Chapter III – Prospectus and Allotment of Securities
1️ Objective and Importance
This chapter governs how companies raise capital from the public or privately through the issue
of securities.
It ensures transparency, investor protection, and compliance during the process of public offers,
private placements, and allotments.
2️ Key Terms
Prospectus: Any document inviting the public to subscribe for shares or debentures.
Public Offer: Offer made to the public through a prospectus.
Private Placement: Offer made to a select group of investors (not exceeding 2️00 in a financial
year).
Securities: Shares, debentures, bonds, etc.
Shelf Prospectus: Prospectus valid for multiple issues within one year.
Red Herring Prospectus: Preliminary prospectus without complete details of price/number of
shares.
3️ Important Sections (Simplified)
Section Subject Explanation (Simplified)
Sec 2️3️ Public offer and private Public companies can issue securities to the public via
placement a prospectus or privately to specific persons. Private
companies can issue only through private placement or
rights issue.
Sec 2️4 Power of SEBI SEBI regulates the issue and transfer of securities for
listed/public companies. MCA handles private/unlisted
public companies.
Sec 2️5 Document containing offer Treats such documents as a prospectus if they
of securities for sale to resemble an offer to the public.
public
Sec 2️6 Matters to be stated in a Lists mandatory disclosures: company name,
prospectus registered office, capital structure, objectives, directors,
auditors, financial info, declarations, etc.
Sec 2️7 Variation in terms of Any change in use of funds raised must be approved by
contract or prospectus shareholders via special resolution.
Sec 2️8 Offer of sale of shares by Existing shareholders can offer shares to the public
certain members using a prospectus.
Sec 2️9 Dematerialisation of Every company making a public offer must issue
securities securities in demat form only.
Sec 3️0 Advertisement of A prospectus or its abridged version must be filed with
prospectus ROC before publication.
Sec 3️1️ Shelf prospectus Permits companies (especially financial institutions) to
issue a shelf prospectus valid for one year without re-
filing for each offer.
Sec 3️2️ Red herring prospectus Used for book-built issues; filed before opening of
subscription list and completed after price
determination.
Sec 3️3️ Issue of application forms Application forms for shares must be accompanied by
an abridged prospectus.
Sec 3️4– Mis-statement in Directors, promoters, or experts are liable for untrue
3️5 prospectus & liability statements; investors can claim damages or rescind
contracts.
Sec 3️9 Allotment of securities No allotment if minimum subscription not received;
money must be refunded within prescribed time.
Sec 40 Securities to be dealt in Public offers must be made through recognised stock
stock exchanges exchanges.
4 Rules & Exceptions
Private placements limited to 2️00 investors per financial year (excluding QIBs & employees).
Money from the issue must be kept in a separate bank account until allotment.
Shelf prospectus needs an Information Memorandum for subsequent offers.
Mis-statements can attract both civil and criminal liability.
5 SEBI-Focused Quick Revision Points
Prospectus = invitation to public.
Minimum subscription must be received within 1️2️0 days or refund within 1️0 days.
Issue through stock exchange is mandatory for public offers.
Demat is compulsory for public issues.
SEBI has overriding authority for listed companies.
6 Practical SEBI MCQ Examples
Q: What is the maximum number of persons a company can offer securities to under private
placement?
A: 2️00 per financial year.
Q: Who regulates issue of securities by listed companies?
A: SEBI.
Q: Shelf prospectus is valid for how long?
A: One year.