CHAPTER 3 – PROSPECTUS AND ALLOTMENT OF SHARES

Sec. 23 to 42 – Coverage
(Refer to New additions material for these sections – 24/30/33/38/41)

Scope of the Chapter

What is Issue of Misstatement

Private
prospectus and prospectus and in Prospectus
Placement
Types of Related S.34 to S.38 +
S.42
Prospectus? Matters S.447

1. Red herring Prospectus S.23 – Who can issue prospectus? (Public offer)
S.32 S.26 -Contents of Prospectus
2. Abridged Prospectus S. 27 – Variation in terms or object of prospectus
S.2(1) S.28 – Offer of sale of shares by certain members
3. Shelf Prospectus S.31 S.29 – Public offer to be in DEMAT form
4. Deemed Prospectus S.25 S.39 – Allotment of Securities
S.40 – Securities to be dealt in stock exchange and underwriting
comission

What is
Prospectus as
per S.2(70)

Includes Red
Any document herring
described as prospectus and
prospectus shelf prospectus
Includes Notice/
circular/
advertisement/any
other document
inviting offers from
PUBLIC.

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 TYPES OF PROSPECTUS

1. Red Herring Prospectus (RHP)– S.32

A prospectus which does not have complete details of quantum of shares or price per
share.

Procedure for issue of RHP:

• Issue RHP prior to the issue of prospectus.
• File the RHP with registrar at least 3 days prior to opening subscription list and the offer.
• Upon closing of the offer the prospectus along with details such as total capital raised,
closing price of securities and other details not contained in RHP shall be filed with
registrar and SEBI
• Any variation between RHP and prospectus must be specified and highlighted as
variation in prospectus.

2. Abridged Prospectus – 2(1)

Prospectus containing silent feature of the prospectus as may be specified by SEBI.
In fact, ‘Abridged Prospectus’ is a summarised form of actual prospectus.

3. Shelf Prospectus S.31

Why shelf prospectus?
We may consider a situation where the issuer company issues debentures frequently and has
to file a prospectus every time it issues a new series of debentures. Here, the concept of shelf
prospectus comes into play. Literally, it means a prospectus with a given shelf life. Any
number of issues could be made during the tenure of the shelf prospectus. The only caveat is
to supplement the shelf prospectus by an “information memorandum” containing key
updates or changes.

Procedure for issue

i. It is not applicable to all companies; SEBI will issue who shall issue shelf prospectus.
ii. Shelf Prospectus is issued with a validity of 1 year (shelf life of Prospectus). A company
can rise funds any number of times during the year without registering prospectus for
every issue.
iii. If any material change takes place in this period, then the Company has to file such
information through an Information Memorandum (in form PAS 2) to communicate such
change to the investor.
iv. Information Memorandum has to filed with registrar within one month prior to
Subsequent issue.
v. Info Memo will contain details such as:
 Change in financial position of the Company
 New charges created if any
 Or any other material information.
vi. Where an investor gives advance money for subscription of securities and post which
there is a material change the company has to intimate such change to the investors.
vii. The investors have option to withdraw the advance, if they do so, the company has to
refund the money within 15 days.
viii. Period of 1 year for computing the life of shelf prospectus commences from the date of
opening of first offer of the Company.

CA CS Karthik Manikonda (75501 37279)

 4. Deemed Prospectus S.25
a. Any document a Company issues to the public either directly or indirectly to raise funds
from public is called as Deemed Prospectus.
b. A Company enters into an agreement with an allotee (issuing house) to transfer securities
to the allotee and such securities are issued to public within 6 months from the date of
the agreement OR the allotee has not paid full consideration to the company before
offer to sale to the public, such agreement will be a deemed prospectus. (Any one
condition satisfied it is enough)
c. All provisions applicable to prospectus are applicable to a deemed prospectus.
d. A deemed prospectus has to be signed by 2 directors in case of Company.
e. The deemed prospectus shall also disclose details such as the net amount of the
consideration received or to be received by the company in respect of the securities to
which the offer relates AND the time and place at which the allotted securities may be
inspected.

5. S.23 Who can issue Prospectus?

S.23
Source of
raising Funds

Public Ltd Private Ltd

Public
Offer
(IPO/FPO/OFS)
(Prospectus
Private Rights Bonus All of public
needed in this
Placement Issue Issue company Except
case)
Public Offer

Definition of the Term Security!

Section 2(81) Defines the term Security

The term security means securities as defined in securities contracts (Regulation) Act 1956,
Securities Inclue;

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other

marketable securities of a like nature in or of any incorporated company or
other body corporate; (ii) Derivative; (iii) Units or any other instrument issued by any
collective investment scheme to the investors in such schemes;
(iv) Units or any other instrument issued to Investors under any collective Investment
scheme to Investors in such schemes (Note 1 below)
(v) Security receipt as per SARFAESI Act, 2002

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(vi) Government Securities
(vii) Such other instruments as may be declared by government to be securities
(viii) Any rights or Interests in Securities (example Rights issue offer)
(ix) Any certificate or instrument (by whatever name called), issued to an investor
by any issuer being a special purpose distinct entity which possesses any
debt or receivable, including mortgage debt (Loans secured by real estate), assigned to such
entity, and acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case may be

(In summary, the passage (ix) describes a certificate or instrument issued by a special-purpose
entity, acknowledging that an investor holds a beneficial interest in a debt or receivable,
including mortgage debt. This is commonly seen in financial transactions where assets, such as
mortgage loans, are bundled together and sold to investors in the form of securities or
certificates. The certificate serves as evidence of the investor's ownership or interest in the
underlying financial assets)

Note 1: For the removal of doubts, it is hereby declared that

“Securities” shall not include any unit linked insurance policy or scrips or any
such instrument or unit, by whatever name called, which provides a
combined benefit risk on the life of the persons and investment by such
persons and issued by an insurer referred to in clause (9) of section 2 of the
Insurance Act, 1938) – Basically Life insurance policies are not included.

Note 2 : Section 23(3) Now also allows Indian companies for Overseas direct Listing, I.e
Indian companies can now directly list their securities in Stock exchanges abroad, (Example :
Freshworks from India).

SECTION 26 – EXPLAINED IN CHART IN THE NEXT PAGE

(Contents of a prospectus)

Not applicability to Sec. 26:

• If it is issued to existing members/debenture holders.
• Terms of issue of shares or debenture are uniform in all aspects in respect to shares
or debenture previously issued and quoted on the recognized stock exchange.
Punishment For contravention of Sec 26

COMPANY Officer

Rs. 50,000 to Rs. 3,00,000 Rs 50,000 to 3,00,000

CA CS Karthik Manikonda (75501 37279)

 Section – - Contents of a Prospectus

Key Points Contents

• Every prospectus General Info Financial Info Statutory Info

Must be dated and • Latest Audited
signed and such • Name and Balanced and • Declaration
date shall be the address of P& L that the
deemed date of registered office • Last 5 Years P company has
publication. of Company, CS, &L A/c& BS complied SEBI
• Prospectus as to Auditor, CFO etc.• Reports of & SCRA
filed with their • Date of opening subsidiary
registrar on or and close issue • Reports about
before the date of • Details of Bank Business
publication. accounts where money
• Prospectus should • Details of
be signed by every
is to be
underwriting invested
person whose agreement if any
name is mentioned • Consent of
in the prospectus directors,
as director or auditors,
proposed director.
Bankers and
• Prospectus has to
experts
issued within 90
• Resolutions
days from the date
on which copy of passed (Details)
prospectus is filed • Main object of
with the registrar. the issue and
Statement of experts present business
to be included in the the company
prospectus following • Risk of the
condition are satisfied: project
• Experts are not undertaken,
engaged formation, duration and
promotion or deadline of the
management of project
Company • If the
• He has given consideration
written consent to received other
issue the than cash
prospectus • Details of
• He has not directors,
withdraw his appointments
consent before the and
date of copy of remuneration
prospectus with the
registrar.

CA CS Karthik Manikonda (75501 37279)

SECTION 27: VARYING TERMS & CONDITIONS OF PROSPECTUS (OR) OBJECTS OF
PROSPECTUS.

Once funds are raised to prospectus the Company has to use these funds strictly for the
purpose for which it was raised. Deviations if any are required to be pre-approved by the
investor and recall option has to give to dissenting Shareholders.

The Proceeds also cannot be used for buying, trading or otherwise dealing in equity shares of
any other listed Company.

S. 27 + Rule 7: Procedure for Variation of Terms

1. Pass SR in general meeting through postal Ballot.

2. Publish such details in 2 newspapers (English + vernacular) along with justification for
such variation.

3. Notice for Special Resolution to contain the following:

➢ Original purpose of issue.
➢ Total money raised.
➢ Money actually utilized.
➢ Extent of achievement of objects.
➢ Details of unutilized money.
➢ Particulars of proposed variation.
➢ Reason and justification for the variation.
➢ Time limit within which the proposed objects would be achieved
➢ Risk factors of the new object.
➢ Other relevant information as necessary.

4. The company has to advertise regarding the same simultaneously with dispatch of
postal ballot notice to shareholders.

5. Place the notice on website of company if any.

6. Give exit opportunity to dissenting shareholders.

CA CS Karthik Manikonda (75501 37279)

SECTION 28: OFS – OFFER FOR SALE (EXISTING MEMBERS SELLING SHARES):
Where certain members of the Company propose to offer for sale to the public the shares
held (Whole or part) by them the following procedure has to be followed
↓
1. Section 28 entitles the members to do so in consultation with the BOD & In accordance
with such procedures as may be prescribed.
2. The document issued by the members or Company in this regard it is a deemed
prospectus.
3. Provisions relating to minimum subscription, minimum application value (5%),
statement to be made by board in relation to utilization of money and other
provisions which cannot be complied is not applicable to Sec. 28. Provided a
reasonable jurisdiction is given.
4. All Rules and Regulations relating to contents of prospectus and liability for mis-
statement in prospectus are applicable as if the prospectus is issued by the company.
5. The members shall also collectively reimburse expense to the Company for the
purpose of the issue.

S.29 All securities to be in DEMAT form

1. Every Public Company and Promoters making a public offer must have their
securities in DEMAT form.
2. Unlisted public company shall convert their shares into demat before making any
offer of securities or Buy back or Bonus or rights offer or Bonus issue.
3. Every company has to apply to depository to convert the shares into DEMAT and
obtain ISIN (International security identification number) and inform the security
holders of the same.

Rule 9A – “Explains the obligation of every unlisted public company’’

1. Company has to ensure there is timely payment of fees to depository, registrar to an
issue & share transfer agent
2. Maintain security deposit of not less than 2 years with depository, registrar of issue
and share transfer agent
3. Comply with guidelines issued by SEBI in relation to DEMAT securities of an unlisted
public company.
4. If there is any default company cannot make offer of securities / buy back / Bonus /
Rights issue till such fees is paid.
5. Company has to file PAS 6 with registrar within 60 days of conclusion of each half
year certified by CA/CS in practice.
6. Report the difference between issued capital & shares held in demat with depository
if any.
7. grievance of a security holder of unlisted public company can be filed with IEPF and
IEPF can initiate action after consultation with SEBI against the concerned party.

CA CS Karthik Manikonda (75501 37279)

SECTION 39 – ALLOTMENT OF SECURITIES:
• Allotment can be done only if Amount stated in prospectus as minimum subscription has
been subscribed (90%).
• The sum payable on application in respect of minimum subscription is received by a
Company by cheque or another instrument.
• Minimum application amount must be 5% of nominal value of shares (or) such other
amount as notified by SEBI. (SEBI Notified 25% for listed companies)
• Minimum Subscription has to be received within 30 Days of issue of prospectus.
• If Minimum Subscription is not received (or) if the issue is oversubscribed the entire
amount in case of Minimum subscription not being met or surplus in case of over
subscription has to be refunded within 15 days from the closure of issue or else interest
has to paid at 15% PA.
• The company has to file a return of allotment (PAS 3) within 30 days to the registrar
(Details such as name of security holder, address, number of shares allotted etc. which
has to be certified by the signatory of the PAS 3 form as true and correct)
• In case an unlisted company whose equity shares or convertible preference shares are
listed on a recognised stock exchange, then a valuation report is required to be attached
with PAS3 where a company issues Rights Issue u/s 62.
• Default if company does not file the return -> Rs 1,000 for every day where the default
continues (OR) Rs 1,00,000 whichever is Lower.

SECTION 40 –SECURITIES TO BE DEALT IN STOCK EXCHANGE:

1. Every Company before making a public offer shall make application to one or more
stock exchange and obtain permission for securities to be dealt with Stock Exchange.
2. The prospectus must take the name the stock exchange in which securities will be
dealt.
3. All money received has to be kept in a separate bank A/c and can be utilized or allotted
only after obtaining permission of the Stock Exchange
4. If Permission is not obtained from any of Stock exchange, the money has to be
refunded.
5. If a condition is requiring any applicant for securities to waive compliance with any
condition, such a condition is VOID.

Contravention of Section - 40

Company Officer

5,00,000 to 50 Lakhs Rs 50,000 to 3,00,000

CA CS Karthik Manikonda (75501 37279)

S. 40 Underwriting + Rule 13 of COMPANY (PAS) Rule 2014:
Underwriter is an intermediary who undertakes to subscribe the securities offered by the
Company in case the securities offered by the Company are not subscribed by the public.

No commission is payabale in case the securities are not offerred to public for subscription.

• Underwriting commission has to authorized by the articles.

• Underwriter commission can be paid out of proceeds of issue or profits of the
company or both.

MAXIMUM RATE OF UNDERWRITING COMMISSION

Shares –> 5% (or) Rate mentioned in AOA -> Whichever is LESS.
Debentures –> 2.5% (or) Rate mentioned in AOA -> Whichever is LESS.

• Prospectus should disclose the name of the underwriter, Rate & amount of
commission payable & number of securities underwritten.
• The copy of underwriting agreement has to be delivered to the registrar at the time
delivering the prospectus for registration. (with the details of commission)

What is Irregular Allotment?

The company’s Act does not specifically mention what is irregular allotment Wherever
requirements of proper issue of securities is missing it amount to irregular allotment:

1. Company does not issue of Prospectus in the public offer U/S 23.
2. Contents of Prospectus U/S 26 is missing (or) info is misleading or faulty.
3. Prospectus is not filed with registrar.
4. Minimum subscription U/S 39 is not received.
5. Minimum amount receivable on application is less than 5% of nominal value.
6. Approval from Recognized Stock exchange not obtain in case of listing U/S 40

GOLDEN RULES FOR FRAMING THE PROSPECTUS:

• The prospectus must present the whole picture of the company.
• The prospectus must disclose all material facts, honestly and accurately.
• All material facts likely to influence the decision regarding investing must be disclosed.
• The prospectus must not contain any untrue or misleading statement.
• No fact should be omitted the existence of which might affects nature and quality of the
decision.
• Suppression of facts, however remote will make a prospectus a misleading prospectus if
inclusion of the fact might have affected the investors decision.

Principle that has to be followerd for contents as part of the Prospectus

Uberrimae fides which means ‘utmost good faith’. The legal doctrine of Uberrimae fides
provides that all parties to contract must deal in good faith, making a full declaration of all
material facts. The intending purchasers of shares are entitled to true and correct disclosures
of all the facts in the prospectus.

CA CS Karthik Manikonda (75501 37279)

SECTION 34: CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS:
1. If prospectus includes any of statement which is misleading
(or)
2. Omission of any matter in the prospectus is misleading. Then,
↓
Every person who has authorized such issue shall be liable U/S 447.

Defences available to the party

• Statement (or) omission is immaterial
• Person proves that –
➢ He has reasonable ground to believe the statement was true and
➢ Continued to believe up to the issue of prospectus that the omission was
necessary.

SECTION 35: CIVIL LIABILITY:

Where any person subscribes to securities based on a statement or omission which is mis-
leading & such a person suffers a loss as a consequence thereof, then civil Liability is
attracted.

Person liable for misstatement U/s 35:

Promoters Directors Experts Every person

who has
authorised the
issue of
Existing prospectus

Proposed
directors

The person above is Liable to pay compensation to every person who has sustained
any loss/ damage
Also, where it is proved that the prospectus was issued with an intention to defraud
the applicants, all the above persons shall be personally liable.

Exceptions / Defences available U/s 35:

1. The director withdrew his consent before the issue of prospectus or it was issued
without his consent/authority.
2. Prospectus was issued without his (person’s) consent and on becoming aware of the
issue he has given a reasonable public notice that it was issued without his knowledge
or consent.
3. Person who made statement based on the report of the experts is not liable If he relied
on the experts reports and the expert has given his consent, Also the export has not
withdrawn his consent before the delivery of prospectus for registration.
4. He has a reasonable ground for believing that the statement to be true and believed it
to be true upto to the time of allotment.

CA CS Karthik Manikonda (75501 37279)

SECTION 36: PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST
MONEY:
Where a person Induces person another for:
➢ Obtaining credit facility from Bank/Financial institution
➢ Entering into underwriting agreement
➢ Securing profits from sale of securities through price fluctuations
↓
Induces by means of giving wrong information, wrong forecast, deceptive information (or)
deliberately conceals material facts, Such a person is liable U/s 447.

SECTION 37: ACTION BY AFFECTED PARTY:

If any person/persons get affected by misleading prospectus they can file a suit/class action
suit (Many people filing a suit together) against the Company for violating S. 34/35/36.

SECTION – 447
PERSON GUILTY OF FRAUD:

INVOLVES DOES NOT INVOLVES

PUBLIC INTEREST PUBLIC INTEREST

IMPRISONMENT FINE Fraud

Fraud <
10,00,000
(or)
(or)
MINI: 3 YEARS MINI: Amount 1% of
1% of
MAX: 10 YEARS involved in fraud turnover of
turnover
MAX: 3 Times the Company
w.e.less
amount of fraud w.e.less

FINE IMPRISONMENT

MINI: Amount
involved in fraud
MAX: 3 Times the 6M TO 10 YEARS
amount of fraud

Both

FINE IMPRISONMENT

Upto Rs. 50,00,000 Upto 5 years

CA CS Karthik Manikonda (75501 37279)

 SECTION 42: PRIVATE PLACEMENT
Private placement means any offer of securities or invitation to subscribe to selected group
of persons by the company.

PROCEDURES FOR PRIVATE PLACEMENT IS AS FOLLOWS:

1. In one financial year such offer should not be made for more than 200 investors, the limit
of 200 will exclude the following;
➢ Qualified institutional Buyers (QIB’S) [Egg: Bank, Insurance Companies etc]
➢ ESOP issued to employee U/s 62
2. If offer is made to more than 200 people it will be deemed as a public offer.
3. Limit of 200 is to be applied individually for all securities (I.e., Equity shares/ Preference/
Debentures)
4. Limit of 200 is not applicable in the following cases:
➢ For an NBFC Registered with RBI.
➢ Housing Finance Bank Registered with National Housing Bank.
5. Offer has to comply with such condition as may be prescribed and laid down by the CG.

6. Offer has to be made only to such persons whose name is recorded by the company as
“identified persons” prior to making an offer and such offer cannot be renounced.

7. Identified persons to whom the offer is made shall receive the offer in form (PAS - 4)
within 30 days of recording his name.

8. Company has to maintained a record of such offers made in (PAS -5) and file it with the
registrar with complete information within 30 days of circulation of relevant Private
placement Offer letter (PAS-4)

9. Application money received should be maintain in separate bank A/c and money received
should be in banking channels and cash deposit made is not allowed.

10. Allotment has to be completed within 60 days of receipt of application money, if not
completed within 60 days, refund the amount within 15 days along with 12% interest after
expiry of 60 days.

11. Pass special resolution in general meeting, explanatory statement to include the following:
➢ Details of Board Resolution
➢ Name & Address of valuer
➢ Kinds of securities offered & Price for the same
➢ Amount which the company intends to raise
➢ Justification for price

Note: Not Applicable for Non-convertible debentures.

CA CS Karthik Manikonda (75501 37279)

12. Special Resolution has to be passed once a year for all the allotments that are done during
the said year.

13. Company cannot make fresh offer unless:

➢ Any prior allotment is completed (or)
➢ Such offer / Invitation has been withdrawn.

14. No form of public advertisement is allowed.

15. An offer made to a Body corporate or an Individual who shares a land border with India,
such offer cannot be made unless such Body corporate or Indivdial obtained approvals
under FEMA (China, Nepal, Pakistan, Bangladesh, Myanmar & Bhutan)

16. After allotment is completed, the company has to file a return of allotment with ROC in
PAS- 3 within 15 days of allotment along with prescribed fees.

PAS – 3 to include the following:

• Full name of security holders along with details such as PAN card, e-mail & address
of shareholder.
• Class of securities held
• No. of securities allowed and date of allotment
• Other information as prescribed
 Default in filing return of allotment?
(Company/Director/Promotor)
Rs. 1000 per day of default extend up to Rs. 25,00,000

Penalty U/s 42 -> Company makes an offer or accepts money in contravention of

Section 42.
(Company / Promotor / Director) Liable for penalty as follows;

Penalty
Amt involved in Offer (or) invitation (or) 2 crores
w.e is lower

(+) Refund the money within 30 days of imposing penalty.

General Note with Respect to Liability for Mis-statement in Prospectus

A General remedy available to a security holder who purchased shares due to misstatement
in prospectus is recession of a contract, I.e Voidable at his option to cancel the Contract and
the other option he has is to sue for damages (Recession is NA when (i) he did not reply on
the prospectus (ii) he was a subscriber to MOA being an initial shareholder)

When can a Security Holder Claim Damages U/s 36 to 38?? (Pre-requisites)

a. Misrepresentation (fraudulent) was there in the prospectus and it is of material fact
b. Person is intended to act upon it
c. Person suffered the damages as consequences of acting upon such fraudul

CA CS Karthik Manikonda (75501 37279)