Prospectus

Introduction
One of the major reasons why businesses choose the company form of business is because it
allows greater accessibility to funds. A public company that has been incorporated under
the Companies Act, 2013 is allowed to raise investments from the general public through
different modes. Since a company raises funds from the public, it also becomes necessary that
such a company be accountable to the public. Accordingly, to secure the interests of the investors
in the company, the Companies Act, 2013 mandates the filing of a prospectus with the Registrar
prior to raising funds.
A prospectus is a document issued by a company to invite deposits or subscriptions from the
public by way of issuing securities of the company. It can be understood as a document or a
booklet containing crucial information about the company and its securities for potential
investors. Section 2(70) of the Companies Act, 2013 defines a prospectus as “prospectus means
any document described or issued as a prospectus and includes a red herring prospectus
referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular,
advertisement or other document inviting offers from the public for the subscription or
purchase of any securities of body corporate”
A document shall be called a prospectus if it satisfy two things:
1. It invites subscription to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.
Prospectus in the form of Advertisement
(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
objects, the liability of members and the amount of share capital of the company, and the names
of the signatories to the memorandum and the number of shares subscribed for by them, and its
capital structure.
Various categories of prospectus
“Shelf prospectus” means a prospectus in respect of which the securities or class of securities
included there in are issued for subscription in one or more issues over a certain period without
the issue of a further prospectus – Explanation to Section 31.
Sub section (1) of Section 31 provides that a ‘shelf prospectus’ may be issued by any class or
classes of companies as the Securities and Exchange Board (SEBI) may provide by regulations in
this behalf. Raising finance from the public by means of various securities is a time consuming
process. Every time any such issue comes, a fresh prospectus is required to be filed. Although it is
a repetitive matter, the procedural aspects take a lot of time. In order to minimise the burden on
such institutions, ‘shelf prospectus’ has been introduced. The validity period of a ‘shelf
prospectus’ cannot exceed one year from the date of opening of the first offering of securities
under that prospectus. For subsequent offerings, information memorandum updating the
information under the various heads will have to be filed and entire set comprising of shelf
prospectus and the information memorandum shall constitute the prospectus and have to be
circulated to the general public. The provisions of Section 31, in this regard, are as follows:
 A shelf prospectus may be issued by any class or classes of companies as the Securities
and Exchange Board of India (SEBI) may provide by regulations in this behalf.
 A company filing a shelf prospectus with the Registrar shall not be required to file
prospectus afresh at every stage of offer of securities by it within the period of its validity
which cannot be more than one year.
 A company filing a shelf prospectus shall be required to file an information memorandum
on all material facts relating to new charges created, changes in the financial position as
have occurred between the first offer of securities, previous offer of securities and the
succeeding offer of securities within such time as may be prescribed, prior to making of a
second or subsequent offer of securities under the shelf prospectus.
 An Information Memorandum shall be issued to the public along with shelf prospectus
filed at the stage of the first offer of securities. Information memorandum together with
the shelf prospectus shall be deemed to be a prospectus.
Note: The word memorandum here means a report, or detailed note or summary and not
Memorandum of Association.
Red Herring Prospectus (Section 32)
Section 32 of the Companies Act, 2013 contains the following provisions with respect to ‘red
herring prospectus’:
1) A company proposing to make an offer of securities may issue a red herring prospectus prior
to the issue of a prospectus. “Red herring prospectus” means a prospectus which does not
include complete particulars of the quantum or price of the securities included therein.
2) A company proposing to issue a red herring prospectus shall file it with the Registrar at least
three days prior to the opening of the subscription list and the offer.
3) The red-herring prospectus shall carry same obligation as are applicable in the case of a
prospectus.
4) Any variation between the red herring prospectus and a prospectus shall be highlighted as
variations in the prospectus.
5) Upon the closing of the offer of securities, the prospectus stating therein:
a) the total capital raised, whether by way of debt or share capital,
b) the closing price of the securities, and
c) any other details as are not included in the red herring prospectus shall be filed with the
Registrar and the Securities and Exchange Board of India.

When prospectus is not required to be issued

Issue of a prospectus by a company is not compulsory in the following cases:
1) A private company is not required to issue a prospectus.
2) Even a public company need not issue a prospectus if the promoters or directors feel that they
can mobilize resources through personal relationships and contacts, and, therefore, the shares or
debentures are not offered to the public.
3) Where the shares or the debentures are offered to existing holders of shares or debentures by
way of right (i.e., rights issue) with or without the right of renunciation in favour of other person
[Section 26 (2) (a)].
4) Where the issue relates to shares or debentures which are, or to be, uniform in all respects
with shares or debentures previously issued and dealt in and quoted on a recognised stock
exchange [Section 26(2) (b)].
Misstatement in a prospectus and its consequences
The prospective shareholders are entitled to true and faithful disclosures in the prospectus. The
persons issuing the prospectus are bound to state everything accurately and not to omit material
facts.
What is an Untrue Statement/Misstatement?
According to section 34(1) of the Act, a statement included in a prospectus shall be deemed to
be untrue:
a) if the statement is misleading in the form or context in which it is included; or
b) where any inclusion or omission from a prospectus of any matter is likely to mislead.
Thus, in regard to considering a prospectus as fraudulent, it is not necessary that there should be
false representation in it; even if every word included in the prospectus is true, the suppression
of material facts may render it fraudulent. To judge its effect, it should be read as a whole.
In Rex v. Kylsant [1932], all the statements included in the prospectus issued by the company
were literally true. One of the statements disclosed the rates of dividends paid for a number of
years. But, dividends had been paid not out of trading profits but out of realised capital profits.
This material fact was not disclosed. Held, that the prospectus was false in material particular
and Lord Kylsant, the managing director and chairman, who knew that it was false, was held
guilty of fraud.
A mere silence cannot be a sufficient foundation of setting aside the allotment of shares. The
withholding of facts should be such that if not stated it makes that which is stated absolutely
false. In Peek v. Gurney [1873], the prospectus issued did not mention about certain liabilities.
This created a false impression about the company being very prosperous. The prospectus was
held to be untrue.

Liability and Defenses

An allottee of shares, who had applied for shares, on faith of a prospectus
(i) containing untrue statement; or
(ii) including or omitting material facts which have the effect of what is stated as false has
remedies against the company, its promoters and directors and experts.
It should be noted carefully that the right to claim compensation for any loss or damage is
available only to a person who has ‘subscribed’ for shares, debentures or any other security on
the faith of the prospectus containing untrue statements. Thus, a subsequent buyer of shares in
the open market has no remedy against the company or the directors or promoters. If there is
any misrepresentation of material fact in a prospectus, there may arise (i) civil liability, and (ii)
criminal liability.
Civil Liability
Section 35 (1) provides that where a person has subscribed for securities of a company acting on
any statement included, or the inclusion or omission of any matter, in the prospectus which is
misleading and has sustained any loss or damage as a consequence thereof, the company and
every person who:
a) is a director of the company at the time of the issue of the prospectus;
b) has authorised himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director, either immediately or after an interval of
time;
c) is a promoter of the company;
d) has authorised the issue of the prospectus; and
e) is an expert referred to in sub-section (5) of section 26,
shall, besides punishment under section 36, be liable to pay compensation to every person
who has sustained such loss or damage.
Defences available to avoid Civil Liability
No person shall be liable under Section 35 (1) if he proves
a) that, having consented to become a director of the company, he withdrew his consent
before the issue of the prospectus, or
b) that it was issued without his authority or consent; or
c) that the prospectus was issued without his knowledge or consent, and that on
becoming aware of its issue, he forthwith gave a reasonable public notice that it was
issued without his knowledge or consent.
However, where it is proved that a prospectus has been issued with intent to defraud the
applicants for the securities of a company or any other person or for any fraudulent purpose,
every person referred to in subsection (1) 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 to the securities on the basis of such prospectus (Section 35 (3).
Criminal Liability
Where a prospectus, issued, circulated or distributed under this Chapter, includes any statement
which is untrue or misleading in form or context in which it is included or where any inclusion or
omission of any matter is likely to mislead, every person who authorises the issue of such
prospectus shall be liable under section 447:
Defences available to avoid Criminal Liability
The aforesaid criminal liability will not be attracted if the person proves that such statement or
omission was immaterial or that he had reasonable grounds to believe, and did up to the time of
issue of the prospectus believe, that the statement was true or the inclusion or omission was
necessary.
Punishment for fraudulently inducing persons to invest money Section 36 provides
that any person who,
i) either knowingly or recklessly makes any statement, promise or forecast which is false,
deceptive or misleading, or
ii) deliberately conceals any material facts, to induce another person to enter into, or to
offer to enter into specified agreements, shall be punishable with imprisonment for a term
with shall not be less than six month but which may extend to ten years and shall also be
liable to fine which shall not be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud.
Agreements covered under Section 36 include:
a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or
underwriting securities; or
b) any agreement, the purpose or the pretended purpose of which is to secure a profit to
any of the parties from the yield of securities or by reference to fluctuations in the value of
securities; or
c) any agreement for, or with a view to obtaining credit facilities from any bank or financial
institution.
Action by Affected Persons (Section 37)
A suit may be filed or any other action may be taken under section 34 or section 35 or section 36
by any person, group of persons or any association of persons affected by any misleading
statement or the inclusion or omission of any matter in the prospectus.
Thus, Section 37, not only provides for individual action but also for class action. (remedies copy
se)

STATUTORY REQUIREMENTS IN RELATION TO A PROSPECTUS

1) Dating of Prospectus – As per section 26, a prospectus issued by or on behalf of a company or
in relation to an intended company must be dated. The Section further provides that the date on
the prospectus shall be deemed to be the date of the publication of the prospectus.
2) Registration of Prospectus – Section 26 (1) requires the delivery of a copy of the prospectus to
the Registrar on or before the date of its publication. The copy of the prospectus so delivered,
should be signed by all the persons named there in as director or proposed director or by his
duly authorised attorney. Every prospectus issued under sub-section (1) shall, on the face of it :
a) state that a copy has been delivered for registration to the Registrar as required under
sub-section (4); and
b) specify any documents required by this section to be attached to the copy so delivered
or refer to statements included in the prospectus which specify these documents.
The Registrar shall not register a prospectus unless the requirements of this section with respect
to its registration are complied with and the prospectus is accompanied by the consent in writing
of all the persons named in the prospectus.
The aforesaid requirements apply to existing company or any intended company.
No prospectus shall be issued after ninety days from the date on which a copy of it was
delivered to the Registrar.
Penalty for non compliance
If a prospectus is issued in contravention of the aforesaid provision of Section 26, the company
shall be punishable with fine which shall not be less than fifty thousand rupees but which may
extend to three lakh rupees and every person who is knowingly a party to the issue of such
prospectus shall be punishable with imprisonment for a term which may extend to three years or
with fine which shall not be less than fifty thousand rupees but which may extend to three lakh
rupees, or with both [Section 26 (9)].
Golden Rule by VC Kinderseley
The ‘Golden Rule’ of the prospectus was propounded by Judge VC Kinderseley in the landmark
judgement of The New Brunswick Railway Company v. Muggeridge (1859). In this case, it was
held that “Prospectus is one of the means by which the investor is informed about the soundness
of the company’s venture.” The essence of the rule is that it is mandatory on part of the company
to issue a prospectus; it is not only required to accurately put forth all the relevant facts and
information but also ensure that it does not hide any information which might affect the decision
of an investor. The rule is also known as the ‘Golden Legacy’ as has been described by Judge
Pagewood in Henderson v. Lacon (1865).
This aforementioned rule has been reflected under various provisions of the Companies Act,
2013 which seeks to protect the interests of investors by providing comprehensive and
elaborative guidelines and requiring relevant disclosure of material facts to ascertain the
financial soundness of a company.

Essentials for a document to be called as a prospectus

The essential conditions required to be fulfilled for a document to be considered as a prospectus
under the Indian company law are as follows:
1. Invitation to the Public – One of the most important points that one must remember is
that a prospectus is an invitation to offer rather than an offer itself. This means that a
company makes an open declaration to the public at large that some of its securities are
available for subscription. A document shall be deemed to be an invitation to the public
only if it is open for any person to subscribe, though there may be a possibility that
ultimately the securities may not be issued to him owing to oversubscription or any other
disqualification.
2. Invitation by the company – The prospectus must be issued by the company itself that
wishes to raise the funds. Even if all the requisite disclosures are made available by the
public by some other authority, that would not satisfy the criteria for making the
invitation. However, an entity, on behalf of the company or on the authorisation of the
company, may follow the stipulated process in order to make an invitation to offer to the
public. Hence, an invitation to offer must be made by the company itself or on behalf of
the company by some other authority authorised by the company.
3. Nature of document and particulars therein – A prospectus shall be in the nature of an
invitation to offer, allowing subscription to the securities of the company. Any document
merely disclosing the details of the securities shall not be considered a prospectus. It must
fulfil all the required stipulations that have been provided under the Companies Act, which
have been discussed in the later section of the article.
4. Information regarding securities of the company – A prospectus is required to contain all
the details regarding the securities. The prospectus must specify the nature of securities,
whether equity-based or debt-based. It must also specify the category as to whether it is
an equity or preference share, debenture, bond, warrant, etc. It must specify the number
of securities available for subscription. It must also provide for other particulars, such as
redemption, rate of interest, etc., as may be applicable to the category of securities.