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Submitted by Pallav Tarnekar

1. Meaning and Definition of Prospectus:

S.2(70) defines Prospectus as- "Any document described or issued as a Prospectus and includes a red herring prospectus or any notice, circular, advertisement or other document inviting offers from 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 2 things-


i. It invites subscription to or purchase of shares or debentures or any other security of a body corporate.
ii. The aforesaid invitation is made to the public.

Case: Nash v. Lynde

Held: To be a Prospectus, it must be 'issued to the public'. Single private communication does not amount to 'issue to the public'. Here the document was passed privately through a small circle of friends of the Directors. The House of Lords held that there had been no issue to the public.

An invitation shall not be an invitation to the public if it cannot be calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving invitation.

Case: Ratan Singh v. Managing Director, Moga Transport Co. Ltd.

Held: The offerings of shares to the kith and kin of a Director is not an invitation to the public to buy shares.

2. Contents of a Prospectus:

As per s.26 of the 2013 Act-

a. Information to be given in a Prospectus:


- Name and address of the registered office of the Company, CS, auditors, etc.
- Dates of the opening and closing of issue (made by the Board).
- Statement by the Board of Directors about separate bank account.
- Disclosure of the details of money.
- Details about underwriting of the issue.
- Consent of auditors, Directors, bankers, etc.
- Details of the resolution passed.
- Procedure and time schedule for allotment and issue of security.
- Capital structure of the Company.
- Details of the Directors, including their appointment and remuneration.
- Particulars such as:
* Present business and location
* Object of the issue
* Purpose of funds
* Schedule of implementation
* Funding plan
* Summary of project
* Interim use of funds
- Particulars relating to:
* Management
* Litigation or legal matter
* Gestation period
* Extent of progress
* Deadlines for completion of project

b. Reports to be Set Out in the Prospectus:


i. Reports by the auditors of the Company with respect to its profits, losses, assets and liabilities.
ii. Reports made in the prescribed manner by the auditors upon the profits and losses for each of the 5 financial years immediately preceeding the financial year of issue of Prospectus, including reports of subsidiary.
iii. Reports made in the prescribed manner by the auditors upon the profits and losses of the business of the Company for each of the 5 fnancial years immediately preceding the issue and assets and liabilities of the business.
iv. Reports about the business or transactions to which the proceeds of the securities are to be applied directly or indirectly.

c. Declaration:

There shall be included 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 SCRA, 1956 and the SEBI, 1992 and rules and regulations made thereunder.

d. Other Matters:

Prospectus shall also state such other matters and set out such other reports as may be prescribed.

3. Statement of an Expert included in a Prospectus:

A Prospectus must contain a statement purporting to be made by an expert. Expert includes an engineer, a valuer, a CA, a CS, a CMA and any other person who has the power to issue a certificate in pursuance of the law.

4. Penalty for Non-Compliance:

The penalty for non-compliance of these provisions is a minimum fine of Rs. 50, 000 not exceeding Rs. 3, 00, 000 or with imprisonment for up to 3 years or with both.

5. Exemptions:

The aforesaid requirements of s.26 with respect to the contents do not apply to:
- Right Issue
- Shares/Debentures uniform in all respects

6. Variation in Terms of Contract or Objects in the Prospectus:

If at any time the Company wants to vary the terms of a contract referred to in the Prospectus or objects for which the Prospectus was issued, it sh all not be allowed to do so except by way of a special resolution. The notice of the special resolution must clearly indicate the justification for such variation and the same should be published in a newspaper in the city where the registered office of the Company is situated.

7. Draft of the Prospectus to be made Public:

The draft Prospectus filed with SEBI is not a public document. The final Prospectus becomes available to the public only 2-3 weeks prior to the opening of the issue. In order to enhance transparency, it has been decided that the draft Prospectus filed with SEBI would be made a public document.

8. Statutory Requirements of the Prospectus:


- Dating of Prospectus
- Registration of Prospectus

9. Shelf Prospectus: S.31

"Shelf Prospectus" means a Prospectus in respect of which the securities or class of securities included therein are issued for subscription in 1 or more issues over a certain period without the issue of a further Prospectus.


i. A shelf Prospectus may be issued by any class or classes of Companies as the SEBI may provide by regulations in this behalf.
ii. Any Company filing a shelf Prospectus with the Registrar shall not be required to file the Prospectus afresh at every stage of the offer of securities by it within the period of its validity which cannot be more than 1 year.
iii. A Company filing a shelf Prospectus shall be required to file an information memorandum on all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed, prior to making of a second or subsequent offer of securities under the shelf Prospectus.
iv. An information memorandum shall be issued to the public along with the shelf Prospectus filed at the stage of the first offer of securities.

Information memorandum together with the shelf Prospectus shall be deemed to be a Prospectus.

10. Red-Herring Prospectus: S.32

S.32 of the Companies Act, 2013 contains the following provisions with respect to the red-herring Prospectus-
i. A Company proposing to make an offer of securities may issue a red-herring Prospectus prior to the issue of Prospectus.
ii. Red-herring Prospectus means a Prospectus which does not include complete particulars of the quantum or the price of the securities included therein.
iii. A Company proposing to issue a red-herring Prospectus shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.
iv. Red-herring Prospectus shall carry the same obligations as are applicable in the case of a Prospectus.
v. Any variation between the red-herring Prospectus and a Prospectus shall be highlighted as variations in the Prospectus.
vi. Upon the closing of the offer of securities, the Prospectus stating therein:
- the total capital raised, whether by way of debt or share capital,
- the cloaing price of the securities, and
- any other details as are not included in the red-herring Prospectus shall be filed with the Registrar and SEBI.

11. Golden Rule for Framing of the Prospectus:

The golden rule for framing of the Prospectus was laid down by Justice Kindersely in the case of-

New Brunswick & Canada Railway & Land Co. v. Muggeridge

Rule: Those who issue a Prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Public is invited to take shares on the faith of the representations contained in the Prospectus. The public is at the mercy of the Company Promoters. Everything must therefore be stated with accuracy. Nothing should be stated as fact which is not so, and no fact should be omitted the existence of which might in any degree affect the nature or quality of the principles and advantages which the Prospectus holds out as inducement to take shares. In a word, the true nature of the Company shall be disclosed.

Submitted by Pallav Tarnekar

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