Investment and Securities Law

• Meaning of Prospectus, What constitutes offer to the public

• Types of Issues floated by Companies
• Definition of Prospectus
• Introduction to the types of offer documents-
• Draft offer document
• Red Herring Prospectus
• Shelf Prospectus
• Abridged Prospectus
• Important provisions of Laws applicable to Prospectus
• Broad Contents of Prospectus (Sec. 26 of Companies Act)
Meaning of a Prospectus
• In general parlance it means a document issued to the public or an
advertisement which invites subscription to or purchase of
shares/debentures or any other security of a body corporate
• Prospectus- “prospect” – Document giving detailed information about
the future prospects of the company
• A document is called a prospectus only if it satisfies two tests:-
1. It invites subscription to or purchase of shares/debentures or any
other security of a body corporate
2. Invitation is made to the public
What constitutes an offer to the Public?
• Sec. 42 r/w Explanation III and Rules framed thereunder of the Companies Act, 2013-
➢ If a company listed or unlisted makes an offer to allot or invites subscription or allots or enters
into an agreement to allot securities to more than 200 persons (earlier limit was 50 in 1956 Act)
➢ in a financial year
➢ whether the payment for securities has been received or not
➢ Whether company intends to list or not on any stock exchange
➢ In or outside India-the same shall be deemed to be an offer to the public.
QIBs and Employees who are offered ESOPs are not counted in the limit of 200 persons
➢ Thus, it can only be done by PUBLIC COMPANIES.
➢ It involves raising of capital from indefinite investors
➢ First time offers by unlisted companies are known as IPOs
➢ Further public offers of securities already listed known as FPOs.
Case Law:- Sahara v. SEBI
 Types of Issues floated by Companies
a) Public issue
Initial Public offer (IPO) and Further Public offer (FPO)
b) Rights Issue
c) Composite Issue
d) Bonus issue
e) Private placement:- Preferential Issue, Qualified Institutional
Placement and Institutional Placement Programmes
Rights Issue
• In general, fresh shares offered to existing shareholders in proportion to their existing holding in the
share capital of the company are termed as “Rights shares” popularly known as rights issue.
• In the rights issue the shareholders have a right to participate in the issue. It is pre-emptive right (right
of refusal) given by the status to existing shareholders.
• In this rights issue, the offer is required to be made to the existing shareholders on pro-rata to their
existing holdings.
• The shareholders who are offered may or may not subscribe to the same. They may subscribe partly or
fully the offer.
• They have a power to renounce the shares offered to any other person who need not be an existing
shareholder of the company.
• With the rights, the shareholder can purchase new shares at a discount to the market price on a stated
future date
• ‘Right Issue’ means offering shares to existing members in proportion to their existing share holding.
The object is, of course, to ensure equitable distribution of Shares and the proportion of voting rights
is not affected by issue of Fresh shares
Composite Issue: Public Issue + Rights Issue

• Composite issue: When the issue of shares or convertible securities

by a listed issuer on public cum-rights basis, wherein the allotment in
both public issue and rights issue is proposed to be made
simultaneously, it is called composite issue
Bonus Issue

• Bonus issue: When an issuer makes an issue of shares to its existing

shareholders without any consideration (free of cost)
• based on the number of shares already held by them as on a record
date it is called a bonus issue.
• The shares are issued out of the Company’s free reserve or share
premium account in a particular ratio to the number of securities held
on a record date.
Example: 1:1 so for every 1 share held, 1 share is given by bonus.
Private Placement

• Private placement: When an issuer makes an issue of shares

or convertible securities to a select group of persons not
exceeding 200, and which is neither a rights issue nor a
public issue, it is called a private placement.
• Private placement of shares or convertible securities by
listed issuer can be of three types:
Types of Private Placements
(i) Preferential allotment: When a listed issuer issues shares or convertible
securities, to a select group of persons in terms of provisions of Chapter VII of
SEBI (ICDR) Regulations, 2009, it is called a preferential allotment. The issuer is
required to comply with various provisions which inter‐alia include pricing,
disclosures in the notice, lock‐in etc, in addition to the requirements specified in
the Companies Act.
(ii) Qualified institutions placement (QIP): When a listed issuer issues equity
shares or non-convertible debt instruments along with warrants and convertible
securities other than warrants to Qualified Institutions Buyers only it is called a
QIP.
(iii)Institutional Placement Programme (IPP): When a listed issuer makes a further
public offer of equity shares, or offer for sale of shares by promoter/promoter
group of listed issuer in which the offer, allocation and allotment of such shares
is made only to qualified institutional buyers for the purpose of achieving
minimum public shareholding, it is called an IPP.
Definition of Prospectus

• (70) ―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;
• Wide definition to cover all documents that invite persons to
subscribe to the share capital of the company
• ‘Offer document’ is a document which contains all the relevant
information about the company, promoters, projects, financial details,
objects of raising the money, terms of the issue, etc. and is used for
inviting subscription to the issue being made by the issuer.
• ‘Offer Document’ is called “Prospectus” in case of a public issue and
“Letter of Offer” in case of a rights issue.
• Sec. 2 (kk) of ICDR defines “offer document” means a red herring
prospectus, prospectus or shelf prospectus, as applicable, referred to
under the Companies Act, 2013, incase of a public issue, and a letter
of offer in case of a rights issue;
Draft Offer Document

• Draft offer document is an offer document filed with SEBI for

specifying changes, if any, in it, before it is filed with the Registrar of
companies (ROCs).
• Draft offer document is made available in public domain including
websites of SEBI, concerned stock exchanges, or concerned Merchant
Banker for enabling public to give comments, if any, on the draft offer
document.
 Red Herring Prospectus

• Red herring prospectus is an offer document used in case of a book

built public issue.
• The Red Herring Prospectus derives its name from the “red herring
fish” known to distract.
• It contains all the relevant details except that of price or number of
shares being offered.
• It is filed with Registrar of Companies before the issue opens
• Red Herring only discloses the Price Band and not the real price
 Shelf Prospectus

• Shelf Prospectus under Explanation to section 31 has been referred to

mean a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more
issues over a certain period without the issue of a further prospectus
- Valid for 1 Year
- It is a single prospectus for multiple issues
- No need of issuing separate prospectus for every act of public issue
upto a period of 1 year
Information Memorandum

• Filed by Companies who are issuing a Shelf Prospectus

• It contains all material information about:-
- New charges created
- Changes in financial position of the Company that might have
occurred in between two public issues
- Such other changes as may be prescribed in regulations
Abridged Prospectus
• Only some selected / salient features of the Prospectus are mentioned
• An abridged prospectus is defined as a memorandum comprising such prominent
aspects of a prospectus as may be prescribed by the Securities and Exchange
Board by establishing regulations in this matter, according to section 2(1) of the
Companies Act 2013.
• It is therefore a document containing a prospectus summary. Its objective is to
summarise the prospectus, which contains the information prescribed by
the Securities and Exchange Board of India (SEBI), without leaving out any
significant factors.
• Its primary goal is to protect the rights of investors. It has been made mandatory
with the application form so that investors are aware of their rights,
consequences, and outcomes when investing in a specific company.
Relevant provisions of applicable laws
❑Companies Act, 2013
• Definition of Prospectus u/S. 2(70) of the Act
• Sec. 25-39 of the Companies Act, 2013
❑SEBI Disclosure and Investor Protection Guidelines 2000
❑SCRA- Sec. 19:- Applicable at the time of listing of securities with the
Stock Exchange
Broad Contents of a Prospectus

• Information to be given in a Prospectus

• Reports to be set out in the prospectus
• Declarations to be made
• Other matters as required by the law/regulations