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 Aron Vem>a (C)

PROSPECTU
S COMPANIES ORDINANCE, 1984
Prospectus means any document described or issued as prospectus
and includes-
• any notice, circular, advertisement or any other communication,
inviting offers from the public for the subscription or purchase of
any shares in or debentures of, body corporate, inviting deposits
from the public other than deposits invited by a banking company
or
a financial institution approved by the Federal Government whether
DEFINITION:
described as(Companies
prospectusActor2013)
otherwise.
@ Clause (70) of Section 2 of the Act define "prospectus" means any
document described or issued as a prospectus and includes a red
prospectus
herring referred to in section 32 or shelf prospectus referred to in
31 or any notice, circular, advertisement or other document inviting
section
from the public for the
offers or purchase of any securities of a body
subscription corporate.

@ Section 26 deals with matters to be stated in prospectus.

 Arun Verma

PROSPECTU re)

S CONCLUSION

Prospectus is a mandatory document for

limited organization to commence their
business, but its complicated procedure delays
the operation of any business, therefore a no.
of organizations hesitate to issue Prospectus to
general public for subscription of share capital
& Debenture.
 Arun Verma (c)

PROSPECTU
S
WHICH COMPANIESARE REQUIRED TO ISSUE
PROSPECTUS
• Every public listed company who intends to offer
shares or debentures of the company to the public.
• Every private company who ceases to be a private
company and converts into a public company and
intends to offer shares or debentures of the company to
the public.
 Arun Verma (C)

REQUIREMENTS OF A PROSPECTUS

® A document would be considered a prospectus

only if it meets the following requirements,
viz.
®it
®it should
should bebe inissued
writing
by or on behalf of a body
corporate
®it should be issued to
public
®it should contain invitation to public for
making deposits or for subscription of shares in
or debentures of a body corporate.
 Arun Vem,a IC)

CONTENTS OF PROSPECTUS (SECTION-26)

@It shall be dated and and shall contain the things:

signed
• (1 Every prospectus following
by or on behalf of a public company
) issued
either with reference to its or or by or on
behalf of any person who formation
is or has beensubsequently,
engaged or in
formation of a interested
company, shall be dated and signed and the
(a) state the followingshall-
• public namely:-
information,
• (i names and addresses of the registered of the company,
)
company office
secretary, Chief Officer, auditors, legal
Financial
bankers, trustees, if any, underwritersadvisers,
and such other persons as
may
be prescribed;
@ (ii) dates of opening and closing of the issue.
@ (iii) details
@(iv) a statement
about by the BOD ofofseparate
underwriting bank account.
the issue.
 Aron Verma (Cl

CONTD ....
• (v) consent of the directors, auditors, bankers to the issue,
expert's opinion, if any, and of other persons, as may be
prescribed such
• ;(vi the authority for the issue and the of the resolution
)
passed therefore details
;
• (vii) procedure and time schedule for allotment and issue of
securities;
• (viii) structure of the company in the prescribed
capital
• (ix) manner;
main objects of public offer, terms of the present issue and
such other particulars as may be
• prescribed;
(x) main and present business of the company and its
objects schedule of implementation of the project;
location,
 Arun Ve<ma
CONTD ... IC)

.• (xi) particulars relating to-

• (A) management perception of risk factors specific to the project;
• (B) gestation period of the project;
• (C) extent of progress made in the project;
• (D) deadline for completion of the project; and
• (E) sany litigation lega action pending or taken by a Government
Departmentor or a statutoryl body during the last five years immediatel
preceding the year of the issue of prospectus against the promoter y of the
company;
• (xii) minimum amount payable by way of premium, issue of
subscription,
shares otherwise than on cash;
• (xiii) details of directors including their appointments and remuneration,
and such particulars of the nature and extent of their interests in the company
as may be prescribed; and
• (xiv) disclosures in such manner as may be prescribed about sources of
promoter's contribution;
 Aron Vem>a (C)

CONTD ....

(B) REPORTSIN PROSPECTUS:

@1 Reports by the auditors of the company.
. Reports relating to profits and losses of the
@ company.
Reports about the business or transaction to which the
2.
proceeds of the securities are to be
@ applied.
3.
(C) DECLARATION:
@Prospectus shall make a declaration about the compliance of
the provisions of the act and nothing contained in the
prospectus is contravening the provisions of act, Securities
Contract regulation act 195 and Securities and exchange
Board of India Act 6
1992.
 Aron Vem>a (C)

CONTRAVENTION OF SECTION 26 OF THE

ACT

• If a prospectus is in contravention of the provision of

the section, thenissued s

• Company shall be punishable with a not les than Rs

fine to Rs three lakhs, and s
50000 which may extend

• Every person who is party to the issue of the prospectus shall

be punishable with an imprisonment for a term which may
extend to three years or with a fine not less than Rs 50000
which may extend to Rs three lakhs, or with both.
 Aron Verma (C)

TYPE OF PROSPECTU
S S
• ABRIDGED PROSPECTUS

• DEEMED PROSPECTUS

• SHELF PROSPECTUS

• RED HERRING PROSPECTUS

 Arun Vom,a (C)

ABRIDGED PROSPECTUS

• According to Sec. 2(1) of the Companies Act of

1956, company cannot issue applications for
a
issue of share or debentures. It cannot do so if
it does not contain the salient features of
the prospectus of the memorandum. This is
known as 'abridged prospectus'. In other
words 'abridged prospectus' is a one that contains
the salient features of the memorandum of the
prospectus.
 Arun Verma le)

DEEMED PROSPECTUS
• Section-zg provides that where a company allots or
agrees to allot any shares or debentures with a view
to these being offered for sale to the public, any
document by which the offer of sale to the public is
made, shall for all purposes be deemed to be a
• prospectus
Further, anissued by theof,company.
allotment or an agreement to allot,
shares or debentures shall be deemed to have been
made with a view to the shares or debentures being
offered for sale to the public, if it is shown;
0 (i) That the offer of the shares or debentures for sale to
the public was made within six months after the
allotment or agreement to allot;
0
(ii) That at the date when the offer was made, the
whole consideration to be received by the company in
respect of the shares or debentures had not been
received by it.
 Aron Verma (C)

Additional requirement relating to

deemed prospectus
• (i) The net amount of consideration received or to
be received by the company in respect of the
shares or debentures to which the offer relates;
• (ii) The place and time at which the contract
under which in the said shares or debentures
have been or are to be allotted may be inspected.
Section 60, dealing with the registration of
prospectus applies to the deemed prospectus in
terms of section 64(4) and accordingly it renders
the persons making the offer of sale to the public
as deemed directors of the company.
 17
~ --
I

SHELF PROSPECTUS AnmVerma(c)

Section-gr Shelf prospectus

• (1) 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
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 in respect of a second or subsequent offer of such securities
• issued during the period of validity of that prospectus, no
further prospectusmemorandum
an information is required. containing all material facts
relating to new
(2) A company charges
filing a shelfcreated, changes
prospectus in required
shall be the financial
to file
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 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:
 Aron Verma le)

• 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
makin_g
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 coml?any or
(3) Where
• other person an
shallinformation
refund all the memorandum
money received asis filed,
every time within
subscription an offerfifteenofdays
securities
thereof. is made under
sub-section (2), such memorandum together with
the shelf prospectus shall be deemed to be a
prospectus.
• Explanation.-For the purr,oses of this section, the
expression "shelf prospectus ' means a prospectus
respect of uihid: the securities or class of securities
in
included therein are issued for subscription in one or
more issues over a certain period without the issue of a
further prospectus.
 Aruo Verma IC)
RED HERRING PROSPECTUS
• A red herring prospectus, as a first or preliminary prospectus, is a
document submitted by a company (issuer) as part of a public
offering of securities (either stocks or bonds). Most frequently
associated with an initial public offering (IPO), this document, like the
previously submitted Form S-1 registration statement, must be filed
• with the Securities and Exchange Commission (SEC).
A red herring prospectus is issued to potential investors, but does not
have complete particulars on the price of the securities offered and
prospectus of securities
quantum displays ato bold red disclaimer
be issued. The front pagestating of that
the
information in the prospectus is not complete and ma_ybe
changed, and that the securities may not be sold until the
registration statement,
effective. Potential filed may
investors with not
the place
marketbuy regulator, is the
orders for
security, based solely on the information contained within the
preliminary :prospectus. Those investors may, however, express
an "indication of interest" in the offering, provided that they
have received a copy of the red herring at least 48 hours
prior to the public sale. After the registration statement becomes
effective, and the stock is offered to the public, indications of interest
ma)' be converted to purchase orders, at the buyer's discretion. The
final prospectus must then be promptly delivered to the buyer.
 • Contents: AnmVe,ma(C)

• "Red-herring prospectus" means a prospectus that

does not have complete particulars on the price of the
securities offered and quantum of securities offered.
The red herring statement contains:
• purpose of the issue;
•
disclosure of any option agreement;
• underwriter's commissions and discounts;
• promotion expenses;
• net proceeds to the issuing company (issuer);
• balance sheet;
• earnings statements for last 3 years, if available;
• names and address of all officers, directors, underwriters
and stockholders owning 10% or more of the current
outstanding stock;
• copy of the underwriting agreement;
• legal opinion on the issue;
• copies of the articles of incorporation of the issuer.
 Mm Verma (C\

REQUIREMEN OF PROSPECTUS
1. ProspectusTS
must be dated i.e. publication date.
2. It must include an auditor's report on last five years profit and
loss account and on balance sheet at last date on which accounts
were prepared being a date not more than 120 days before the
date of issue of the prospectus.
3. It must be issued/published not less than seven or more than
thirty days before the subscription date.
4. If prospectus includes a statement made by an expert, the expert
must not be engaged or interested in the formation or promotion
or in the management of the A written consent of the
company.
expert should also be obtained before the issue of prospectus
with the statement.
5. In case of a listed company approval of the SEBI must be
obtained within sixty days before the date of issue of prospectus.
However, Commission may, impose such conditions as it may
deem necessary.
 Cont' Aron Venna (C)

d
6. A copy of prospectus must be sent to the registrar before the issue of
prospectus.

7 . Registrar shall not register the prospectus unless the above

requirements have been complied with.

8 . A sufficient number of copies of the prospectus issued under sub•

section (1) of section 53 shall be made at the registered
office ofavailable
the company with the stock exchange at which the company
is listed or is proposed to be listed and with the bankers to the issue
and the prospectus in its full text or in such abridged form as may be
prescribed shall be published at least in one local daily and one
English daily newspaper having circulation in the province where
stock exchange is situated at which the company is
listed.
 Aron Verma (C)

EXPERTS
1.OPINION
Expert includes an engineer, a valuer, an accountant, or
every other person whose profession gives authority to
any statement made by him.

2. Experts written consents are required to be obtained

which are not withdrawn before the issue of prospectus.

3. Statement is required to be included in the prospectus

that experts have given and not withdrawn their
consents.

4. An expert shall not be a person engaged or interested in

the formation or in the management of the company.
 Arun Verma (C)

DOCUMENT RE
S
DOCUMENTS REQUIRED TO BEQATTACHED TO
THE PROSPECTUS: UI
1. Consent of expert; and RE
2.
D
In the case of a prospectus issued generally;

a copy of contracts regarding remuneration of Chief

Executive etc and in case of an unwritten contract, a
memorandum thereof, and

a report from the auditors regarding any adjustments to

assets and liabilities of the company and reason thereof.
 Aron Vem>a (C)

LIABILITY FOR MISSTATEMENT IN THE PROSPECTUS

• Those who issue holdin out to the public the great

prospectus
advantages which will accrue gto persons who will take shares in
a proposed undertaking, and invitin the to take shares on the
faith of the representations g contained, are bound to
therein
everything with strict and scrupulous accuracy and not only stateto
abstain from stating as fact that which is not but to omit no
one fact within their knowledge, so,the existenc of which might in
any degree affect the nature or extent e and quality of the
privileges and advantages which the prospectus holds as
inducement to take shares.
 Aron Ve,ma (C)

WHO CAN BE SUED?

• The company
• Every director
• Every person whose name appeared in the prospectus as a proposed
director
• Every promoter
• Every person who authorised the issue of prospectus
• An expert ( an engineer, a chartered accountant, a company
secretary, a cost accountant, e
t
ONUS OF PROOF c
.)
• An allottee must prove that:
• The misrepresentation was of fact;
• It was in respect of material fact;
• He acted on the misrepresentation; and
• He has suffered damages in consequence.
 Aron Vem>a (C)

CIVIL LIABILITY FOR MISSTATEMENTS IN

PROSPECTUS
1. Where a person subscribed for securities of a company acting on any
has or the inclusio or omission of any matter, in the
statement included, misleadinn and has sustained any loss or damage as
consequence is gthe company and every person who-
thereof,
prospectus which a
• a. is a director of the company at the time of the issue of the
• prospectus;
b, has authorised himself to be named and is named in the prospectus as a
director of the company, or has agreed to become such director, either
immediately or after an interval of time;
• c. is a promoter of the company;
• d. has authorised the issue of the prospectus;
• e. and
is an expert referred to in sub-section (5) of section 26, shall, without
prejudice to any punishment to which any person may be liable under
section 36, be liable to pay compensation to every person who has sustained
such loss or damage.
 Aron Vem>a (C)
Contd .....
2. No person shall be liable under sub-section (J), if he proves-
• a. that, having consented to become a director of the company, he
withdrew his consent before the issue of the prospectus, and that
was issueditwithout his authority or or
• consent;
b. that the prospectus was issued without his or consent,
and that on becoming aware of its issue knowledge
he forthwith gave a
reasonable public notice that it was , without his knowledge or
consent. issued
3. Notwithstanding anythin contained in this section, it is
g
proved that a prospectus whereintent to defraud the
has been issued with
applicants for the securities of a company or any other person for
any fraudulent purpose, or to in subsection (J)
person referred
every
shall be personally responsible, without any limitation of for
liability,
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.
 Arun Vem,a lc)

REMEDIES AGAINST THE

COMPANY
1. Recession of contract: The right to rescind the contract is
) available if hethe
proves the
•!•following:
Prospectus issued by or on behalf of the
•!•
was must company.
Statement must be be untrue. misrepresentation
•!• The materialmust. have the to rely on
the statement in applying
misrepresentation
Statement for
induced shareholders
•!•shares.
Misrepresentation must be of the facts and not of of
law( expression opinion).
•!• That he has taken action promptly to rescind the contract.

2.) Right of action for damages for deceit: This remedy is

even after the company has gone into liquidation only if
available
following
conditions are satisfied:
•!• Person who issued the prospectus knew that statement was false.
•!• That person was authorised to issue the prospectus.
•!• That the allottee has suffered the loss due to misrepresentation.
 Aron Vernia (C)

REMEDIES AGAINST THE DIRECTORS, PROMOTERS

AND EXPERTS
1. Compensation: The liability consist in paying
) damages by way of compensations to the aggrieved
party. The compensation payable will be difference
between the price paid fortheshares and their value at the
date they are allotted to the subscriber.
2. Damages for non compliance with section 26: The
) remedy is to recover damages and not of
3.) Damages under General Law: recession. Plaintiff bas to
establish the following:
•!• There was fraudulent misstatement.
•a!• False related to material facts.
representation
 Anm Verma (C)

CRIMINAL LIABILITY FOR MISSTATEMENTS IN

PROSPECTUS

• Where a issued, circulated or distributed under this

Chapter, includes any statement which is untrue or
prospectus,
in form or context in which it is included or where
misleading
any
inclusion or omission of any matter is likely to mislead,
every
person who authorizes the issue of such prospectus shall
•!•beImprisonment for a term which may not be less than six
months but which may extend to 10 years; or
liable under section 447.
•!• not less than the amount involved in fraud but it
may extend to three times the amount of fraud;
Amount
•!• or both and fine.
•imprisonment
Provided that nothing in this section shall apply to a person if
he proves that such statement or omission was immaterial
or
that he bad reasonable grounds to believe, and did up to the
time of issue of the prospectus believe, that the statement
 Arun Verma
IC)

KYOU