INTRODUCTION

A prospectus under company law is a formal legal document issued by a

company to provide potential investors with detailed information about
the company’s financial status, business activities, and the specific
investment being offered. This document is crucial when a company seeks
to raise capital through public offerings, such as the sale of shares or
bonds.
The primary purpose of a prospectus is to ensure transparency and
enable investors to make informed decisions. It must contain
comprehensive information, including the company’s history, financial
statements, risk factors, and the terms of the offering. It typically outlines
the number of shares or bonds being issued, their price, and how the
raised funds will be utilized.
Under company law, the preparation and issuance of a prospectus are
governed by specific regulatory frameworks, which vary by jurisdiction.
The document must be approved by the relevant regulatory body (such as
a securities commission) before it is distributed to the public. This ensures
that the company complies with legal requirements, including accurate
disclosure of material facts and the provision of a fair view of its
operations and financial health.
A prospectus generally includes sections like the company’s business
overview, financial statements (audited), management details, risk factors,
and any legal matters that could affect the company’s operations. It also
includes specific terms of the investment offering, such as the price and
timing of the offering.
Overall, the prospectus serves both as a tool for transparency and a legal
safeguard, protecting investors from misleading or incomplete
information. It is a critical document in maintaining trust in capital
markets and ensuring compliance with regulatory standards under
company law.

PROSPECTUS
A prospectus, as per Section 2(70) of the Companies Act, 2013 means any
document described or issued as a prospectus and includes a red herring
prospectus or shelf prospectus 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. Thus, a prospectus is not
merely an advertisement; it may be a circular or even a notice.
A document shall be called a prospectus if it satisfies two things:
a) It invites subscription to, or purchase of, shares or debentures or any
other security of a body corporate;
b) The aforesaid invitation is made to the public.
It can be understood as an invitation to offer the securities of the
company. The public intending to invest in the company can make offer
above the offered price but within the price band. Its upon the company
to allot shares to the public in the manner it deems fit.
Section 28(2) of the Companies Act, 2013 provides that any document
through which an offer for sale is made to the public shall be deemed as
the Prospectus.
In the case, Pramatha Nath Sanyal vs Kali Kumar Dutt (1924), the Hon’ble
Calcutta High Court held that even if an advertisement is made in a
newspaper regarding the certain shares left for the purchase by the
company, it shall constitute a prospectus.1
Essential Ingredients to Constitute a
Prospectus:

1
Pramatha Nath Sanyal v. Kali Kumar Dutt, AIR 1925 CAL 714
 I. Invitation to Public: Prospectus is an invitation to offer rather than
the offer himself. A document shall be deemed to be an invitation to
public only if it is open for any person to subscribe, though there
maybe a possibility that the ultimate securities may not be issued to
him owing to oversubscription or any other disqualification.
II. Invitation by the Company: It must be issues by the company itself
that wishes to raise the funds. However, an entity, on behalf of the
company or on the authorisation of the company, may follow the
stipulated process in order to make an invitation to offer to the
public.
III. Nature of Document and the particulars therein: A prospectus shall
be in the nature of an invitation to offer, allowing subscription to
securities of the company. Any document merely disclosing the
details of the securities shall not be considered as a prospectus.
IV. Information regarding the Securities of the company: A prospectus
is required to contain all the details regarding the securities of the
company. It must specify the nature of the securities, whether
equity-based or debt-based. It must also specify the category as to
whether it is an equity or preference share, debenture, bond,
warrant, etc. It must specify the number of securities available for
the subscription, and also provide for other particulars such as
redemption, rate of interest, etc.
Objectives of the Prospectus:
The object of prospectus is arousing the interest of the potential investors
in the company and induces them to invest in its share or debentures.
Prospectus is issued with the following broad objectives:
 It is an official and formal notice of formation of a new company.
 It is also an official record describing the terms and conditions of
offer of capital issues to investors.
 It serves as written evidence about the terms and conditions of issue
of shares or debentures of a company.
  It is a means of promotion to promote the marketing of new issues
and plays the role of silent salesman.
 However, it is a controlled advertisement and seller beware, attitude
is honoured.
 It maintains all authentic records on the issue and makes the
directors liable for the misstatement in the prospectus.
The law is very strict regarding the contents of prospectus and wants to
give maximum protection to numerous innocent investors against
unscrupulous, promoters and directors.2
GOLDEN RULE
The ‘Golden Rule’ of the prospectus was propounded by the Hon’ble
Judge V C Kinderseley in the Landmark judgement of the case ‘New
Brunswick Railway and Land Company Ltd. vs. Muggeridge, 1859’3.
In this case, it was held that “Prospectus is one of the means by which the
investor is informed about the soundness of the company’s venture.”
The essence of the rule is that it is mandatory on the part of the company
to issue a prospectus. It is not only required to accurately to put forth all
the relevant facts and information but also ensure that it does not hide
any information which might affect the decision of the investor.4
[The rule is also known as the ‘Golden Legacy’ as has been described by
the Judge Pagewood in the case ‘Henderson vs Lacon’5. ]
Types of Prospectus
According to the nature of public issue and their usefulness to a company
and to public, there are 4 types of prospectus-
 Deemed Prospectus
 Red Herring Prospectus
2
N.H. Kumara, “A Study on Prospectus and its Kinds Under the Companies Act, 2013” 8 International Journals of
Creative Research Thoughts (2020).
3
New Brunswick v. Muggeridge, 1859 (UK Cas) 280
4
Pankhuri Anand, “Prospectus Under Company Law” iPleaders (2024).
5
Henderson v. Lacon Park District, 366 III. App. 3d 1233
  Shelf Prospectus
 Abridged Prospectus
Deemed Prospectus: Section 25 of the Companies Act, 2013 deals with
the deemed prospectus. When a company wishes to issue its securities
through an intermediary, the document containing the details of such
securities is considered to be deemed prospectus.
The original allotment is presumed to have been made with a view of
offering them to a public where-
1. Shares are offered to the public within the six months of allotment
2. At the date of offer to the public the whole of the consideration has
not received by the company
In the case SEBI vs. Kunnamkulam Paper Mills Ltd.6, it was held that
where a right issue is made for the existing members with a right to
renounce in the favour of the others, it becomes a deemed prospectus if
the number of such other exceeds 50.
Red Herring Prospectus: Section 32 of the Companies Act, 2013, deals
with the Red Herring Prospectus. A company proposing to make an offer
of securities may issue a red herring prospectus prior to the issue of a
prospectus. A company proposing to red herring prospectus shall file it
with the Registrar at least 3 days prior to the opening of the subscription
list and the offer.
It is a prospectus wherein the information regarding either the quantities
of the securities or the price of the securities is not disclosed by the
company. Rather, the company only provides a price brand. This enables a
company to gauge the worth of its securities and enables them to achieve
the requisite minimum subscription, which may not otherwise be possible
had they already supplied the entire information.
Shelf Prospectus: Section 31 of the Companies Act, 2013 deals with the
Shelf prospectus. Drafting a prospectus is a cumbersome process as it
6
SEBI v. Kunnamkulam Paper Mills Ltd., (2013) 178 Comp Cas 371 (Ker)
requires a number of disclosures and information to be passed on to the
investor. It may also be possible that a company makes multiple public
offers in one financial year itself. In such a case, it will become nearly
impossible for the company to draft an entirely new prospectus every
time. Yet, it is also crucial to note that significant changes may take place
in the financial status of the company. To balance the interest of the
company as well as that of the investors, the law provides for the concept
of shelf prospectus.
A company issue a shelf prospectus when it has an offer for subscription
by the public, more than one round of issue. Shelf Prospectus is a single
prospectus that can hold good for multiple public offers.
Information Memorandum: 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 offer of securities or the
previous offer of securities and the succeeding offer of securities.
Abridged Prospectus: It means a memorandum containing such salient
features of a prospectus as maybe specified by the Securities and
Exchange Board by making regulations in this behalf.7
It is also called as Summary of the prospectus. Normally companies’
prospectus consists of 300 to 500, 600 pages and it is difficult to attach
with the application form.
Further, section 33 of this Act mandates for annexing the abridged
prospectus along with the form for the application of purchase for
securities. However, the proviso for the sub-section (1) provides that this
requirement maybe dispensed with where the form of application was
issued for:
 “in connection with bona fide invitation to a person to enter into an
underwriting agreement with respect to such securities; or
7
Companies Act, 2013, s. 2(1)
  in relation to securities which were not offered to public.”
I f company fails to comply with the provisions of the abridged prospectus
as discussed above, it shall be subjected to a penalty of upto Rs.50,000 for
every default.8
Application form for securities cannot be issued unless they are
prospectus as may be prescribed. This is known as Abridged Prospectus.
The purpose is to reduce the expense-burden of a public issue. The full
“prospectus” has to be maintained in the office of the company.
PROCESS FOR FILING AND ISSUING A PROSPECTUS
UNDER A COMPANY LAW:
CONTENTS: For filing and issuing of the prospectus of a public company, it
must be duly signed and dated and contain all the necessary information
as stated under S. 26 of the Companies Act, 2013.
i. Name and other crucial info such as registered address of the office,
the secretary, the auditor, etc.
ii. The dates of issue, including the opening and closing dates
iii. Undertakings of the Board of Directors regarding separate bank
accounts for the purpose of keeping receipts of the issue
iv. Undertakings of BoDs regarding the details of utilisation and non-
utilisation of receipts of previous issues
v. Consent of directors, auditors, and bankers to the issue, and expert
opinions
vi. The details of the resolution passed for the issue
vii. Procedure and time scheduled for the allotment of the securities
viii. The capital structure of the company
ix. The objective of the issue
x. The objective of the business and its location

8
Companies Act, 2013, s. 33(3)
 xi. 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
xii. The amount is payable on the premium
xiii. Details of directors, their renumeration, and the extent of their
interest in the company
xiv. Reports for financial information such as auditor’s report, report of
profit and loss of the 5 financial years, business and action reports,
statement of compliance with the provision of the Act and any other
report.

As per S.26(4) of the Companies Act, 2013 the company issuing the
prospectus has to deliver a copy of the prospectus, signed by every
person whose name has been mentioned in the prospectus as a director
of the company or the attorney of the director, to the Registrar on or
before the date of publication.

DELIVERY OF THE COPY OF PROSPECTUS TO REGISTRAR:

The prospectus shall duly state that a copy of prospectus has been served
to the registrar. It should also mention the documents submitted to the
registrar along with the prospectus.9

REGISTRATION OF THE PROSPECTUS:

The registrar can register the prospectus when:

i. It fulfils the requirement of the provision.

9
Companies Act, 2013, s. 26(6)
 ii. It contains the written consent of all the persons named in the
prospectus.10

INVALIDITY OF PROSPECTUS: The prospectus is considered invalid if it is

not issued within 90 days from the date of delivery to Registrar.

CONTRAVENTION OF SECTION 26:

1. Fine not less than Rs. 50,000 extending upto Rs. 3,00,000.
2. Person aware of the contravention actively participate in violation of
this act, then Imprisonment upto term of 3 yrs, or fine more than Rs.
50,000 extending upto Rs. 3,00,000.

MISSTAEMENT IN PROSPECTUS:

It occurs when an untrue or misleading statement is included and issued

in the prospectus. Any deletion and inclusion of any matter which
misleads the public is also a misstatement under section 34 of this Act.

LIABILITY FOR MISSTATEMENT WITHIN THE PROSPECTUS:

Criminal Liability: When any statement within the prospectus includes

misleading or untrue information is distributed then everyone who
authorized the issue of the prospectus is liable under section 447 of this
Act.

The people who can be sued are:

 The company who issues the prospectus

 Every director of the company
 Every promoter of the prospectus
10
Companies Act, 2013, s. 26(7)
  Every person who authorizes the issue of the prospectus
 Any expert such as engineer, CA, CS,etc

Civil Liability: Section 62 of this act deals with the civil liability and makes
the actual person responsible to pay every single individual who has
contributed for any share or debentures and could have grieved any
damages by believing the prospectus where false and misleading
information has been published.11

REMEDIES FOR MISSTATEMENT FOR PROSPECTUS:

For civil liability: There are two remedies available for the company:

1. Revocation of the Contract- The person who purchased the

securities can cancel the contract. The money will be refunded to
him, which he paid to company.
2. Damages for Fraud- After revocation, the shareholders can claim
damages from the company by filing a case in the court.

Remedies against the Directors, promoters and the authorised who issued
the prospectus:

1. Damages for misstatement- Compensation will be given to the

shareholders for the loss by them.
2. Damages for non-disclosure- Fine of Rs. 50,000 and recovering the
damages must be given by the people who mislead the purchasers.

For criminal liability-

11
Manisha Singh, “Prospectus and Misstatement in a Prospectus Under Companies Act,2013” LawBhoomi (2020)
  Imprisonment upto 2 years or Rs. 50,000 fine must beard by the
people that mislead.
 Person who knowingly issued a misstatement is punishable for
imprisonment upto 5 years or with a fine Rs. 1,00,000.

CASE LAWS

Kisan Mehta vs. Universal Luggage Manufacturing Co. Ltd. (1988)12

In this case, the Plaintiff filed a PIL against a company alleging that the
company had issued a prospectus containing a false statement. It was
stated that the plaintiff himself did not have any interest in the matter but
filed the case as the statements were likely to confuse or mislead the
general public. The Hon’ble Bombay High Court dismissed the case stating
that a locus standi of the plaintiff was required to file such case.

Rex v. Kylsant (1932)13

The prospectus stated that dividends of 5 to 8 per cent had been regularly
paid over a long period. The truth was that the company had been
incurring substantial losses during the seven years preceding the date of
the Prospectus and dividends had been paid out of the realized capital
profit. Held, the prospectus was false and misleading. The statement
though true in itself was rendered false in the context in which it was
stated.

Thus, the persons issuing the prospectus must not include in the
prospectus all the relevant particulars specified in Parts I & II of Schedule

12
Kisan Mehta v. Universal Luggage Manufacturing, [1988]63COMPCAS398(BOM).
13
Rex v. Kylsant, 23 Cr. App R. 83.
II of the Act, which are required to be stated compulsorily but should also
voluntarily disclose any other information within their knowledge with
might in any way affect the decision of the prospective investor to invest
in the company.14

Mohandas Shenoy Adige vs. Securities and Exchange Board of India

(2021)15

In this case, the question raised by the complaint was whether the non-
compliance with the statements made in the prospectus amounted to
misstatement in the prospectus. The allegations included that the
company raised the public funds only to syphon funds to the group of the
companies. The Securities Appellate Board held that no case of
misstatement was found as the complainant was unable to establish that
the funds were actually being syphoned.

In case of no fact-based finding, the non-adherence with the statement in

the prospectus cannot be held to be misstatements.

14
Manisha Singh, “Prospectus and Misstatement in a Prospectus Under Companies Act,2013” LawBhoomi (2020)
15
Mohandas Shenoy Adige v. Securities, (2021) 07 SEBI CK 0181.
 CONCLUSION

A prospectus is a formal document issued by companies to provide

potential investors with detailed information about their business,
financial status, and investment opportunities.

It serves as a key tool for transparency and helps investors make informed
decisions. However, if any statement in the prospectus is untrue or
misleading, it can have serious legal consequences. Under the Companies
Act, those responsible for the untrue statements, including directors,
officers, and professionals involved, may be held liable for damages
caused to investors.

Misleading statements can undermine the credibility of the offering,

result in regulatory penalties, and erode public trust in the company.
Additionally, investors who suffer losses due to reliance on false
information can seek compensation.

Hence, ensuring the accuracy and truthfulness of all statements in a

prospectus is critical to both legal compliance and maintaining investor
confidence.