Prospectus: Legal Regulation

• Chapter III of the CoAct deals with

“Prospectus and allotment of securities”, the
chapter is divided into two parts, Part I deals
with Public Offer and Part II deals with Private
Placement.
• Section 23 of the Act provides that a company whether
public or private may issue securities. A public company
may issue securities:
• (a) to public through prospectus ("public offer") by
complying with the provisions of Part I of Chapter III of the
Act; or
• (b) through private placement by complying with the
provisions of Part II of Chapter III of the Act; or
• (c) through a rights issue or a bonus issue in accordance
with the provisions of this Act and in case of a listed
company or a company which intends to get its securities
listed also with the provisions of the SEBI Act, 1992 and the
rules and regulations made thereunder.
• The section deals with issue of securities,
which is a wider term not restricted to equity,
preference or debentures.
• A public company may issue any of the
aforesaid securities by way of a public offer or
rights/ bonus issue or private placement.
Public Offer here includes initial public offer
(IPO) or further public offer (FPO) of securities
to the public by a company
• To increase the accountability of companies and
enhance protection to small investors the term
private placement has been defined for the first
time in the Act.
• Explanation II to Section 42 defines private
placement so as to mean any offer of securities or
invitation to subscribe securities to a select group
of persons by a company (other than by way of
public offer) through issue of a private placement
offer letter and which satisfies the conditions
specified in this section.
 Prospectus
• In general parlance prospectus refers to an
information booklet or offer document on the
basis of which an investor invests in the securities
of an issuer company.
• It has been defined under section 2(70) so as to
mean any document described or issued as a
prospectus and includes a red herring prospectus
referred to in section 32 or shelf prospectus
referred to in section 31 or any notice, circular,
advertisement or other document inviting offers
from the public for the subscription or purchase
of any securities of a body corporate.
• For filing and issuing the prospectus of a public
company, it must be signed and dated and
contain all the necessary information as stated
under section 26 of the Companies Act,2013:
• Name and registered address of the office, its
secretary, auditor, legal advisor, bankers, trustees,
etc.
• Date of the opening and closing of the issue.
• Statements of the Board of Directors about
separate bank accounts where receipts of issues
are to be kept.
• Statement of the Board of Directors about the
details of utilization and non-utilisation of
receipts of previous issues.
• Consent of the directors, auditors, bankers to
the issue, expert opinions.
• Authority for the issue and details of the
resolution passed for it.
• Procedure and time scheduled for the
allotment and issue of securities.
• The capital structure of the in the manner
which may be prescribed.
• The objective of a public offer.
• The objective of the business and its location.
• Particulars related to risk factors of the
specific project, gestation period of the
project, any pending legal action and other
important details related to the project.
• Minimum subscription and what amount is
payable on the premium.
• Details of directors, their remuneration and
extent of their interest in the company.
• Reports for the purpose of financial information
such as auditor’s report, report of profit and loss
of the five financial years, business and
transaction reports, statement of compliance with
the provisions of the Act and any other report.
• Filing of copy with the registrar
• As stated under sub-section 4 of section26 of the
Companies Act, 2013, the prospectus is not to be
issued by a company or on its behalf unless on or
before the date of publication, a copy of the
prospectus is delivered to the registrar for
registration.
• The copy should be signed by every person whose
name has been mentioned in the prospectus as a
director or proposed director or the assigned
attorney on his behalf.
• Delivery of copy of the prospectus to the
registrar
• As per section26(6) of the Companies Act
2013, the prospectus should mention that its
copy has been delivered to the registrar on its
face. The statement should also mention the
document submitted to the registrar along
with the copy of the prospectus.
• Registration of prospectus
• Section26(7) states about the registration of a
prospectus by the registrar. According to this
section, when the registrar can register a
prospectus when:
• It fulfils the requirements of this section, i.e.,
section 26 of the Companies Act, 2013; and
• It contains the consent of all the persons
named in the prospectus in writing.
 Types of the Prospectus
• Red Herring Prospectus
• Shelf Prospectus
• Abridged prospectus
• Deemed Prospectus
• Shelf Prospectus
• Shelf prospectus can be defined as a prospectus
that has been issued by any public financial
institution, company or bank for one or more
issues of securities or class of securities as
mentioned in the prospectus. When a shelf
prospectus is issued then the issuer does not need
to issue a separate prospectus for each offering
he can offer or sell securities without issuing any
further prospectus.
• The provisions related to shelf prospectus has been
discussed under section 31 of the Companies Act,
2013.
• The regulations are to be provided by the Securities
and Exchange Board of India for any class or classes of
companies that may file a shelf prospectus at the
stage of the first offer of securities to the registrar.
• The prospectus shall prescribe the validity period of
the prospectus and it should be not be exceeding one
year. This period commences from the opening date of
the first offer of the securities. For any second or
further offer, no separate prospectus is required.
• While filing for a shelf prospectus, a company is
required to file an information memorandum along
with it.
• Information Memorandum [Section 31(2)]
• The company which is filing a shelf prospectus is
required to file the information memorandum. It
should contain all the facts regarding the new charges
created, what changes have undergone in the financial
position of the company since the first offer of the
security or between the two offers.
• It should be filed with the registrar within three
months before the issue of the second or subsequent
offer made under the shelf prospectus as given
under Rule 4CCA of section 60A(3) under the
Companies (Central Government’s) General Rules and
Forms, 1956.
• When any company or a person has received an
application for the allotment of securities with
advance payment of subscription before any
changes have been made, then he must be
informed about the changes. If he desires to
withdraw the application within 15 days then the
money must be refunded to them.
• After the information memorandum has been
filed, if any offer or securities is made, the
memorandum along with the shelf prospectus is
considered as a prospectus.
• Red herring prospectus
• Red herring prospectus is the prospectus which lacks
the complete particulars about the quantum of the
price of the securities. A company may issue a red
herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of
securities.
• This type of prospectus needs to be filed with the
registrar at least three days prior to the opening of the
subscription list or the offer. The obligations carried by
a red herring prospectus are same as a prospectus. If
there is any variation between a red herring
prospectus and a prospectus then it should be
highlighted in the prospectus as variations.
• When the offer of securities closes then the
prospectus has to state the total capital raised
either raised by the way of debt or share capital. It
also has to state the closing price of the securities.
Any other details which have not been included in
the prospectus need to be registered with the
registrar and SEBI.
• The applicant or subscriber has right
under Section60B(7) to withdraw the application
on any intimation of variation within 7 days of
such intimation and the withdrawal should be
communicated in writing.
• Abridged Prospectus
• The abridged prospectus is a summary of a prospectus filed
before the registrar. It contains all the features of a
prospectus. An abridged prospectus contains all the
information of the prospectus in brief so that it should be
convenient and quick for an investor to know all the useful
information in short.
• Section33(1) of the Companies Act, 2013 also states that
when any form for the purchase of securities of a company
is issued, it must be accompanied by an abridged
prospectus.
• It contains all the useful and materialistic information so
that the investor can take a rational decision and it also
reduces the cost of public issue of the capital as it is a short
form of a prospectus.
• Deemed Prospectus
• A deemed prospectus has been stated
under section 25(1) of the Companies Act, 2013.
• When any company to offer securities for sale to
the public, allots or agrees to allot securities, the
document will be considered as a deemed
prospectus through which the offer is made to the
public for sale. The document is deemed to be a
prospectus of a company for all purposes and all
the provision of content and liabilities of a
prospectus will be applied upon it.
 Sahara v SEBI Fiasco
• Facts of the case –
• From 25th April 2008 to 13th April 2011, Sahara India
Real Estate Corporation Limited (SIRECL) and Sahara
Housing Investment Corporation Limited (SHICL)
floated an issue of Optionally Fully Convertible
Debentures (OFCDs) and started collecting
subscriptions from investors.
• The company had over Rs. 17,656 crore during that
period. In the guise of “Private Placement”, the
amount was collected from about 30 million investors.
This act was performed without complying with the
requisites relevant to the public offerings of the
securities. The Whole Time Member of SEBI was taking
cognizance of the act.
• On June 23rd ,2011 they passed an order. The order directed
two companies to refund the money to the investors which
was collected from the them. Additionally, the promoters of
the two companies along with Mr. Subrata Roy were
restrained from accessing the securities market until further
orders. An appeal was made before the Securities Appellate
Tribunal (SAT) by the Sahara. This appeal was against the
order of the Whole Time Member.
• After hearing, on 18th Oct, 2011 the SAT confirmed and
maintained the order of the Whole Time Member.
Subsequently an appeal was made by Sahara before the
Supreme Court of India against the order of the SAT.
• Issue 1. Whether SEBI has the power to adjudicate and investigate
in the given matter according to Section 11, 11A, 11B of SEBI Act
and under Section 55A of the Companies Act. Or whether the
jurisdiction under Section 55A (c) of the Companies Act is with the
Ministry of Corporate Affairs (MCA).
• Issue 2. Whether the hybrid OFCDs comes under the definition of
“Securities” within the meaning of SEBI Act, Companies Act and
The Securities Contracts (Regulation) Act (SCRA) for vesting SEBI
with the jurisdiction to adjudicate and investigate.
• Issue 3. Whether the issue of the OFCDs to millions of persons
who had subscribed to that issue is a Private Placement so that
not to come within the scope of SEBI Regulations and various
other provisions of Companies Act.
• Issue 4. Whether listing of the provisions under
Section 73 compulsorily applies to all the public
issues or it only depends on the “intention of the
company” for getting listed.
• Issue 5. Whether the Public Unlisted Companies
(Preferential Allotment Rules) 2003 will be applied
in this case or not.
• Issue 6. Whether OFCDs are Convertible Bonds
and whether they are exempted from application
of SCRA as per the provisions of Section 28(1)(b).
• Judgment for issue 1–
• In the present matter the
• Supreme Court held that SEBI have power to adjudicate
and investigate. Also the SC said that according to the SEBI
Act, the SEBI has special powers for doing investigation and
adjudication to protect the interests of the investors.
• This special power of the SEBI do not show disrespectful
attitude to any provisions which are present in any law.
They are an analogous to other law and it should be read in
harmonious manner with other provisions. In the present
matter where the interests of the investors are at stake,
there is no conflict of jurisdiction between the SEBI and the
MCA.
• For supporting this view, the Supreme Court gave special
importance to the legislative intent, and also to the
statement of objectives for enacting the SEBI Act and the
inserting Section 55A in the Companies Act to authorize
special powers to SEBI in the matters of issue, allotment
and transfer of the securities.
• The SC observed that according to provisions mentioned
under Section 55A of the Companies Act, so far matters
connected to issue and transfer of the securities and
non-payment of the dividend, the SEBI has the power to
administer in the case of listed public companies and also in
the case of those public companies which intended of
getting their securities listed on a recognized and identified
stock exchange in India.
• Judgment for issue 2-
• The OFCDs issued two companies which are in the nature of
“hybrid” instruments. The Supreme Court held that even
though the OFCDs had issued that, it do not cease to be a
“Security” within the meaning of the SEBI Act, Companies
Act, and SCRA.
• It says in spite of having the definition of “Securities” under
section 2(h) of SCRA, it doesn’t contain the term “hybrid
instruments”. The definition which is provided in the Act is
covering all the “Marketable securities”.
• In this case such OFCDs were offered to number of people,
so the question about the marketability of such instrument
do not arise. Additionally, since the name itself was
comprise of the term “Debenture”, it is considered as a
security according to the provisions of the SEBI Act,
Companies Act and SCRA.
• Judgment for issue 3-
• The Supreme Court held that even though the
intention of the companies was of making the issue of
OFCDs look as a private placement, but when such
securities are given to more than 50 persons, it ceases
to be so.
• This is specifically mentioned in Section 67(3). Hence
the SEBI will have jurisdiction in that matter. Here, the
issuer has to act in accordance with the provisions of
the legal framework for a public issue. Although
Sahara companies opposed that they do not fall under
the provisos to Sec 67 (3) as the Information
memorandum mentioned that OFCDs were issued only
to those belonging to Sahara Group.
• No public offer was present, but the SC held that as the
companies elicited public demand for OFCDs via issue of
Information Memorandum under Sec 60B of the Companies
Act, is only meant for Public Issues. Additionally, observed
that the issue was not for persons associated to the Sahara
Group as introducers were required for someone to
subscribe to OFCDs and in the present case introducer will
not be needed because a person is already associated to
Sahara Group.
• Hence, the SC concluded that it can be clearly noticed from
the intension and actions of the two companies that they
desired to issue securities to public in the garb of a private
placement for bypassing various laws and regulations in
relation to that. Moreover, SC observed, Sahara companies
had violated the provisions of Sec 67(3) as they had issued
securities to more than the statutory limit.
• Hence attracting civil and criminal liability. Also, the
Supreme Court held that the violation of sec 60B of
the Companies Act had took place. Because issue of
OFCDs by circulation of IM to public had attracted
provisions of Section 60B of the Companies Act, which
are required in filing prospectus under Sec 60B(9) and
companies had not given a final prospectus on closing
of the offer and also can’t manage to register it with
SEBI.
•
• Judgment for issue 4-
• The Sahara argued that listing requirement under Section
73 of Companies Act is optional and it applies only to those
companies who “intend to get listed”, and no company can
be forced for getting listed on a stock exchange or else it
will be violation of corporate autonomy.
• However, the SC refused this and held that, Sec 73 (1) is a
compulsory provision of law which companies should
comply with and any issue of securities exceeds 49 persons
according to Sec 67(3) of the Companies Act, the intention
of companies to get listed do not matter at all.
• Section 73(1) of the Act puts obligation on every
company who is intending to offer debentures or
shares to public for applying on a stock exchange
to list its securities. Also, the maxim ”acta exterior
indicant interiora secreta” i.e external action
reveals inner secrets applies in this case of
Saharas.
• The court also held that, if securities to fifty or
more are offered, it is a public offering as per
Section 67(3) of the Companies Act.
• Judgment for issue 5-
• According to the Unlisted Public Companies (Preferential
Allotment) Rules 2003, preferential allotment by unlisted
public companies on private placement was given
authorization without any restriction on numbers according
to Section 67(3) of the Companies Act, argued by the
companies.
• Moreover, Sec 67(3) is applicable to Preferential Allotment
which was made by unlisted public companies in 2011 by
amending the 2003 rules which was with prospective effect
and not with retrospective effect. Therefore, before the
2011 Rules were made there was freedom to make
preferential allotment to more than 50 persons also.
• Nevertheless, the SC disagreed and observed that 2003
Rules apply only in the context of preferential allotment of
unlisted companies, however, if the preferential allotment
is a public issue, then 2003 Rules would not apply.
• Judgment for issue 6-
• Here the Supreme Court held that 28(1)(b),
accurately points out that only the convertible
bonds and share or warrant of the type
referred here are excluded from applicability
of SCRA and not debentures which are
another category of securities in definition
which is present in Section 2(h) of SCRA.
• Issue of prospectus after registration
• If a prospectus is not issued before 90 days from the
date from which a copy was delivered before the
registrar, then it is considered to be invalid.
• Contravention of section
• If a prospectus is issued in contravention of the
provision under section 26 of the Companies Act 2013,
then the company can be punished under section
26(9). The punishment for the contravention is:
• Fine of not less than Rs. 50,000 extending up to
3,00,000.
• If any person becomes aware of such
prospectus after knowing the fact that such
prospectus is being issued in contravention of
section 26 then he is punishable with the
following penal provisions.
• Imprisonment up to a term of 3 years
(Omitted), or
• Fine of more than Rs. 50,000 not exceeding
Rs. 3,00,000.