The prospectus is an important document, related to the formation of the Company. A prospectus is a legal document through which the Public Company raises funds after its incorporation. Promoters play an important role in the making of the prospectus. The prospectus is a notice, document, circular, advertisement through which a public company appeals for a fund from the public. Under the Companies Act, the right to issue a prospectus is only given to the Public Companies with share capitals. Thus, a Public Company, but not a Private Company is entitled by issuing a prospectus, to invite application for its shares or debentures. The fund raises from existing shareholders through notice, document, etc. are not termed as a prospectus. The prospectus includes various information’s regarding the company which issues a prospectus such as financial performance of the Company, directors, promoters, and the sector in which the company deals.
Definition of Prospectus
The term Prospectus is defined as “any document described or issued as a prospectus and includes a red- hearing prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for subscription or purchase of any securities of a body corporate”. It is a legal document that is required to file with the Securities and Exchange Commission (SEC), which provides details about the investment to the public. The prospectus contains detailed information of the Board of Directors, Company Secretary, company’s management, capital structure, financial performance, recent projects of a company, and other related information.
Is Prospectus a written document or oral?
Whether a television advertisement and visual clips which give all the required details of the company and also give the information regarding new shares and debentures are termed as Prospectus?
No, the Prospectus shall not be oral. According to Section 25 of the Companies Act, the Prospectus must be in writing because it is a document.
Types of Prospectus
According to the provisions of the Companies Act 2013, the Public Company can issue four types of Prospectus.
1. Deemed Prospectus:
As per the provision of Section 25 of Companies Act, 2013, Deemed Prospectus is a document that offers the sale of securities to the public. In deemed prospectus, the company issues any securities of the company to another person often called Issue House, who make a further offer of sale of these shares to the public by advertisements.
2. Red Hearing Prospectus:
According to the provision of Section 32 of the Companies Act, 2013, a Red Hearing Prospectus is a prospectus with a view issued by a Public Company may before issuing an actual prospectus (Section 32 (1)) to explore the demand for securities and price at which securities may be offered.
It is a prospectus that does not include complete particulars of the quantum or price of the securities included therein.
According to Section 32 (3), the red herring prospectus shall file it with the registrar at least 3 days before the opening of the subscription list.
Section 32 (3) states that, in case of any variation between red hearing and actual prospectus, then in the Actual prospectus the variation shall be highlighted and the heading shall be “As Variations”.
3. Shelf Prospectus:
According to Section 31 of the Companies Act, 2013, Shelf Prospectus is a prospectus in respect of which the securities or the class of securities included therein are issued for subscription in 1 or more issues over a certain period without the issues of a further prospectus. This prospectus may be issued by any class or classes of companies at the Securities & Exchange Board of India (SEBI) may provide by regulations on this behalf.
The validity period of the shelf prospectus is not more than one year. For the subsequent offer of securities with the given period, no further issuance of the prospectus is required. In the case of Shelf Prospectus, the company shall require to file an Information Memorandum with the registrar before making a subsequent offer of securities.
4. Abridged Prospectus:
Section 33 of the Companies Act, 2013 states that a memorandum containing such salient features of a Prospectus as may be specified by the SEBI by making regulations on this behalf, and also this abridged prospectus is attached to every form of application issued for the purchase of any securities. If a company makes any default regarding the attachment of the abridged prospectus, then they shall be liable to a penalty of ₹50000 for each default.
The prospectus is an offer or Invitation to Offer?
The Prospectus has issued to the public at large, so the question arises that the prospectus is whether a general offer to the public? No, a prospectus is not an offer but merely it is an invitation to offer according to the Indian Contract Act. The prospectus is a constructed document that shall be issued to the public as an invitation for the subscription of shares.
When the new company is incorporated, they issue a prospectus through which the public gets to know about the existence of the Company. The company tries to convince the public that they give the best opportunity to them for their investment. If the public is convinced then they give an offer through the application for the purchase of shares and debentures.
Prospectus — invitation of offer
Application for purchase of shares — Offer
Allotment of Shares — Acceptance
After acceptance, the contract is binding to the Companies and the shareholders.
A Company gets 120 days for this whole process after the prospectus was issued. But if the company fails to do so i.e. obtain a minimum subscription from the public with a specified period, then the amount they received from the public is returned to them. Also, the company didn’t get the “Certificate of Commencement of Business” because the public doesn’t rely upon or interested in this company.
Who needs a prospectus?
The potential investors need a prospectus to evaluate the value of the offered public securities. Prospectus also states the company history, financial performance, company’s projects, capital structure of the company, potential growth of a company, etc. In other words, a prospectus discloses material facts of the company in front of the potential users which helps them to understand the risk factor on their investment.
When Prospectus is not required to be issued?
Under Section 26 of the Companies Act, 2013, the following state of affairs where the prospectus need not be issued-
1. When the shares or debentures are not offered to the public.
2. When shares and debentures are to be allotted to the existing shareholders or debenture Holders with or without a right to renounce (reject).
E.g. when shares are placed privately to less than 50 persons (private placement means less than 50 (i.e. 49), if 50 or more then considered as a public issue).
3. When shares and debentures are to be allotted are similar (uniform in nature) to the current shares and debentures (already issued shares and debentures), then there is no requirement to issue a new prospectus.
4. When not permissible by law (i.e. a Private Company is not required to issue prospectus (Section 2 (35)).
5. Where invitation to the public for subscription to the shares or debentures of a company is made in the form of Newspaper Advertisement (Section 30).
6. When an invitation to such person who has an underwriting contract for shares and debentures.
Content incorporated in Prospectus
The Prospectus has issued on the behalf of the company. Section 26 of the Companies Act, 2013, read with Rule 3 of the Companies (Prospectus and Allotment of Securities) Rule 2012:- For the formation of the Public Company, the prospectus must be signed and dated and contains the following information:
1. General Information:
- Name and Addresses- It includes the name and registered office address of the Company. It must also include the name and address of the Company Secretary, Auditor, Chief Financial Officers, Legal Advisor, Banker, Trustee.
- Issued Listed at (Name of Stock Exchange)
- Opening and Closing Date of the issue- Details of opening and closing date of the Subscription list.
- Rating of the shares and debentures
- Details about underwriters
- A statement by the Board of Directors- A statement was given by the Board of Directors about the separate bank account in which the money raised from the issue shall be deposited. Also, the Board of the Director discloses that how much amount they used or utilized.
- Consent of the directors/ auditors/ bankers to the issue, experts opinion or another person as may be prescribed.
2. The capital structure of the Company:
- Issued, subscribed, and paid-up capital
- Size of the present issue
3. Terms of the Present Issue:
- The Authority for the issue
- Procedure and schedule for allotment and issue of securities
- How to apply- Availability of Prospectus and Terms & Mode of Payment for the subscription
- Special tax benefits to the shareholders and Company
4. Particulars of the Issue:
- Objects of the Issue
- Project Cost
5. The company, Management and Project:
- History, main objects and present Business of the Company
- Plant location, machinery, technology, etc.
- Backgrounds of promoters, collaboration, etc.
- Infrastructure and facility
- The products and services
- Information related to threat factors of certain specific projects or their imminent legal actions, the gestation period of the project, and all other information related to it.
6. Financial Performance of the Company:
- Balance Sheet Data, Profit And Loss Account
- Any change in accounting policy during the last three years
- Stock market quotation of shares and debentures
7. Details of all payments refunds, interest, dividend, dues, etc.
8. Detail of Companies under same management- If there are numbers of companies under the same management, disclose all the details of these companies
Issues of Prospectus:
Under Section 26 of the Companies Act, 2013, the issues of a prospectus are stated-
The prospectus shall be considered invalid if the company does not issue a prospectus before 90 days from the date from which the copy was delivered to the registrar.
The company can be punished if a prospectus was issued in contravention under Section 26 of the Act. The punishment for the contravention is a fine of ₹50000 and it may extend to ₹300000.
Misstatement of a Prospectus
The prospectus is a trusted legal document on which people can rely before subscribing or purchasing securities from the company. But any misstatement that occurs in the prospectus leads to punishment in the form of a fine or imprisonment. Misstatement includes an untrue or misleading statement, non-disclosing facts, which is issued in the prospectus.
Liability for misstatement in a Prospectus
The liabilities for Misstatement in a prospectus are Civil Liability (Section 35) and Criminal Liability (Section 34).
1. Civil Liability (S.35)
According to the provision of Section 35 under the Companies Act, 2013, civil liability arises when a person who has subscribed for securities on the faith of the misleading prospectus has remedies against the company and the directors, promoters, experts & every person who authorized the issue of prospectus.
(i) Remedies against Company:-
In against company, two remedies are available:
(a) Rescind the Contract– The person who purchases the shares can rescind the contract if he found any misstatement in the prospectus and the money will be refunded to him which he pays to the company while purchasing securities.
Right to rescind or terminate the contract is available if the person proves the following:
- The prospectus was issued on the behalf of the company;
- The statement must be untrue;
- The statement must be a material misrepresentation;
- The misrepresentation must have induced the shareholders to take the securities and he must have relied on the statement in applying for securities;
- The misrepresentation of statement must be of fact and not of law
- That he has taken action promptly to rescind the contract within a reasonable time and before the company goes into liquidation.
(a) Damages for Fraud – In this case, the person only claims damages against the company but he cannot rescind the contract because of unreasonable delay, affirmation (provide assurance), and commencement of winding- up. At these stages, the shareholder can file a suit against the company for the misstatement and claim damages for it.
In cases where it is proved that a prospectus has been issued with intent to defraud the applicants, then, every person referred to in subsection (1) of Section 35 shall be personally accountable without any limitation of liability any of the losses or damages that may have been sustained by any person who subscribed to the securities based on such prospectus.
Defences available to avoid criminal liability:
Under Section 35 (2) of the Act, if the person proves that,
- Having a director of the company given his consent for issuing prospectus but he withdrew his consent before the issue of the prospectus and that it was issued without his authority or consent;
- That the prospectus was issued without his knowledge or consent and that on becoming aware he gave a reasonable public notice that it was issued without his knowledge or consent.
Criminal Liability (S.34)
According to the provision of Section 34 of the Companies Act, 2013, criminal liability arises where prospectus contains any untrue statement, then, every person who has authorized the issue of the prospectus shall be punishable under Section 447. The punishment involves imprisonment for a period of 6 months which can be extended to 10 years or a fine, maybe the amount involved in the fraud, or it can be extended 3 times the amount involved in the fraud or both.
Defences available under criminal liability:
The defenses are available under criminal law if a person proves that,
- Such statement or omission was immaterial;
- He has a judicious ground to consider that the inclusion or omission was necessary;
- He has judicious ground to consider that the statement was true.
In APL Industries Ltd. v. Securities and Exchange Board of India,
The SEBI (Securities and Exchange Board of India) ordered the company to refund the amount of subscription to the subscriber where the public issue of share was unsubscribed.
In Derry v. Peek,
The prospectus of a company contained that the company has been authorized to use steam power in moving its trams. But, the authority that was authorized to approve the Board of Trade refuses its approval. The court held that there is no misstatement in the prospectus, the Board of Directors was not held guilty of fraud, because they were honest and they mentioned the statement in a good faith. They were not intended to deceive anyone.
In Henderson v. Lacon,
In the prospectus, it is contended that the directors and their friends have subscribed a large portion of and they now offer to the public remaining shares. But in reality, the directors had subscribed only 10 shares each. The court held that the subscribers can rescind the contract.
In Arnison v. Smith,
The court held that, in the prospectus, the non-disclosure of facts does not amount to misrepresentation unless the concealment has prevented an adequate appreciation of what was stated.
In Peek v. Gurney,
The court held that-
- Every man must be held responsible for the consequence of false representation made by him to another, upon which the other acts and is injured.
- The aforesaid false representation was made with the intention that it should be acted upon by the third person in the manner resulting in injury.
- Such injury must be an immediate consequence and not remote.
The prospectus is a legal document only issued by a public company on the verge of raising funds. The prospectus plays a major role in the decision-making of the subscribers for the subscription of securities (shares, debentures, and other related instruments). It is merely an invitation to offer for the subscription of shares. It includes detailed information of the company’s Board of Directors, Company Secretary, company’s management, capital structure, financial performance, recent projects of a company, and other related information.
For being a valid prospectus, it should contain all the essential requisites and it must be registered. If any prospectus is not registered then, it is considered invalid. For any misstatement of a prospectus i.e. untrue statement or misleading statement to deceive anyone, then such person was held guilty and was liable for fine or imprisonment.
The public company must issue a prospectus for raising funds but, in case of private company converts into public then they should issue a prospectus or statement in lieu of prospectus with the memorandum of association (MOA) on its conversion into a public company.
Reference of Statutes and Books
- The companies Act, 2013
- Companies (Prospectus and Allotment of Securities) Rule 2012
- Companies Rule 2014
- Singh Avatar, Company Law, Seventeenth Edition, 2018
 Companies Act, 2013
 Section 2(70), Companies Act, 2013
 Section 32, Companies Act, 2013
 Section 31, Companies Act, 2013
 Under Section 35 (1) of the Companies Act, 2013, the term “person” includes directors, company secretary, auditor, chief financial officer, banker or other authorized officers.
 (2017) 200 Comp Cas 440 (Del)
 (1889) LR 14 AC (HL)
 (1867) LR e Eq 249
 (1889) LR 41 Ch D 348
 (1873) LR 6 (HL) 377
This article has been written by Aditi Sahu, 3rd Year (B.B.A. LL.B.) student at Banasthali Vidyapith.