Prospectus and

3 Allotment of Securities
CHAPTER

PRACTICE QUESTIONS
1. Explain various instances which make the allotment of securities as irregular allotment under
the Companies Act, 2013. [ICAI MODULE]

Sol. Irregular allotment: The Companies Act, 2013 does not specifically provide for the term “Irregular
Allotment” of securities. Hence, we have to examine the requirements of a proper issue of securities
and consider the consequences of non- fulfillment of those requirements.
In broad terms, an allotment of shares is deemed to be irregular when it has been made by a
company in violation of Sections 23, 26, 39 or 40. Irregular allotment therefore arises in the
following instances:
1. Where a company does not issue a prospectus in a public offer as required by section 23; or
2. Where the prospectus issued by the company does not include any of the matters required
to be included therein under section 26 (1), or the information given is misleading, faulty
and incorrect; or
3. Where the prospectus has not been filed with the Registrar for filing under section 26 (4); or
4. The minimum subscription as specified in the prospectus has not been received in terms of
section 39; or
5. The minimum amount receivable on application is less than 25% of the nominal value of the
securities offered or lower than the amount prescribed by SEBI in this behalf; or
6. In case of a public issue, approval for listing has not been obtained from one or more of the
recognized stock exchanges under section 40 of the Companies Act, 2013.

2. What is a Shelf-Prospectus? State the important provisions relating to the issuance of Shelf-
Prospectus under the provisions of the Companies Act, 2013 and the Companies (Prospectus and
Allotment of securities) Rules, 2014. [ICAI MODULE]

Sol. As per explanation to section 31, the expression “shelf prospectus” means 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.
A company is required to issue a prospectus each time it accesses the capital market. It leads to
unnecessary repetition for a company which makes more than one offer of securities in a year to
mobile funds from the public. A way out is shelf prospectus which remains valid (on the shelf) a
 specified time period during which offers for securities may be made by a company to the public
without going through the arduous exercise of issuing fresh prospectus every time.
(i) Filing of shelf prospectus with the Registrar
Shelf prospectus may be filled with the Registrar at the stage of first offer of securities,
by class or classes of companies as the Securities and Exchange Board may provide by
regulations in this behalf.
It has to indicate a period not exceeding one year as the period of validity of such shelf
prospectus.
The period of validity is to commence from the date of opening of the first offer of securities
under such prospectus.
In respect of any second or subsequent offer of such securities issued during the period of
validity of such prospectus, no further prospectus is required.
(ii) Filing of ‘Information Memorandum’ with the Shelf Prospectus
A company filing a shelf prospectus shall be required to file an information memorandum
with the Registrar within the prescribed time, prior to the issue of a second or subsequent
offer of securities under the shelf prospectus containing;
(a) All material facts relating to new charges created,
(b) Changes in the financial position of the company as have occurred between the first offer of
securities or the previous offer of securities and the succeeding offer of securities, and
(c) Such other changes as may be prescribed,
The information memorandum shall be prepared in Form PAS-2 and filed with the Registrar
along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014
within one month prior to the issue of a second or subsequent offer of securities under the
shelf prospectus.
(iii) Safeguard (in case of changes) to applicants who made payment in advance.
It is provided that where a company or any other person has received applications for the
allotment of securities along with advance payments of subscription before the making of
any such change, the company or other person shall intimate the changes to such applicants
and if they express a desire to withdraw their application, the company or other person shall
refund all the monies received as subscription within fifteen days thereof.
(iv) Information Memorandum together with Shelf Prospectus is deemed Prospectus
Where an information memorandum is filed, every time an offer of securities is made under
sub-section (2), such memorandum together with the shelf prospectus shall be deemed to
be a prospectus.

3. The Board of Directors of Chandra Mechanical Toys Limited proposes to issue a prospectus inviting
offers from the public for subscribing to the equity shares of the Company. State the reports which
shall be included in the prospectus for the purposes of providing financial information under the
provisions of the Companies Act, 2013. [ICAI MODULE]

Sol. As per section 26(1) of the Companies Act, 2013, every prospectus issued by or on behalf of a public
company either with reference to its formation or subsequently, or by or on behalf of any person
who is or has been engaged or interested in the formation of a public company, shall be dated and
signed and shall state such information and set out such reports on financial information as may
be specified by the Securities and Exchange Board in consultation with the Central Government.
28 Corporate and Other Laws
 It is provided that until the Securities and Exchange Board specifies the information and reports
on financial information under this sub-section, the regulations made by the Securities and
Exchange Board under the Securities and Exchange Board of India Act, 1992, in respect of such
financial information or reports on financial information shall apply.
According to clause (c) of Section 26 (1), the prospectus shall make a declaration about the
compliance of the provisions of the Companies Act, 2013 and a statement to the effect that nothing
in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation)
Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules and regulations
made thereunder.
Accordingly, the Board of Directors of Chandra Mechanical Toys Limited which proposes to issue
the prospectus shall provide such reports on financial information as may be specified by the
Securities and Exchange Board in consultation with the Central Government to comply with the
above stated provisions and make a declaration about such compliance.

4. Examine the validity of this allotment in the light of the provisions of the Companies Act, 2013:
The Board of Directors of Reckless Investments Ltd. have allotted shares to the investors of the
company without issuing a prospectus with the concerned Registrar of Companies. Explain the
remedy available to the investors in this regard. [MTP Aug. 2018]

Sol. Relevant Provision: According to Section 23 of the Companies Act, 2013, a public company
can issue securities to the public only by issuing a prospectus. Section 26(1) lays down the
matters required to be disclosed and included in a prospectus and requires the registration of
the prospectus with the Registrar before its issue.
Conclusion: In the given case, the company has violated with the above provisions of the Act and
hence the allotment made is void. The company will have to refund the entire moneys received
and will also be punishable under section 26 of the Act.

5. The Board of Directors of Chandra Ltd. proposes to issue the prospectus inviting offers from the
public for subscribing the shares of the Company. State the reports which shall be included in
the prospectus for the purposes of providing financial information under the provisions of the
Companies Act, 2013. [RTP May 2022]

Sol. Relevant Provision: As per section 26(1) of the Companies Act, 2013, every prospectus issued
by or on behalf of a public company either with reference to its formation or subsequently, or by
or on behalf of any person who is or has been engaged or interested in the formation of a public
company, shall be dated and signed and shall state such information and set out such reports on
financial information as may be specified by the Securities and Exchange Board in consultation
with the Central Government:
Provided that until the Securities and Exchange Board specifies the information and reports on
financial information under this sub-section, the regulations made by the Securities and Exchange
Board under the Securities and Exchange Board of India Act, 1992, in respect of such financial
information or reports on financial information shall apply.
Prospectus issued make a declaration about the compliance of the provisions of this Act and a
statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the
Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act,
1992 and the rules and regulations made thereunder.
Prospectus and Allotment of Securities 29
 Conclusion: Accordingly, the Board of Directors of Chandra Ltd. who proposes to issue the

prospectus shall provide such reports on financial information as may be specified by the Securities
and Exchange Board in consultation with the Central Government in compliance with the above
stated provision and make a declaration about the compliance of the above stated provisions.

6. Prakhar Ltd. intends to raise share capital by issuing Equity Shares in different stages over a
certain period of time. However, the company does not wish to issue prospectus each and every
time of issue of shares.
Considering the provisions of the Companies Act, 2013, discuss what formalities Prakhar Ltd.
should follow to avoid repeated issuance of prospectus? [RTP Nov. 2018]

Sol. Relevant Provision: Shelf prospectus means 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
According to Section 31 of the Company Act, 2013 any class or classes of companies, as the
Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus
with the Registrar at the stage:
(i) of the first offer of securities included therein which shall indicate a period not exceeding
one year as the period of validity of such prospectus which shall commence from the date of
opening of the first offer of securities under that prospectus, and
(ii) in respect of a second or subsequent offer of such securities issued during the period of
validity of that prospectus, no further prospectus is required.
The other formalities related to such repeated/subsequent issue of shares:
A company filing a shelf prospectus shall be required to file an information memorandum containing
all material facts relating to new charges created, changes in the financial position of the company
as have occurred between the first or previous offer of securities and the succeeding offer of
securities and such other changes as may be prescribed, with the Registrar within the prescribed
time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus.
Conclusion: Thus, Prakhar Ltd. can follow the above provisions and can issue a shelf prospectus.

7. An allottee of shares in a Company brought action against a Director in respect of false statements
in prospectus. The director contended that the statements were prepared by the promoters and
he has relied on them. Is the Director liable under the circumstances? Decide referring to the
provisions of the Companies Act, 2013. [MTP March 2021]

Sol. Yes, the Director shall be held liable for the false statements in the prospectus under sections
34 and 35 of the Companies Act, 2013. Whereas section 34 imposes a criminal punishment on
every person who authorises the issue of such prospectus, section 35 more particularly includes
a director of the company in the imposition of liability for such misstatements.
The only situations when a director will not incur any liability for mis statements in a prospectus
are as under: No criminal liability under section 34 shall apply to a person if he 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.
No civil liability for any mis statement under section 35 shall apply to a person if he proves that:

30 Corporate and Other Laws

 (i) Having consented to become a director of the company, he withdrew his consent before the
issue of the prospectus, and that it was issued without his authority or consent; or
(ii) 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.
Conclusion: Therefore, in the present case the director cannot hide behind the excuse that he

had relied on the promoters for making correct statements in the prospectus. He will be liable for
mis statements in the prospectus.

8. With a view to issue shares to the general public a prospectus containing some false information
was issued by a company. Mr. X received copy of the prospectus from the company, but did not
apply for allotment of any shares. The allotment of shares to the general public was completed by
the company within the stipulated period. A few months later, Mr. X bought 2000 shares through
the stock exchange at a higher price which later on fell sharply. X sold these shares at a heavy
loss. Mr. X claims damages from the company for the loss suffered on the ground the prospectus
issued by the company contained a false statement. Referring to the provisions of the Companies
Act, 2013 examine whether X’s claim for damages is justified. [MTP March 2018]

Sol. Under section 2(70) of the Companies Act, 2013, “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 a body corporate.
A prospectus is a document inviting offers from the public. The prospectus and any statement
therein has no legal binding either on the company or its directors, promoters or experts to a
person who has not purchased securities in response to it. Since, X purchased shares through
the stock exchange (open market) which cannot be said to have bought shares on the basis of
prospectus. X cannot bring action for deceit against the directors.
Hence, X will not succeed. It was also held in the case of Peek Vs. Gurney that the above-mentioned
remedy by way of damage will not be available to a person if he has not purchased the shares on
the basis of prospectus.

9. RD Ltd. issued a prospectus. All the statements contained therein were literally true. It also stated
that company had paid dividends for a number of years but did not disclose the fact that the
dividends were not paid out of trading profits but out of capital profits. An allotee of shares claims
to avoid the contract on the ground that the prospectus was false in material particulars. Decide
that the argument of shareholder, as per the provision of the Companies Act, 2013, is correct
or not? [Dec. 2021]

Sol. Relevant Provision: According to section 34 of the Companies Act, 2013, where a prospectus,
issued, circulated or distributed, 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.
Further, Section 35(3) provides that, 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 section 35(1), shall be personally responsible,
Prospectus and Allotment of Securities 31
 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.
Conclusion: In the given question, the non-disclosure of the fact that dividends were paid out of

capital profits is a concealment of material fact as a company is normally required to distribute
dividend only from trading or revenue profits and under exceptional circumstances it can pay
dividend out of capital profits. Hence, a material misrepresentation has been made.
Accordingly, in the given case the allottee can avoid the contract of allotment of shares.

10. Sudarshan Exports Ltd. was dealing in export of rubber to specified foreign countries. The company
was willing to purchase rubber trees in Andhra Pradesh. The prospectus issued by the company
contained some important extracts of the expert report and number of trees in Andhra Pradesh.
The report was found untrue. Mr. Alok purchased the shares of Sudarshan Exports Ltd. on the
basis of the expert report published in the prospectus. Will Mr. Alok have any remedy against the
company? State also the circumstances where an expert is not liable under the Companies Act,
2013. [May 2020]

Sol. Relevant Provision: Under section 35(1) of the Companies Act 2013, where a person has
subscribed for securities of a company acting on any statement included in the prospectus which
is misleading and has sustained any loss or damage as a consequence thereof, the company and
every person including an expert shall, be liable to pay compensation to the person who has
sustained such loss or damage.
In the present case, Mr. Alok purchased the shares of Sudarshan Exports Ltd. on the basis of the expert
report published in the prospectus. Mr. Alok can claim compensation for any loss or damage that he
might sustained from the purchase of shares, which has not been mentioned in the given case.
Conclusion: Hence, Mr. Alok will have no remedy against the company.
Circumstances when an expert is not liable: An expert will not be liable for any mis-statements
in the prospectus under the following situations:
• Under section 26(5), that having given his consent, but withdrew it in writing before delivery
of the copy of prospectus for registration, or
• Under section 35(2), that the prospectus was issued without his knowledge/consent and
that on becoming aware of it, he forthwith gave a reasonable public notice that it was issued
without his knowledge or consent;
• That, as regards every misleading statement purported to be made by an expert or contained
in what purports to be a copy of or an extract from a report or valuation of an expert, it was
a correct and fair representation of the statement, or a correct copy of, or a correct and fair
extract from, the report or valuation; and he had reasonable ground to believe and did up
to the time of the issue of the prospectus believe, that the person making the statement was
competent to make it and that the said person had given the consent required by section 26(5)
to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of
the prospectus for registration or, to the defendant's knowledge, before allotment thereunder.

11. State in what way does the Companies Act, 2013 regulate and restrict the following in respect of
a company going for public issue of shares:
(i) Minimum Subscription; and
(ii) Application Money payable on shares being issued. [ICAI MODULE]

32 Corporate and Other Laws

Sol. Relevant Provision: The Companies Act, 2013 by virtue of provisions as contained in Section 39(1)
and (2) regulates and restricts the minimum subscription and the application money payable in
a public issue of shares as under:
Minimum subscription [Section 39(1)] No Allotment shall be made of any securities of a company
offered to the public for subscription; unless:
(i) the amount stated in the prospectus as the minimum amount has been subscribed; and
(ii) the sums payable on application for such amount has been paid to and received by the
company.
Application money: Section 39(2) provides that the amount payable on application on each
security shall not be less than 5% of the nominal amount of such security or such amount as SEBI
may prescribe by making any regulations in this behalf.
Further section 39(3) provides that if the stated minimum amount is not received by the company
within 30 days of the date of issue of the prospectus or such time as prescribed by SEBI, the
company will be required to refund the application money received within such time and manner
as may be prescribed.
In case of any default under sub-section, the company and its officer who is in default shall be
liable to a penalty, for each default, of one thousand rupees for each day during which such default
continues or one lakh rupees, whichever is less.
Section 40(3) provides that all moneys received on application from the public for subscription
to the securities shall be kept in a separate bank account maintained with a scheduled bank.

12. A Ltd. issued 1,00,000 equity shares of `100 each at par to the public by issuing a prospectus.
The prospectus discloses the minimum subscription amount of `15,00,000 required to be
received on application of shares and share application money shall be payable at `20 per share.
The prospectus further reveals that A Ltd. has applied for listing of shares in 3 recognised stock
exchanges of which 1 application has been rejected. The issue was fully subscribed and A Ltd.
received an amount of `20,00,000 on share application. A Ltd., then proceeded for allotment of
shares.
Examine the three disclosures in the above case study which are the deciding factors in an allotment
of shares and the consequences for violation, if any under the provisions of the Companies Act,
2013. [Jan. 2021]

Sol. Relevant Provision: As per the requirement of the question, disclosures which are the deciding
factors in an allotment of shares are laid down in section 39 of the Companies Act, 2013.
According to Section 39(1), no allotment of any securities of a company offered to the public for
subscription shall be made unless:
(i) the amount stated in the prospectus as the minimum amount has been subscribed; and
(ii) the sums payable on application for the amount so stated have been paid to, and received by
the company by cheque or other instrument.
The amount payable on application on every security shall not be less than five per cent of the
nominal amount of the security or such other percentage or amount, as may be specified by the
Securities and Exchange Board by making regulations in this behalf.
Given Case and Analysis: In the question, A Ltd. issued shares to public by issuing of prospectus,
disclosing minimum subscription, sum payable on application for the amount; and the amount
received on share application is more than 5% of the nominal amount of the security.
Prospectus and Allotment of Securities 33
 Further, it revealed that A Ltd. has applied for listing of shares in 3 recognised stock exchanges
of which one application was rejected.
In the given instance, there is compliance to section 23, as nothing is talked about matters
required to be included in the prospectus under section 26(1) and about filing with the registrar;
assuming that the said requirements have been complied with, requirement of section 39 as
regards obtaining of minimum subscription and the minimum amount receivable on application
(not less than 5% of the nominal value of the securities offered) are fulfilled.
The provisions of section 40 of the Companies Act, 2013 states that every company making public
offer shall, before making such offer, make an application to one or more recognized stock exchange
or exchanges and obtain permission for the securities to be dealt with in such stock exchange or
exchanges.
The above provision is very clear that not only the company has to apply for listing of the securities
at a recognized stock exchange, but also obtain permission thereof from all the stock exchanges
where it has applied, before making the public offer.
Since one of the three recognized stock exchanges, where the company has applied for enlisting, has
rejected the application and the company has proceeded with making the offer of shares, it has violated
the provisions of section 40. Therefore, this shall be deemed to be irregular allotment of shares.
Conclusion: Consequently, A Ltd. shall be required to refund the application money to the
applicants in the prescribed manner within the stipulated time frame.

13. Kapoor Builders Limited decides to pay 2.5 percent of the value of debentures as underwriting
commission to the underwriters but the Articles of the company authorise only 2.0 percent
underwriting commission on debentures. The company further decides to pay the underwriting
commission in the form of flats. Examine the validity of the above arrangements under the
provisions of the Companies Act,2013. [ICAI MODULE]

Sol. Relevant Provision: Section 40(6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription or procurement of subscription
to its securities, whether absolute or conditional, subject to a number of conditions which are
prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014. In relation
to the case given, the conditions applicable under the above Rules are as under:
(i) The payment of such commission shall be authorised in the company’s articles of association;
(ii) The commission may be paid out of proceeds of the issue or the profit of the company or both;
(iii) The rate of commission paid or agreed to be paid shall not exceed, in case of shares, five
percent (5%) of the price at which the shares are issued or a rate authorised by the articles,
whichever is less, and in case of debentures, shall not exceed two and a half per cent (2.5%)
of the price at which the debentures are issued, or as specified in the company’s articles,
whichever is less;
Conclusion: Thus, the Underwriting commission is limited to 5% of issue price in case of shares
and 2.5% in case of debentures subject to the rates in articles of association.
In view of the above, the decision of Kapoor Builders Ltd. to pay underwriting commission exceeding
2% as prescribed in the Articles is invalid.
The company may pay the underwriting commission in the form of flats as both the Companies
Act and the Rules do not impose any restriction on the mode of payment though the source has
been restricted to either the proceeds of the issue or profits of the company.

34 Corporate and Other Laws

14. Examine the validity of the following statement referring to the provisions of the Companies Act,
2013 and/or Rules: “The Articles of Association of X Ltd. contained a provision that upto 4% of
issue price of the shares may be paid as underwriting commission to the underwriters. The Board
of Directors of X Ltd. decided to pay 5% underwriting commission.” [ICAI MODULE]

Sol. Relevant Provision: Section 40(6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription or procurement of subscription
to its securities, whether absolute or conditional, subject to the number of conditions which are
prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014.
Under the Companies (Prospectus and Allotment of Securities) Rules, 2014 the rate of commission
paid or agreed to be paid shall not exceed, in case of shares, five percent (5%) of the price at which
the shares are issued or a rate authorised by the articles, whichever is less.
In the given problem, the articles of X Ltd. have prescribed 4% underwriting commission but the
directors decided to pay 5% underwriting commission.
Conclusion: Therefore, the decision of the Board of Directors to pay 5% commission to the
underwriters is invalid.

15. TDL Ltd., a public company is planning to bring a public issue of equity shares in June, 2018. The
company has appointed underwriters for getting its shares subscribed. As a Chartered Accountant
of the company appraise the Board of TDL Ltd. about the provisions of payment of underwriter's
commission as per Companies Act, 2013. [May 2018]

Sol. The provisions of the Companies Act, 2013 regarding the payment of underwriter’s commission
are as follows:
Payment of commission: A company may pay commission to any person in connection with the
subscription to its securities, whether absolute or conditional, subject to such conditions as given
in Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
Conditions for the payment of commission:
(a) The payment of such commission shall be authorised in the company’s articles of association;
(b) The commission may be paid out of proceeds of the issue or the profit of the company or both.
Rate of commission: The rate of commission paid or agreed to be paid shall not exceed, in case
of shares, 5% of the price at which the shares are issued or a rate authorised by the articles,
whichever is less, and in case of debentures, shall not exceed two and a half per cent of the price
at which the debentures are issued, or as specified in the company’s articles, whichever is less.
Disclosure of particulars: The prospectus of the company shall disclose the following particulars:
(a) The name of the underwriters;
(b) The rate and amount of the commission payable to the underwriter; and
(c) The number of securities which is to be underwritten or subscribed by the underwriter
absolutely or conditionally.
No commission to be paid: There shall not be paid commission to any underwriter on securities
which are not offered to the public for subscription.
Copy of contract of payment of commission to be delivered to registrar: A copy of the contract
for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus
for registration.
Prospectus and Allotment of Securities 35
16. Prakash Limited wants to raise funds for its upcoming project. Accordingly, it has issued private
placement offer letters for issuing equity shares to 55 persons, of which four are qualified
institutional buyers and remaining are individuals. Before the completion of allotment of equity
shares under this offer letter, company issued another private placement offer letter to another
155 persons in their individual names for issue of its debentures.
Being a public company is it possible for Prakash Limited to issue securities under a private
placement offer? By doing so, whether the company is in compliance with provisions relating to
private placement or should these offers be treated as public offers? What if the offer for debentures
is given after allotment of equity shares but within the same financial year? [ICAI MODULE]

Sol. Relevant Provision: According to section 42 of the Companies Act, 2013 any private or public
company may make private placement through issue of a private placement offer letter.
However, the offer shall be made to the persons not exceeding fifty or such higher number as may
be prescribed, in a financial year. For counting number of persons, Qualified Institutional Buyers
(QIBs) and employees of the company being offered securities under a scheme of employees’
stock option will not be considered.
Further, Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
prescribes maximum of 200 persons who can be offered securities under the private placement
in a financial year, though this limit should be counted separately for each type of security.
It is to be noted that if a company makes an offer or invitation to more than the prescribed number
of persons, it shall be deemed to be an offer to the public and accordingly, it shall be governed by
the provisions relating to prospectus.
Also, a company is not permitted to make fresh offer under this section if the allotment with respect
to any offer made earlier has not been completed or otherwise, that offer has been withdrawn
or abandoned by the company. This provision is applicable even if the issue is of different kind
of security.
Any offer or invitation not in compliance with the provisions of this section shall be treated as a
public offer and all provisions will apply accordingly.
Conclusion: In the given case Prakash Limited, though a public company but the private placement
provisions allow even a public company to raise funds through this route. The company has given
offer to 55 persons out of which 4 are qualified institutional buyers and hence, the offer is given
effectively to only 51 persons which is well within the limit of 200 persons. From this point of
view, the company complies the private placement provisions.
However, as per the question, the company has given another private placement offer of debentures
before completing the allotment in respect of first offer and therefore, the second of fer does not
comply with the provisions of section 42. Hence, the offers given by the company will be treated
as public offer.
In case the company gives offer for debentures in the same financial year after allotment of equity
shares is complete then both the offers can well be treated as private placement offers.

17. CDS Ltd. is planning to make a private placement of securities. The Managing Director arranged
to obtain a brief note from some source explaining the salient features of the issue of private
placement that the Board of Directors shall keep in mind while approving the proposal on
this subject. The brief note includes, inter alia, the information/suggestions on the following
points:

36 Corporate and Other Laws

 (i) A private placement shall be made only to a select group of identified persons not exceeding
200 in a financial year.
The aforesaid ceiling of identified persons shall not apply to the offer made to the qualified
institutional buyers but is applicable to the employees of the Company who will be covered
under the Company's Employees Stock Option Scheme.
(ii) The offer on private placement basis shall be made only once in a financial year for any
number of identified persons not exceeding 200.
The Company solicits your remarks on the points referred above as to whether they are
valid or not? Reasoned remarks should be given in accordance with the provisions of the
Companies Act, 2013. [Jan. 2021]

Sol. Relevant Provision: As per the provisions of sub-section (2) of section 42 of the Companies Act,
2013, private placement shall be made only to a select group of persons who have been identified
by the Board (herein referred to as “identified persons”), whose number shall not exceed 50 or
such higher number as may be prescribed, in a financial year subject to such conditions as may
be prescribed.
It is also provided that any offer or invitation made to qualified institutional buyers, or to employees
of the company under a scheme of employees’ stock option as per provisions of section 62(1)(b)
shall not be considered while calculating the limit of two hundred persons.
According to Rule 14 (2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
an offer or invitation to subscribe securities under private placement shall not be made to persons
more than two hundred in the aggregate in a financial year.
As per Explanation given in this Rule, it is clarified that the restrictions aforesaid would be reckoned
individually for each kind of security that is equity share, preference share or debenture.
Referring to the above mentioned provisions of sub-section (2) of section 42 of the Companies
Act, 2013 and Rule 14 the Companies (Prospectus and Allotment of Securities) Rules, 2014, we
can conclude as follows:
(i) The company is correct in proposing that private placement shall be made only to a select
group of identified persons not exceeding 200 in a financial year. This part of the proposal is
correct.
The company is also correct in proposing that the aforesaid ceiling of identified persons shall
not apply to offer made to the qualified institutional buyers, but the company is not correct
in saying that the said ceiling is applicable to employees covered under the Company’s
Employee Stock Option Scheme.
Hence, the second part of the proposal is only partially correct.
(ii) The Companies (Prospectus and Allotment of Securities) Rules, 2014 provides that an offer
or invitation to subscribe securities under private placement shall not be made to persons
more than 200 in aggregate in a financial year.
Keeping the ceiling of 200 persons in aggregate during a financial year, offer of private
placement can be made more than once in a financial year. Therefore, the second statement
is not fully correct.
qqq

Prospectus and Allotment of Securities 37

 NOTES

38 Corporate and Other Laws