti es and Exchange Board specifies the information and rep orts on financial
information under this sub -section, t he regulations made by the Securities and Exchange Board under the
Secu rities and Exchange Boar d o f India Act, 1992, in respect of such financi al information or reports on
financial information shall ap ply.
According to clause (c) o f section 26 (1), the prospectus shall make a declarat ion about the compliance o f
the provisions of the Compan ies Act, 2013 and a statement to the effect that nothi ng in the prospectus is
contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 and the Securit ies an d
Exchange Board o f India Act, 1992 and the r ules and regu lations made thereunder.
Accordingly, the Board of Plu m limited w hich proposes to issue the prospectus shall p rovide such reports
on financial infor mation as may be specified by the Secur ities and Exchange Board in consultation w ith th e
Central Government to comply w ith the above stated p rovisions and make a declar ation about such
comp lianee.

Sec 27• Variation in Terms of Contract or Objects stated in the Prospectus

Question 2

XYZ limited issued a prospectus to raise funds for a new manufacturing project. After successfully raising
the funds, the company identified an investment opportunity in a different Industry six months later,
requiring a signlflc:int portion of the funds . The proposed investment Involved trading In equity shares of
other listed companies.
The board of directors sugi:estad vorying the original objectives for which the funds were raised to allow
this new investment and recommended passing a special resolution in the company's general meeting.
While the promoters and controlling shareholders supported this change, some shareholders expressed
concerns, particularly regarding the deviation from the initially stated purpose of the funds.
Based on the provisions of the Companies Act, 2013, advise on the validity of the proposal to redirect the
funds toward this new investment. {RTP Jan'25}

Answer 2
Accord ing to section 27(1) o f the Companies Act, 2013, the terms of a contract referred to in the prosp0ctus or
objects for which t he prospectus has been issued can be varied, but only with the authority of t he com pany given
by it in gener al meeting by way of special resolution .
The second proviso to sub-section (1) prescribes that such company is not to use any amou nt raised by it
through the prospectus for buying, trading or otherwise dealing in equity shares o f any other listed compa ny.
In the given question, XYZ Limited, is planning to use the amount initially raised for investing in a different
industry, w hich also involves trading in equ ity shares o f other listed companies.
Though XYZ Limited has passed a special resolution for the said proposal but it cannot use any amount raised
by it through the prospectus for buying, trading or otherwise dealing in equ'ity shares of any other listed
company. Hence, the said proposal for new investment is not valid.

Sec 30- Advemsement of Prospectus

Question 3

KeyViwit Su Limited decides to issue 1,001000 securities of the company. The company decides to publish
an advertisement of the prospectus. Enumerate to the company about necessary contents of its
memorandum to be specified therein. {RTP May 21}

Chapter 3 Prospectus and Allotment of Securities

Answer3
According to Section 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 following:
(i) t he objects,
(ii) t he liability of members and the amount of share capital of the company,
(iii) the names of the signatories to the memorandum,
(iv) the number of shares subscribed for by the signatories, and
(v) the capita l structure of the company.

Sec 31- Shelf Prospectus

Question4

Wiwitsu Limited proposes to issue series of debentures frequently within a period of one year to raise the
funds w ithout undergoing the complicated exercise of issuing the prospectus every t ime of issuing a new
series of debentures. Examine the feasibility of the proposal of Wiwitsu Limited having taken into account
the concept of deemed prospectus dealt with under the provisions of the Companies Act, 2013. (MTP 3
Marks March '22, PYP July 21, 3 Marks)

Answer 4
Informatio n Memorandum together with Shelf Prospectus is deemed Prospectus. The expressio n "shelf
prospectus" means a prospectus in respect of which the securities o r class of securiti es included therein are
issued fo r subscription in o ne o r more issues over a certain period witho ut t he issue of a further prospectus.
[Explanati on to Section 31]
Any class o r classes of companies, as t he Securiti es and Excha nge Board may provide by regulations in this
behalf, may file a shelf prospectus with the Registrar at the stage-
(ij of the first offer of securities Included therein which shall indicate a period not exceeding one year as the
period of va lidity of such prospectus which shall commence from the date• of opening of the first offer of
secu rities under that prospectus, and
(ii) in respect of a second o r subseq uent offer of such securities issued d uring the period of valid ity of that
prospectus,
No further prospectus is required fo r issue of securities. [ Sub-section (1 )1
Hence, the proposal of Wiwitsu Limited to take into account the concept of deemed prospectus is correct.

EXAM INSIGHTS: Most of the examinees were not able to give provisions of deemed prospect1,1s and shelf
prospeetus under the Coi'rlpai;ies Aet, 2013.

Sec 32- Red herring Prospectus

Question 5

The Board of Directors of Wiwitsu l .i mited are proposing to raise funds from the public through issue of
equity shares. However due to volatlle financial markets, the price per share and the number of shares to
be issued are left open and to be decided post closure of the issue. As a financial advisor of the company,
what would you suggest to the:, Boa rd in this regard 'IS per the:, provisions of tho Companies Act, 2013? (PYP
5 Marks May'22}

Answer 5
As a financial consultant the Board of Directors of Wiwitsu Limited would be advised to issue a Red Herri ng
Prospectus. The expression "red herring prospectus" means a prospectus whi ch does not include complete
particulars of the quantum or price of the securities incl uded therein . [Explanation to Section 32]
Thus, Wiwitsu Limited may raise funds from public through red herring prospectus whereby the price per
secu ri ty and number of securities are left open to be decided post closure of the issue.

Chapter 3 Prospectus and Allotment of Securities

 ~
The company may foll ow the provisions of section 32 in issuing a red herring p rospectus:
(1) Red Herring Prospectus is issued prior to issue of Prospectus: A compa ny proposing to make a n o ffer
of securities may issue a red herring prospectus prior to the issue of a prospectus.
(2) Filing with the registrar: A company p roposing to issue a red he rri ng prospectus sha ll file it wit h the
Registra r at least t hree da ys p rior to the opening of the subscrip tion list and the o ffer.
(3) Oblieations under Red Herring Prospectus vis-ii-vis Prospectus : A red he rring pro spectus shall ca rry
the same obligations as are a pplicable to a p rospectus a nd any variation between the red herring
prospectus and a prospectus shall be highlighted as variations in th e p rospectus.
(4) Filing of Red Herring Prospectus with Registrar and SEBI upon closing of Offer: Upon the closing of
the offer of secu rities u nder this section, the prospectus stating therein the total capital raised,
whether by wa y o f d e bt o r share capital, a nd the closing price of the securities a nd any other details as
a re not included in the red he rring prospectus shall be filed with the Registrar a nd the Secu rities and
Exchange Board.

EXAM INSIGHTS: The given question deals with the requirement of section 32 of the Companies Act, 2013
which d eals with the legal provision related to Red He rring Prospectus . Pe rformance o f the majority
examinees was Average. Some of them have correctly explained the provisions related to 'Red Herring
Prospectus' as pe r the Compa nies Act, 2013.

Sec 33· Abridged Prospectus

Question 6

What is meant by "Abridged Prospectus"? Under what circumstances an abridged prospectus need not
accompany the detailed information regarding prospectus along with the application form? What are the
penalties in case of default in complying with the provisions related to issue of abridged prospectus? (MTP
March'l9,4 Marks, MTP Oct'18, 6 Marks, MTP Oct'Zl, S Marks)
Answer 6
(1) Meaning of Abridged Prospectus: • According to Section 2(1) o f the Companies Act, 2013, an abridged
p rospectus means a memora ndum containing such salie nt features of a pro spectus as may be specified by
t he Securities and Exchange Board by maki ng regula tions in this behalf.
(2) Circumstances under which the abridged prospectus need not accompany the application forms: Section33
(1) of the Companies Act, 2013 states that no applicatio n form fo r the pu rchase of any of the securitiesof a
company ca n be issued unless such form is accompanied by a n abridged prospectus. In terms of the Proviso
to sect ion 33 (1) an abridged prospectus need not accompany the application form if it is shown that the
form of application was issued:
(i) In connection with a bo na fide invitatio n to a person to e nter into a n u nde rwriti ng agreement with
respect to such securities; or
(ii) Whe re the secu rities are not offered to the public.
(3) Penalties in case of contravention of provision : a company makes a ny default in complying with the
p rovisions of this section, it shall be lia ble to a penalty of fifty thousand r upees for each d efault.

Sec 34 & 35· Criminal & Civil Liability fo,- Misstatement in Prospectus

Question 7

RO Ltd. issued a prospectus. All the statements contained therein were literally true. It also stated that
company had paid dividends for a number of years but did not disclose the fact that the dividends were
not paid out of trading profits but out of capital profits. An allotee of shares claims to avoid the contract
on the ground that the prospo,ctus was false in material particulars. Oe<iide that the argument of
sh:,rcholder, as per the provision of the Companies Act, 2013, is correct or not ? (PYP 3 Marks Dec 'Zl , RTP
May'lB)

Chapter 3 Prospectus and Allotment of Securities

Answer7
According to sectio n 34 of the Companies Act, 2013, where a prospectus, issued, circulated o r distributed,
includes any statement which is untrue or misleading in form o r context in which it is included or where any
inclusion or omission of any matter is likely to mislead, every person who authorises t he issue of such
prospectus shall be liabl e under section 447.
Further, Section 3$(3) provides that, where it is proved that a prospectus has been issued with intent to
defraud the applicants for t he securities of a company or any other person or for any fraud ul ent pu rpose,
every person referred to in sub-section (1) of section 35, shall be personally responsible, without any
limitation of liability, for all or any of the losses or damages that may have been incurred by any person who
subscribed t o t he secu rities on the ba sis of such prospectus.
In the given q uestion, the non-disclosure of the fact that dividends were pa id out of capital profits is a
concealm ent of material fact as a company is normally required to dist ribute dividend o nly from trading or
revenue profits and under exceptional circumstances it can pay dividend out of capital profits. Hence, a
material misrepresentation has been made.
Accord ingly, in the given case the allottee ca n avoid the contract of allotm ent of shares.

EXAM INSIGHTS: Most of the examinees were able to reply correctly the provisions of material misstatement
of prospectus ur,der the Companies Act 2013 .

Question 8

MBL Pharmaceutical Limited is committed to provide quality medicines at an affordable cost through
relentless pursuit of excellence i n its operations, product quality, documentation and services. The
company is now focusing on oncology therapeutics & other generies with a vision to be a Global Leader in
Oncology. The prospectus issued by the company contained some important extracts of the expert's
report on research by oncology department. The report was found untrue. Mr. Diwakar purchased the
shares of MBL Pharmaeeutleal Limi ted on the basis of the export's report published In tho prospectus. Will
Mr. Dlwakar have any remedy against the company? State also the circumstances where an expert is not
liable under the Companies Act, 2013. (PYP 5 Marks, May '23)

Answer 8
Rem edy aga inst the company: Under section 35 (1) of the Companies Act 2013, where a pe rson has
subscribed for securities of a company acting on any statement included in the prospectus which is
misl ead ing and has sustained any loss o r damage as a consequence thereof, t he company and every person
including an expert sha ll be liable to pay compensatio n to the person who has sustained such loss or damage.
In the present case, Mr. Diwakar puFehased the shares of MBL Pharmaceutical limited on the basis of the
expert's report published in the prospectus. Mr. Dlwakar can claim com pensation for any loss or damage
that he might have sustained from the purchase of shares. Further, section 35 also menti ons punishment
prescribed by section 36 i.e., pu nishment for fraud under section 447.
Circumstances when an expert is not liable: An expert will not be liable for any misstatement in a prospectus
under the fol lowing situations:
(I) Under section 26 (5): It states that having given his consent, the expert withdrew it in writing before
delivery of the copy of prospectus fo r filing, or
(ii) Under section 35 (2) (b): It states that the prospectus was issued without hi s knowledge/consent and
that on becoming aware of it, he forthwith gave a reasonable public notice that it was issued without
his knowledge or consent;
(iii) An expert wil l not be liable in respect of any statement not made by him in the capacity of an expert
and included in the prospectus as such;
(iv) Under sectio n 35 (2) (c): As regards every misleading statement purported t o be made by an expert
/contained in a copy of/ an extract fro m a report/ valuation of an expert, It was a correct and fair
representation of the statement, or a correct copy of, or a correct and fair extract from, the report or
valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus
believe, that the person making the statement was competent to make it and t hat the said person had
given t he consent required by sectio n 26(5) to the issue of the prospectus and had not withd rawn that

Chapter 3 Prospectus and Allotment of Securities

 ~
consent befo re filing of a copy of the prospectus with the Registrar o r, to the defe ndant's
knowle dge, befo re a llotment thereunder.

Question 9 t't LDR

Sudarshan Exports Ltd. was dealing in export of rubber to specified foreign countries. The company was
willing to purchase rubber trees in Andhra Pradesh. The prospectus issued by the company contained
some important extracts of the expert report and number of trees in Andhra Pradesh. The report was
found untrue. Mr. Alok purchased the shares of Sudarshan Exports Ltd. on the basis of the expert report
published in the prospectus. Will Mr. Alok have any remedy against the company? State also the
circumstances whore an expert is not liable under tho Companies Act, 2013. ( PYP 5 Marks Nov 122, RTP
May '20, SM)

Answer9
Under section 35 (1) of the Compan ies Act 2013, where a pe rson has subscribed fo r securit ies o f a company
acting o n any stateme nt included in the pros pectus which is m isleading a nd has sust aine d any loss or
damage as a conseq uence t he reof, the company a nd every person includ ing a n expe rt shall, be lia ble to pay
compensatio n to the person who has sustained such loss o r damage. In the present case, Mr. Alok purchased
the s ha res of Sudarsha n Exports Ltd. on the basis o f t he e xpert report published In the prosp ectus. Mr. Alo k
can claim compensatio n for a ny loss or damage that he m ight susta ine d from t he purchase of shares, which
has not been me ntioned In the given case . Hence, Mr. Alo k will have no re me dy against the company.
Circumstances \,vhen a n expe rt is not lia ble: An e xpert wil l not be liable fo r a ny mis- statement s in the
prospectus u nde r the following situa tions:
(i) Under section 26 (5), that having given his consent, but withdrew it in writing before de livery of the copy of
prospectus for filing, or
(ii) Under section 35 (2), that the p rospectus was issued without his knowledge/ consent a nd that on becomi ng
aware of it, he forthwith gave a reasonable public notice that it was Issued without his knowledge or
consen t;
(iii) that, as regard s every misleading state me nt purporte d to be made by a,n e xpert or con tained in what
purpo rts to be a copy of or an e xtract from a repo rt or valuatio n of an e:xpert, it was a correct and fair
representation of the st atement, o r a correct copy o f, o r a correct and fair extract from, the re port or
valuation; a nd he had reasona ble gro und to believe and did up to the t ime of t he issue of t he prospectus
believe, that the person
making the state me nt was competent to make it and that the said pe rson had given the consent re quired
by section 26(5) to the issue of the prospect us and had not withd rawn that consent befo re delivery of a
copy of the pros pectus for registration or, to the defendant's knowle dge, before allotment the re und er.

Sec 39· Allotment of Securities

Question 10

State in what way does the Companies Act, 2013 regulate and restrict the following in respect of a company
going for public issue of shares:
(i) Minimum Subscription, and
(ii) Application Money payable on shares being issued? {MTP April'l9, 5 Marks, MTP Oct'lB, Apr'2l, 6
Marks,SM)

Answer 10
The Com pan ies Act, 2013 by virtue of p rovisions as contained in Section 39 (1) a nd (2) regula tes a nd restrict s
the minim um subscript ion and the a pp licat ion money payable in a publ ic issue of shares as under:
Minimum subscription (Section 39 {1)1
No Allotment shall be made of a ny securities of a company offered t o the public for su bscription;
unless; -
{I) the amount stated In the prospectus as the m in imum amount has been subscribe d; and

Chapter 3 Prospectus and Allotment of Securities

(ii) t he sums payable on appl ication for such amount has been paid to and received by the company-
Application money: Section 39 (2) provides that the amount payable on application o n each security shall not
be less than 5% of the nomi nal amount of such security o r such amount as SEBI may prescribe by making
any regulatio ns in this behalf.
Further section 39 {3) provides that if the stated minimum amount is not rece ived by the company within
30 days of the date of issue of the prospectus or such time as prescribed by SEBI, the company wi ll be
required to refund the application money received within such ti me and manner as may be prescribed.
In case of any defa ult under sub-section, the company and its officer who is in default shall be liable to a
penalty, for each default, of o ne thousand rupees for each day d uring which s uch defa ult conti nues or one
lakh rupees, wh ichever is less.
Sectio n 40 (3) provides that al l moneys received on applicat io n from the public for subscription to the
secu rities shall be kept in a separate bank account maintained with a sched ule d bank.

Question 11

Johnson Limited goes for Public issuo of its shares. The lssuc was over subscribed. A dcf:,ult was committC!d
with respect to allotment of shares by the officers of the company. There were no Manaelne Director,
Whole time Director or any other officer/person designated by the Board with the responsibility of
Complying with the provisions of the Act. State, who are the persons consi dered as officers in default
under the Companies Act, 2013. Examine who will be considered in default in the instant case?
{PYP July'21,5 Marks}

Answer 11
As per section 39 of the Companies Act, 2013, wh ich deals with the allotment of securities, states that in
case of any default related to minimum subscription an~ of return of allotment money under sub-section
(3) and (4), the company and its officer who is in default shall be liable to a penalty, for each default, of one
thousand rupees for each day d uring which such defau lt continues or o ne lakh, rupees, whichever is less.
As per section 2(60) of the Act, Officer who is in defaul t, has been described as:
For the pu rpose of any provisio n in this Act which enacts that an officer of the company who is in default
sha ll be liable to any pena lty or punishment by way of imprison ment, fine or othen,vise, mea ns any of
the fol lowing officers of a company, namely:-
{!) whole-time director (WTD);
(ii) key managerial personnel (KM P);
{i ii) where there is no key managerial personnel, such director or directors as :specified by the Boa rd, or all
t he directors, if no director is so specified;
(iv) any person who, under t he immediate authority of the Board or any key managerial personnel, is
charged with any responsibility.
(v) any person in accord ance with whose advice, directio ns o r instructions the Board of Directors of t he
company is accustomed to act,
{vi) every director, in respect of a contravention of any of the provisions of this Act,
(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and
merchant bankers to the issue o r transfer;
In the given case, as stated Johnson Limited, committ ed a defa ult with respect to the allotment of shares
by the officers. As in company there were no managing director, whole time director, or any other
officer/ person designated by the Board with the responsibil ity of complying with the provisions of the Act.
Therefore, in such situat ion, all the direct ors of the company may be treat ed as officers in defa ult.

Question 12
Bheem Ltd . issued 1,00,000 equity shares of 'I: 100 each at par to the public by issuing a prospectus. The
prospectus discloses the minimum subscription amount of 'I: 15,00,000 required to be received on
application of shares and share application money shall be payable at 'I: 20 per share. The prospectus
furth<!r

Chapter 3 Prospectus and Allotment of Securities

 ~
reveals that Bheem ltd . has applied for listing of shares in 3 recognized stock exchanges of which 1
application has been rejected . The issui, was fully subscribed and Bheem Ltd. received an amount of
~20,00,000 on share application. Bheem Ltd., then proceeded for allotment of shares.

Examine the three disclosures in the above case study which are the deciding factors in an allotment of
shares and the consequences for violation, if any under the provisions of the Companies Act, 2013. {MTP
6 Marks April '23 & Sep '23, PYP 6 Marks Jan '2l}
Answer 12
As per the r equir ement of the question, disclosures which are the deciding factors in an al lotment of sh ares
are laid down in section 39 of the Companies Act, 2013.
Accord ing to section 39(1), no allotment of any secu rities of a company offer ed to th e public for subscription
sha ll be made unless-
• the amount stated in the prospectus as the minimum amount has been subscribed, and
• the sums payable on application for the amount so stated h ave been paid to and received by the company
by cheque or other instrument.
The amount payable on ap plication on every secur ity shall not b e less than five per cent of the nominal
amount of the secur ity or such oth er p ercentage or amount, as may be specified by the Securities and
Exchange Board by making regu lations in this beha lf.
In the question, Bheem ltd. issued shares to public by issuing of prospectus, disclo sing min imum
subscription, sum payabl e on application for the amount; and the amount received on share application is
more than 5% of the nominal amount o f the security.
Further, it revealed that Bheem l td. has appl ied for listing of shares in 3 recognized stock exchanges of
which one ap plication was rejected.
In t he given instance, ther e is compliance to section 23, as nothing is t alked about matters required to be
included in the prospectus under section 26 (1) and about filing with the regi strar; assuming that the said
requirements have been comp lied w ith, req uirement of section 39 as rega rds ob tain ing of minimum
subscription and the minimum amount receivabl e .o n ap plication (not less than 5% of the nominal value of
the securities offere d) ar e fulfil led.
The pr ovisions of section 40 of the Companies Act, 2013 states that every company m aking public offer
sha ll, before making such offer, make an application to one or more r ecogn ized stock exchange or exchanges
and obtain permission for the secur it ies to be d ealt w ith in such stock exchange or exchanges.
Th e above provision is very clear that not only the company has to apply for listing of the secur ities at a
recognized stock exchange, but also obtai n permission thereof from all the stock exchanges wher e it has
app lied, before making the public offer. Since one o f t he th ree recognized stock exchanges, wher e the
comp any has ap plied for enlisting, has rej ected the application and the company has p roceeded with making
the offer of shares, it has violated the provisions of section 40. Therefore, this sh all be deemed to be
irregular allotment of sha res. Consequently, Bheem Ltd . sha ll be required to r e fund the application money
to th e applicants in the prescribed manner within the stipulated time frame.

Sec 40- Securities to be dealt with in Stock Exchani:es

Question 13

Examine the validity of the following statement with reference to the provisions of the Companies Act,
2013.
"The Articles of Association of X limited contain a provision that the underwriting commission may be
paid up to 4% of the issue price of the shares. However, the Board of Directors have decided to pay the
underwriting commission of 5% to Deal & Co., the underwriters." {SM)

Answer 13
Section 40 (6) of the Companies Act 2013, p rovid es that a compa ny may pay commission to any person in
connection with the sub scription to its secur it ies, su bject to the condit ions prescribed und er the Companies
(Prospectus and Allotment o f Securities) Rules, 2014. Rule 13 states that the rate of commission paid or
agreed to be paid shal l not exceed, in case of sha res, five percent (5%) of the pr ice at wh ich the shares ar e

Chapter 3 Prospectus and Allotment of Securities 3.10

issued or a rate authorised by the articles, whichever is less.
In the given pr oblem, the articles o f X Ltd. have prescribed 4% underwriting commission but the di rectors
decided to pay 5% underwriting commission.
Therefor e, the decision of the Board of Director s to pay 5% underwr iting comm ission to the underwr iters
(i.e. Deal & Co.) is invalid.

Sec 42· Private;, Placement

Question 14

Sw3tl limited is intending to issue its securities on private placement basis. E)(plain to the directors of the
company, the provisions of the Companies Act, 2013, on the following matters:
{i) Meaning of Private Placement
{ii) 'Time limit for Allotment of Securities' and 'repayment of application money in case of default in
allotment.' (MTP S Marks March '22}

Answer 14
(i) Meaning of 'Private Placement': As per Explanation I to section 42(3), the term "private placement" means
any offer or invitation to subscribe or issue o f securities to a select group of persons by a company (other
than by \'lay of pub li c offer) through private p lacement offer - cum-application, which satisfies the
conditions specified in section 42 .

(ii) 'Time l imit for Allotment of Securities' and 'repayment of application money in case of default in
al lo tment': A company making an offer or invitation under section 42 shall allot it s securit ies with in sixty
days from the date o f r eceipt of the application money for such securities and if the company is not able to
allot the securities within that period, it shall repay the application money to the subscribers w it hin fifteen
days from the expiry of sixty days and if the company fails to repay the application money within the
aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per
annum from the expiry of the sixtieth day.

Question 15

Referring to the provisions of the Companies Act, 2013, answer the following queries:
(i) What is the type of resolution to be passed and maximum number of persons to whom an offer by
private placement in a financial year be made?
{ii) Explain tha consl!qUC!ncC!s of non-allotml!nt of sharas within thC! stipulatC!d timelinC!.
(iii) In case the shares were allotted within the requisite allowed time, when can the company start utilizing
the funds received by it from such private placl!ment? {PYP S Marks May'24)

Answer 15
(i) Rule 14 (1) of the Companies (Prospectus and Allotment of Secur ities) Rules, 2014, requires prior approval
of the shareholders of the company, by a special r esolution for each of the private placement offers or
invitations.
Provided further that this sub-r ule shall not apply in case of offer or invitation for non-convertib le debentures,
where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified
in clause (c) of sub -section (1) of section 180 in such cases relevant Board resolution under clause (c) of sub-
section(3) o f section 179 would be adequate.
Provided also that in case of offer or invitation for non-convertible debentures, where the proposed amount
to b e raised through such offer or invitation exceeds the limit as specified in clause (c) of su b- section (1) of
section 180, it shall be sufficient if t he compa ny passes a previous special r esolution only once in a year for all
the offers or invitations for such debentures during the year.
Thus, based on above, the resol ution w ill be passed.
As per section 42(2) o f the Companies Act, 2013, a private p lacement shall be made only to a select grou p
o f persons who have been identified by the Boar d, whose number shall not exceed SO or such higher number

Chapter 3 Prospectus and Allotment of Securities

 ~
as may be pr escribed, in a financia.1yea r.
Rule 14 (2) of the Companies (Prospectus and Allotment o f Secur ities) Rules, 2014 has p rescribed ' an offer
or invitation to subscribe securities under p rivate placement shall not be made to per sons more than two
hundred (200) in the aggregate in a financial year'.
Provided that any offer o r invitation made to Qualified Institutional Buyers and Employees of the company
being offer ed under a scheme of ESOP under section 62(1)( b) shall not be considered while calculating the
Iim it of two hundred persons.
As per ru le 14(7), NBFCs wh ich are registered w ith the RBI and Housing Fi nance Companies which are
registered w ith th e National Housing Bank; if they are complying with any r egulations made by the RBI or
National Housing Bank in resp ect of offer or invitation to be issued on pr ivate placement basis, then need
not to comply with the r ule 14(2) above.
Thus, based on above, the maximu m number of persons to whom an offer by p r ivate placement in a financial
year will be d etermined.
(ii) As per section 42(6) of the Companies Act, 2013 provides that a company making an offer or invitation
under private p lacement shall al lot its securities within sixty days from the date of receipt of the
application money.
If company fails to make allotment withi n 60 days, then repayment of t he application money to the subscribers
shall b e made w ithin fifteen days from t he expiry of sixt y days and if the company fails to repay the ap plication
money within the afor esaid period, it shall be liable to repay that money with interest at the r ate of twelve per
cent pe.r annum from the expiry of the sixtieth day.
(Iii) Company shall not utilise monies raised through private placement unles:s allotment is made and the
return of allotment Is filed with the Registrar In accordance with section 42(8). The ret urn o f allotment
shall be filed with the Registrar within 15 days from t he date of the al lotment under section 42.
Hence, it can utilize the money thus received once the return has been filled w ith the Registrar.

Question 16

The Board of Directors of 'Viwit Su Limited' made a private placement offer to a group of 150 persons to
subscribe for 100 equity shares@"; 100 each on lstApril, 2022 aher passing a special resolution in this
regard. The company received application money from the members on 15thApril, 2022 but did not make
nn nllotment of shnres till 31stJuly, 2022. Instead, during this interim period, the comp:iny opted to utiliic
the npplicatlon money for the pnyment of dividend th:>t h:,d been decl:>red by the company. Some of the
members raised an objection that as the allotment w:>s not done by the company within the prescribed
time limit, the company is liable to repay the application money with interest@ 15% p.a. for such non-
compliance. Examine the validity of the objection raised by the members with reference to the Companies
Act, 2013, and also decide whether application money can be used for the payment of dividends by the
company. (PYP 5 Marks Nav'23}

Answer 16
As per section 42(6) of the Compani es Act, 2013, a company making an offer or invitation under private
placement sha ll allot its securities w ith in 60 days from the date o f receipt of the application money for such
securities and if the company is not ab le to allot the securities w ithin that period, it sha ll repay the
application money to the subscribers w ithin 15 d ays from the expiry of 60 days and if the company fa ils to
repay the application money with in th e aforesaid period, it shall be liable to repay that money w ith interest
at the r ate o f 12% per ann um from the expiry o f the 60th day.
It is p rovided that the monies r eceived on ap plication under this section shall be kept in a separate bank
account in a scheduled bank and shall not be utilised for any pur pose other th an:
(1) for adjustment against allotment o f securities; or
(2) for the repaymen t of monies where the company is unable to allot secu rities..
In the instant case, application money from the members was received on 15th Ap ril, 2022 and company
did not make an allotment of shares till 31st July, 2022 i.e. after expiry of the p eriod of 60 days. Hence, the
company is liable to repay that money with inter est at the rate of 12% per annum from the expiry of the
60th day.
Th erefore, the objection raised by the members for non- al lotment of shar es/ non-refund o f share
application money within the statutory time limit is valid. However, their claim to pay interest@ 15% is not

Chapter 3 Prospectus and Allotment of Securities 3.12

[Link].
Also, the appl ication money cannot be used for the payment of dividend s by the company.

Exam Insights: This Is the first-choice qu estion relating to private placement offer. Majority of the
examinees have provided the correct provisions and answer relating to the time limit for allotment of
shares and the consequences thereof, if the company fails to allot the shares w ithin the stipulated time and
intends to utilize the share appl ication money for the payment of dividend as per the provisions of the
Companies Act, 2013.

Question 17

CDS Ltd. is planning to make a private placement of securities. The Managing Director arranged to obtain
a brief note from some source explaining the salient features of the issue of private placement that the
Board of Directors shall keep In mind while, approving the proposal on this subject. The brief note includes,
inter 3lia, the inform:ition / suireestions on the following points:
(i) A private placement shall be made only to a select group of identified persons not exceeding 200 in a
financial year.
The aforesaid ceiling of identified persons shall not apply to the offer made to the qualified institutional
buyers but i s applicable to the employees of the Company who will be covered under the Company's
Employees Stock Option Scheme.
(ii) The offer on private placement basis shall be made only once in a financial year for any number of
identific,d persons not exceeding 200.
The Compony solicits your remarks on the points referred above :is to whether they are valid or not?
Rc,:isoned rem:irks should be given In ;iccordancc with the provisions of the Companies Act, 2013.
{PYP 4 Morks Ja n 21) {MTP 5 Marks Sep '23)

Answer 17
As per the p rovisions of sub-section (2) of section 42 of the Companies Act, 2013, private placement shall
be made only to a select group of persons w ho have been identified by the Board (herein referred to as
"Identifi ed persons"), whose num ber shall not exceed SO or such higher n umber as may be prescribed, in
a financial year su bject to such conditions as may be p rescribed.
It is also p rovided that any o ffer or invitation made to qualifie d institutional buyers, or to employees of the
company under a scheme of employees' stock option as per provisions of section 62(1){b) shall not be
considered w hile calculating the limit of two hundred persons.
According to Ru le 14 (2) of the Compan ies (Prospectus and Allotment of Secur iti es) Ru les, 2014, an offer
or invitation to subscribe securities under p rivate placement shall not be made to persons more than two
hundred in the aggregate in a financi al y ear.
As per Explanation given in this Rule, it is clarified that the restrictions aforesaid would be reckoned
individually for each kind of secur ity that is equity share, preference share or d ebenture.
Referr ing to the above mentioned provisions of su b -section (2) of section 42 of the Companies Act, 2013
and Rule 14 the Companies (Prospectus and Allotment of Securities} Rules, 2014, we can conclude as
follows:
(i) The compa ny is correct in proposing that private placement shall be made only to a select group of
identified persons not exceeding 200 in a financia l year. This part o f the pr oposal is correct.
The company is also correct in proposing that the aforesaid ceiling of identified persons shall not apply to
offer made to the qualified institutional buyers, but the company is not correct in saying that the said ceiling
is applicabl e to employees ccrvered under the Company's Employee Stock Option Scheme. Hence, the
second part of the proposal is only partially correct.
(ii} The Companies (Prospectus and Allotment of Securities) Ru les, 2014 provides that an offer or invitation
to subscribe securities under pr ivate placement shall not be made to persons more than 200 in aggregate
in a financial year.
Keeping the ceiling of 200 persons in aggregate du ring a financial year, offer of privat e placement can
be made mor e than once in a financial year. Therefore, the second statement is not f ully correct.

Chapter 3 Prospectus and Allotment of Securities

 ~
Question 18 8 LDR

Purple limited wants to raise funds for its upcomine project. Accordinely, It has Issued private placement
offer letters for issuing equity shares to 55 persons, of which four are qualified institutional buyers and
remaining are individuals. Before the completion of allotment of equity [Link] under this offer letter,
company issued another private placement offer letter to another 155 persons in their individual names
for issue of its debentures.
Being a public company is it possible for Purple limited to issue securities under a private placement offer?
By doing so, whether the company is in compliance with provisions relating to private placement or should
thc,sc, offc,rs bc t rc,atod as public offors? What If the offc,r for dobentures is given aftor allotment of equity
shares but within the same financial year? (MTP 6 Morks Oct'22, MTP 6 Morks Mar'21, PYP 5 Marks Dec
'21, SM}
Answer 18
According to section 42 of the Companies Act, 2013 any private or public company may make private
placement through issue of a private placement offer letter.
However, the offer shall be made to the persons not exceeding fifty or such higher number as may be
prescribed, in a financial year. For counting number of persons, Qualified Institutional Buyers (QIBs) and
e mployees of the company being offered securities under a scheme of employees' stock option will not be
considered.
Further, Rule 14 (2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes
maximum of 200 persons who can be offered securities under the private placement in a financial year,
though this limit should be counted separat ely for each type of security.
It is to be noted that if a company makes an offer or invitation to more than the prescribed number of
persons, it shall be deemed to be an offer to the public and accord ingly, It shall b e governed by the provisions
relating to prospectus.
Also, a company Is not permitted to make fresh offer under this section if the a llotment v,ith respect to any
offer made earlier has not been completed or otherwise, that offer has been withdrawn or abandoned by
the compa ny. This provision is applicable even if the issue is of different kind of security.
Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer
and all provisions will apply accordingly.
In the given case Purple Limited, though a public company can raise funds t!hrough private placement as
provisions related to private placement allow even a public company to raise funds through this route. The
company has given offer to 55 persons out of which 4 are qualified institutional buyers and hence, the offer
Is give n effectively to only 51 persons which Is we ll with in the limit of 200 persons. From this point of view,
the company complies the private place ment provisions.
However, as per the question, the company has given another private placement offer of debentures before
completing the allotment in respect of first offer and therefore, the second offer does not comply with the
provisions of section 42. Hence, the offers given by the company will be treated as public offer.
In case the company gives offer for debentures in the sa me financial year after allotment of eq uity shares is
complete then both the offers can well be treated as private placement offers .

Question 19

Stuti Ceramic Pvt. ltd . (SCPL) manufactures crockery items which are predominantly used only by the
domestic houschold customers. Now tho company wants to Ql<pand its area of operation to manufacture all
types of crockery items and cutlery for the use of big hotels. For this expansion plan, the company needs
funds of around " 500 lakh. The company docs not want to convert itself from private company to public
company since the promoters do not want to dilute their equity stake otherwise the public company have
the option to raise the funds through public issue. The company explored the other avenue of raising funds
by issue of right shares to the existing shareholders, however only~ 100 lakh could be generated.
The banks and financial institutions are also reluctant to increase their exposure in the company.
Referring to the provisions of tho Companies Act, 2013, advise tho SCPl, whothcr the company can raise
further funds through private placement issue. If so, are there, any limit for fresh offer and time, limit of
allotment of securities? (PYP 5 Marks Sep'24}

Chapter 3 Prospectus and Allotment of Securities 3.14

Answer 19
Whether Stuti Ceramic Pvt Ltd {SCPL) can raise funds through Private Placement?
Yes, SCPL can raise funds through the p rivate placeme nt of shares.
Section 23(2)(6) of the Compa nies Act, 2013 (the Act) provides that a private company may issue securities
through priva te place me nt by complying with the provisions specified in section 42 of the Act in supple ment
with those stat ed under Rule 14 of the Companies (Prospectus a nd Allotment of Securities) Rules, 2014.
Meaning of Private Placement
Accord ing to the Expla nation i to section 42(3) of t he Act, "private placement " means a ny offer or invitation to
subscribe o r issue ofsecurities to a select group of persons by a company (other tha n by wayof public
offer) through private placement offer- cum-application, which satisfies the cond itions specified in this section.
Offer to be made only to a select group of persons
A private placement shall be made only to a select group of not more than two h undred (200) pe rsons (referred
to as "ide ntified pe rsons") in a financial year who have been ide ntified by the Board afte r passing a special
resolution (Section 42(2) read with Rule 14(1) of t he Companies (Prospectus and Allotment of Securities), Rules
2014].
Limit on Fresh Offer
As per section 42(5) of the Act, no fresh offer or invitation under this section shalll be mad e unless the allotments
with respect to any offer or invitation made earlier have been completed or that offer o r invitation has been
withdrawn or abandoned by the company.
Thus, Stuti Ce ramic Pvt. Ltd. can raise furthe r funds through private place me nt issue afte r the allotments with
respect to right Issue for~ 100 lakh have been completed and subject to the maximum number of 200 persons
(identified persons) under section 42(2) and by complying with the procedu res stated in Rule 14 of the
Companies (Prospectus and Allotment of Securities) Rules, 2014.
Time limit for Allotment of Securities
As per section 42(6) of the Companies Act, 2013, a company making an offer or in,vitation under-this section shall
allot its securities within 60 days from the date of receipt of the applicatio n money for such securities and if the
company is not able to allot the securities within tha t period, it shall repay the a pplication money to the
subscribers within 15 days from the e xpiry of 60 days and if the company fails to repay the application money
within the aforesaid period, it shall be lia ble to repay that mone y with inte rest a t the rate of 12% per annum
from the expiry of the sixtieth day.

Multiple Choice Questions (MCQs)

Sec 25• Deemed Prospectus

1. Modem Furniture limited, issued a document containing offer of securities for sale that is considered as
deemed prospectus under section 25, which requires s1.1ch document must contains certain
matters/disclos1.1res in addition to those, required under section 26. Which of following are correct
req1.1irements;
i. A statement of the net amount received or to be received as consideration for the securities
to which the offer relates
ii. The persons making the offer were named in the prospectus as promoters of the company.
iii. The time and place at which the 1.1nderlying contract for allotment may be inspected. (SM}
(a) i o r ii o nly
(b) i or Hi only
(c) ii or iii only
(d) All of i, ii and iii
Ans: {b)

Chapter 3 Prospectus and Allotment of Securities

 ~
Sec 26- Contents & Requirements in Prospectus

2. Modem Furniture decided to raise capital by issue for which prospectus need to be issued. The copy of
prospectus submitted with registrar for filling need to be duly signed by: {SM)
(a) Any two directors Including managing directo rs
(b) Majority of directors
(c) Majority of directors includ ing proposed directors
{d) Every directo r or proposed director
Ans: (d)

Sec 31· Shelf Prospectus

3. Rig exploration and refinery limited (RERL) decided to raise capital through issue of a shelf prospectus.
Company secretary explains the requirement to board that RERL shall be required to file an information
memorandum with the, Registrar within, prior to the, issue, of a second or su bscqucnt offcr of securitlc,s
under the shelf prosp<?ctus. {SM)
{a) 15 days
(b) 21 days
(c) 30 days
(d) 1 mo nt h
Ans: (d)

4. Dwapar Equipment FinanC<? Llmit<?d, a non-banking finance, company {NBFC), is dcsirous of offcring sccurcd,
redeemable, non-convertible 9% Dcbcnturos to the public In three or more tranches over a cc,rtain period
of time,, Which kind of prospectus it is required to issue so that its purpose Is served and there arises no
need to take out a fresh prospectus for second and subsequent offer of securities. {MTP 2 Marks Oct'19 &
Oct '23)
(a) Deemed Prospectus.
{b) Shel f Prospectus.
(c) Red Herring Prospectus.
(d) Abridged prospectus.
An swc,r (b)

Sec 32· Red herring Prospectus

5, A prospectus which does not include complete particulars of the quantum or price of the securities
included therein is called: {MTP 1 Mark Oct '21)
(a) A deemed Prospectus
(b) A Shelf Prospectus
(c) An Abridged Prospectus
(d) A Red Herring Prospectus
Ans: (d)

Sec 39· Allotment of Securities

6. The minimum amount of subscription in a public issue shall be received within days from the date of issue
of prospectus. {MTP 1 Mark Oct 21)
(a) 30
(b) 60
(c) 90
(d) 120
Ans: (a)

Chapter 3 Prospectus and Allotment of Securities 3.16

7 . Krishna Religious Publishers limited has received application money of',: 20,00,000 (2,00,000 equity shares
of"! 10 each) on 10th October, 2019 from the applicants who applied for allotmc,nt of sharc,s in response to
a private placc,ment offc,r of securities made by the company to them. Select the latest date by which the
company must allot the shares against the, application money so received. ( RTP Nov '21)
(a) 9th November, 2019
(b) 24 h November, 2019
(c) 9th De cember, 2019
(d) gth January, 2020
Ans: (c)

Sec 40· Securities to be dealt with in Stock Exchanges

8. Section 40 of the Companies Act, 2013 requires every company shall make an application to one or more
recognizc,d stock exchange or exchanges before making public offer. Madhav Casting limited filc,d an
application to three exchangc,s for the securities to be dealt with in such stock exchanges, it received
permission from couple of them and proceed with public issue. There will be: {SM)
(a) No pe nalty, as a pplication has been fil ed
(b) Penalty o n Mad hav Casting Limit ed ranging from"- 5 lakh to ·ii! 50 lakh
(c) Penalty on Mad hav Casting Limited ranging fro m "- 5 lakh to "- SO la kh and every officer of the
com pany who is in default ra nging from ',: 50 thousand to "- 3 lakh
(d) Pena lty on Madhav Casting lim ited ranging fro m "- 5 lakh to ',: 50 la kh and every officer of the
com pany who is in default ranging from"- 50 thousand to"- 3 la kh and/or Impriso nme nt upto one
year.
Ans: (c)

9 . When a copy of the contract for the payment of underwriting commission is required to be delivered to the
Registrar: {MTP 1 Mark Oct '20, Mar'22 & Sep '23)
(a) Th ree days before the d elivery of the prospectus for registr.a tio n
(b) At the time of delivery of the prospe ctus fo r registra tion
(c) Th ree days after the de livery o f the pros pe ctus for regist ratio n
(d) Five days after the delive ry of the prospe ctus for registrat ion
Ans: (b)

10. Which of the following statements is not true? {MTP 2 Marks Oct 21}
(a) in case of s hares, the ra te of und e rwriting commissio n t o be paid shall no t exceed five pe rcent o f the
issue price o f the sha re .
(b) underw riting com missio n should not be more than the rate specified by the Article o f Association .
(c) in case o f debe ntu res, t he rate of underwriti ng commission shall not exceed five pe rcent of the issue
price of t he de bent ures.
(d) amount of commission may be paid out of profits o f the company.
Ans (c)

[Link] Su Limited made a public issue of Debentures. The articles of the company authorises the payment
of underwriting commission at 2 per cent of the issue price. The company has negotiated with the proposed
underwriters, Gama Brokers and has finalised the rate at 2.25 per cent. The amount that the company is
e ligible to pay as underwriting commission is: (RTP Nov 21} (MTP 2 Marks Sep '23}
(a) 5%
(b) 2%
(c) 2.5%
(d) 2.25%
Ans: (b)

Chapter 3 Prospectus and Allotment of Securities

[Link] Board of Diroctors Vishvas Ltd. decide to pay 5% of the issue price of shares as underwriting commission
to the underwriters. However, the Articles of Association of the company permit only 3% commission. What
is tho maximum amount of underwrltin,: commission that c:in be p:iid to the underwriters. {MTP 2 marks
July'24)
(a) 2%
(b) 3%
(c) 5%
(d) No lim it has prescribed under the Companies Act, 2013 in case undenvr; ting commission is to be paid
in case of issue of shares.
Ans: (b)

Sec 42• Private Placement

[Link] of the following st:itement is contr:iry to the provisions of the Companias Act, 2013?
{MTP 2 Marks April '23, RTP May'21}
(a) A p rivate company can make a private placemen t of its securities.
(b) The company has to pass a special resolution for private placement.
(c) M inimum offer per person should have Market Value o f ~ 20,000.
(d) A public company can make a private placement of its securit ies.
Ans (c)

[Link]:ig<l Private Limited issu<!d 9% Non-convertible Dcbentur<ls worth ~ 10 l:ikh :ind ther<!aftcr, the,
dirc<:tors contemplated to get them listed. After due formalities, these privately pl aced non-convertible
debenturos of 0: 10 lakh were listed. Which of the followlne options Is appliczible in the elven situation: (RTP
Nov '23}
(a) Newage Private Limited shall be considered as a listed company.
(b) Newage Private Limited shall not be consider ed as a listed company.
(c) Newage Private Li mited shall be consider ed as a listed company only \Vhen minimum amou nt of list ed
privately placed non-convertible debentures is~ 15 lakh.
(d) Newage Private Limited shall be considered as a listed company only when minimum amount of listed
privately placed non-convertible debentures is minimum 0: 20 lakh.
Ans: (b)

Chapter 3 Prospectus and Allotment of Securities 3.18