Prospectus

1. Meaning
2. Importance
3. Contents
4. Statutory requirements
5. Types
6. Misstatements and its consequences
7. Defences
8. Conclusion

Following the incorporation of the firm, the next step is to raise the necessary
resources for the company's operations. It is known that a private company is
prohibited to invite the public to subscribe to its share capital. Hence, the need the
public is invited to subscribe to the share capital only if a public company even a
state-owned company if the managers are confident arranging the required capital
privately, they do not need to issue a prospectus.

Generally, a public company increases its capital by issuing a prospectus. Moreover,

when inviting investors, the purpose of issuing a prospectus is to inform them the
company's activities, financial status, capital structure, future prospectus,
management, etc. In this research paper; you will know the meaning, need and the
importance of publishing the prospectus.

You will also notice the contents of the brochure, meaning of purported prospectus,
shelf prospectus and advertisement. At the end, you will also learn about the golden
rule of creating a brochure and allocation of shares under a fictitious name and also
various remedies in case of loss to the investor if the prospectus contains false
information.

Meaning of a Prospectus:
A prospectus is defined as a legal document that describes a company's securities that
are offered for sale. Usually, the prospectus describes the business of the company
and the purpose of the securities offered.

A prospectus is an important disclosure document that a company must submit when

issuing investment securities to the public. These official documents provide potential
investors with detailed information about investment funds, bonds, stocks and other
investment offers offered to the public.[1]

A prospectus, as per Section 2(70)[2], 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.

Therefore, a prospectus can be more than just an advertisement; it can also be a notice
or a circular.

If a document meets both requirements, it will be referred to as a prospectus:

a. It seeks subscriptions for or purchases of any other body corporate security,

including shares, debentures;
b. The invitation is made public.

Importance of a Prospectus
In essence, under Section 42(2) of the Companies Act, an offer or invitation that
doesn't fall within the criteria of a private placement is deemed to be an invitation to
the public. If a company offers securities to over 200 individuals within a fiscal year,
except for certain exempt categories like eligible institutional purchasers or employees
eligible for assets through employee stock plans, it is considered a public offer.

Case law has established that a single private communication, such as in the Nash v.
Lynde [3]case, passing through a small circle of friends, doesn't constitute an issue to
the public. Similarly, offering shares to relatives or close associates of a director, as
seen in Rattan Singh vs. Managing Director[4], Moga Transport Co. Ltd., is not
regarded as an invitation to the public to purchase shares.

Regarding the requirement of an abridged prospectus under Section 33, it stipulates

that an application form for securities must be accompanied by an abridged
prospectus. However, exemptions apply: no abridged prospectus is needed if the
application is for underwriting agreements or if the securities were not offered to the
public. Additionally, upon request before the subscription period's closure, a person
must be provided with a copy of the prospectus. Failure to comply with these
provisions results in penalties.

An 'abridged prospectus' as defined in Section 2(1) is a memorandum containing key

features of a prospectus as prescribed by the Securities and Exchange Board through
regulations.

In summary, the Companies Act outlines rules regarding what constitutes a public
offer, exceptions to such offerings, and requirements for providing abridged
prospectuses and full prospectuses in the context of securities issuance and
subscriptions.

Contents of a Prospectus
According to Section 23 of Companies Act, 2013, contents of a prospectus should
include as follows:

 Information to be given in a Prospectus

Prospectus required under section of the Companies Act and rule of the
Companies Act (Prospectus and Allotment of Securities):
a. Names and addresses of the registered office of the company, company
secretary, Chief Financial Officer, auditors, legal advisers, trustees, if
any, the names, addresses and contact details of the issuer's subsidiary.,
compliance officer of the issuer company, merchant bankers and co
�managers of the issue, registrar of the issue, bankers of the issue,
issuers' stockbrokers, issuers, rating agency of the issue, organizers of
the instrument, names and addresses of organizers of any number, other
persons prescribed in the regulations of the Securities and Exchange
Commission.

b. The date of start and end of the issue and a note in the brochure of the
board or of the committee authorized by it about the issuance of
certificates or the return of the application within fifteen days of the end
of the issue or within of a shorter period. Before the deadline set by the
Securities and Exchange Commission or otherwise, the application
money will be returned to the applicants without delay, unless the
 applicants receive interest fifteen per cent annum for the delayed period.

c. A statement by the Board of Directors about the separate bank account

where all monies received out of the issue are to be transferred.

d. Disclosure of details of all monies including utilised and unutilised

monies out of the previous issue in the prescribe manner.
e. Details about underwriting of the issue including the names, addresses,
telephone numbers, fax numbers and e-mail addresses of the
underwriters and the amount underwritten by them.
f. Consent of the directors, auditors, bankers to the issue, trustees,
solicitors or advocates, merchant bankers to the issue, registrar to the
issue, lenders and experts.
g. The authority for the issue and the details of the resolution passed
therefore procedure and time schedule for allotment and issue of
securities.
h. The capital structure of the company shall be presented in the following
manner, namely:
i. the company's main objectives and current business activities and
location
ii. the objects of the issue
iii. the purpose for which there is a requirement of funds
iv. the funding plan (means of finance)
v. the summary of the project evaluation report (if available)
vi. the schedule of implementation of the project
vii. the interim use of funds, if any

i. particulars relating to:

i. the understanding of management of project-specific risk factors
ii. gestation period of the project
iii. extent of project progress
iv. deadlines for completion of the project
v. any litigation or legal action pending or taken by a government
j. Department or a statutory body during the last five years...
k. minimum subscription, amount payable by way of premium, issue of
shares otherwise, then on cash.
l. 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.
 m. disclosure of the sources of the advertiser's contribution in the prescribed
manner.

 Reports to be set out in Prospectus

For the purpose of the financial information, the prospectus will list the
following reports:

i. The company's auditors' reports regarding its earnings and losses and
assets and liabilities as well as the quantities and rates of any dividends
paid by the issuer company for every share class across all five financial
years right before the prospect issue year and other similar other issues
that might be mandated;

ii. Reports submitted by the auditors in the format required regarding the
earnings and losses for every one of the five fiscal years that preceded
the fiscal year of the prospectus's release, which includes these reports
from its subsidiaries and in a way that may be specified.

However, in the event that a company's five-year formation period has

not yet passed, the prospectus must outline in a way that may be required
the reports pertaining to earnings and losses for every fiscal year that
came before the fiscal year of the prospectus's release, which includes
these reports from its subsidiaries;

iii. Reports submitted by the auditors in the format required regarding the
earnings and losses incurred by the corporation throughout each of the
previous five fiscal years just before the matter and the business's assets
and liabilities on the final date on which the company's accounts were
created, which was not more than one hundred years old and eighty days
prior to the prospectus's release;

iv. Once more, in the situation of a company that has been involved for five
years If time hasn't passed since the incorporation date, the prospectus
will outline in the required way, the auditors' reports regarding the
earnings and losses incurred by the company's operations during all
fiscal years starting on the date of its establishment, as well as the
business's assets and liabilities as of the final date prior to the
prospectus's release; and

v. Reports of the operations or transactions to which the money from either

directly or indirectly, securities are to be employed;
Declaration
A declaration attesting to the Act's compliance with its requirements and a statement
stating that nothing in the prospectus conflicts with the Act's, the Securities Contracts
(Regulation) Act of 1956, and the 1992 Securities and Exchange Board of India Act
as well as the rules and regulations laid down there.

Other matters
The prospectus should include any other information and outline any further reports
that may be required.

Furthermore, highly detailed disclosure obligations are outlined in the SEBI

Regulations, 2009 about the offer documentation. Businesses must adhere to the same
rules.

I. Expert Declaration Found in a Prospectus

A statement claiming to be from an expert may be found in a prospectus. The
phrase "expert" comprises engineers, valuers, chartered accountants, and
businesses secretary, a cost accountant, or anybody else with authority to grant
a certificate issued in compliance with a legislation. There will be reports from
and expert will be included in a prospectus, if:
Such an expert is someone who, among other things:
o Provides written consent to the prospectus's release and has not been
involved in the company's formation, promotion, or management
withheld the approval until the prospectus was given to the Registrar in
order to registering,
o A declaration indicating that he has granted and has not revoked his
consent thereto is in the prospectus as well.

Exemptions:

o The aforesaid requirements of Section 26[5], that is, with respect to

the contents do not apply to:
 The issue of subscription rights, i.e. the prospectus given to the
existing members or bondholders of the company or the
registration form for the shares or bonds of the company,
regardless of whether the applicant has the right to renounce the
shares in favour of someone else or not.
 Shares/Debentures Uniform in all respects: The provisions of
Section 26 do not apply to the issue of a prospectus or form of
application relating to share debentures which are, or must be
 identical in all respects to previously issued shares or bonds traded
or listed on a recognized stock exchange.

o Variation in terms of contract or objects in prospectus (Section 27)[6]: 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
cannot do so except by special resolution. The notice of the special
resolution shall clearly state the reason for such change and shall be
published in the newspapers (one English and one vernacular) of the city
where the registered office of the company is located.

II. Offer of sale of shares by certain members of company (Section 28)[7]

You may have noticed that provisions regarding the offer and sale of shares by
specific company members to be carried out by the company on their behalf
have been included for the first time in the Companies Act, 2013.

It stipulates that in situations in which specific employees or body corporate

suggest, after consulting the Board of Directors, providing whether all or a
portion of their shareholdings are available to the public, they shall jointly Give
the business permission to act in any way related to the offer of sale for and on
in their stead. They will pay back the business for all of the costs it incurred on
this issue.

Section 28, in this regard provides that any document by which the offer of sale
to the public is made shall, for all purposes, be deemed to be a prospectus
issued by the company and all laws and rules made thereunder as to the
contents of the prospectus and as to liability in respect of misstatements in and
omission from prospectus or otherwise relating the prospectus shall apply as if
this is a prospectus issued by the company.

Statutory Requirements in Relations to a Prospectus:

1. Dating of Prospectus:
A prospectus published by, on behalf of, or in connection with a company that
is intended to be acquired must be dated in accordance with Section 26. The
Section further provides that the date on the prospectus shall be deemed to be
the date of the publication of the prospectus.
2. Registration of Prospectus:
In accordance with Section 26(1), a copy of the prospectus must be delivered to
the Registrar by the date of publication, at the latest.

Each person should sign the copy of the prospectus that was delivered in this
manner identified as a director therein, as a proposed director, or by his legally
authorized lawyer. Each prospectus published in accordance with subsection
(1) must, on the face from it:
a. declare that a copy has been sent to the Registrar for registration as
required by subclause (4); and
b. list any documents that must be attached to the submission in order for
this section to be fulfilled, copy delivered in this manner, or make
reference to the prospectus's statements, which mention these records.

A prospectus cannot be registered by the Registrar unless all of the conditions

listed in this section regarding registration are met and the prospectus has the
written consent of every individual listed in the prospectus.

Any planned company or an existing company must comply with the

aforementioned requirements.

A prospectus cannot be released more than ninety days following the date that a
copy was sent one of them was given to the Registrar.

3. Refusal to Register the Prospectus - According to Section 26(7), the Registrar

is not permitted to register a prospectus unless all of the Section 26 registration
requirements are met and all parties' written consent is attached to the
prospectus according to the prospectus. Consequently, the prospectus will not
be registered by the Registrar if;
a. It is not dated.
b. It lacks the matters, reports, and declarations that are supposed to be
included in it;
c. It includes reports or statements from experts involved in the
establishment, advancement, or management of the business;
d. It includes a statement attributed to an expert without providing a
statement of its own that he has authorized in writing the prospectus's
release and has not revoked this consent prior to receiving a copy of the
prospectus for registration, to the Registrar;
 e. Not all of the individuals named are signed a copy that is delivered to the
Registrar therein as a director of the company, as a director-in-proposal,
or by his legally authorized attorney.

4. Prospectus in the form of Advertisement (Section 30)[8] - It is necessary to

include information about the goals, member liability, and share capital of the
company's memorandum in any advertisement or prospectus that is published,
regardless of the format of the business, as well as the names of those who
signed the memorandum and the quantity of shares they subscribed for as well
as the capital structure.

When Prospectus not Required to be Issued:

In the following situations, a company is not required to issue a prospectus:

1. A prospectus is not necessary for a private company to publish.

2. A prospectus is not required even for publicly traded companies if the
promoters or Directors believe that by developing personal relationships, they
can mobilize resources and relationships, so the shares or debentures aren't
made available to the general public.
3. When the debentures or shares are made available to current shareholders or
rights-issued debentures, either with or without the right of Abandonment in
favour of another individual [Section 26 (2) (a)].

Types of Prospectuses
The provisions of Section 31, in this regard, are as follows:

I. Shelf Prospectus - The provisions of Section 31, in this regard, are as follows:
i. A shelf prospectus may be issued by any class or classes of companies as
the Securities and Exchange Board of India (SEBI) may provide by
regulations in this behalf.
ii. A company filing a shelf prospectus with the Registrar shall not be
required to file prospectus afresh at every stage of offer of securities by
it within the period a period of validity that cannot exceed one year.
 iii. A company that presents a shelf prospectus must send notification of all
significant circumstances related to new charges, changes in financial
status 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 offering of
securities pursuant to a shelf prospectus.
iv. An Information Memorandum shall be issued to the public along with
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.

A "shelf prospectus" is a prospectus that covers securities or a class of

securities that are issued for subscription in one or more issues over a
predetermined period of time without the need for a follow-up prospectus
Justification for Part 31.

According to Section 31 subsection (1), a "shelf prospectus" may be published

by any class of businesses that the Securities and Exchange Board (SEBI)
recognizes may do so by means of regulations. Obtaining funds from the
general public by employing different security measures is an exhausting
procedure. Whenever any such when a new prospectus is needed, it must be
submitted. Despite being a repetitive issue, the formalities require a significant
amount of time.

II. Red herring prospectus - Section 32 of the Companies Act, 2013 contains
the following provisions with respect to 'red herring prospectus':

1. A company proposing to offer securities may issue a prospectus before

issuing a prospectus.
2. A company that intends to issue a herring prospectus in accordance with
paragraph 1 must deliver it to the registrar at least three days before the
opening of the subscription list and offer.
3. The red herring brochure has the same obligations as the brochure, and
any deviations between the red herring brochure and the brochure must
be highlighted as brochure variations.
4. After the end of the offer of securities in accordance with this section, a
prospectus is indicated, in which the total capital acquired through debt
or share capital and the closing price of the securities and other
information not included in the offer are indicated. The red herring
 prospectus must be sent to the registrant and the Securities and Exchange
Commission.

Explanation: This section uses the term "introduction of a red herring quot;
means a prospectus that does not contain complete information about the
number or price of securities contained therein.

III. Abridged Prospectus: The abridged prospectus is a summary of a prospectus

filed before the registrar. It contains all the features of a prospectus. The
abridged prospectus briefly contains all the information contained in the
prospectus, so that it is convenient and fast for the investor to receive all the
useful information immediately. Section 33(1) of the Companies Act 2013 also
provides that when the securities purchase form of a company is issued, an
abridged prospectus must be attached to it. It contains all the useful and
material information for the investor to make a solid decision and also reduces
the cost of a public issue of capital because it is a short prospectus.[9]

IV. Deemed Prospectus: If a company offering securities for sale to the public
distributes or agrees to distribute securities, the document is considered a
prospectus by which the offer for sale to the public is made. The document is
considered for all purposes as the prospectus of the company and is subject to
all the contents and obligations of the prospectus.

In the case of SEBI v. Kunnamkulam Paper Mills Ltd[10]., it was held by the court
that where a rights issue is made to the existing members with a right to renounce in
the favour of others, it becomes a deemed prospectus if the number of such others
exceeds fifty.[11]

Misstatement in a Prospectus and its Consequences:

1. Criminal liability for mis-statements in prospectus (Section 34):
Where a prospectus, issued, circulated or distributed under this Chapter,
includes any statement which is untrue or misleading in form or context in
which it is contained or where the inclusion or omission of any matter is likely
to be misleading, any person authorizing the issue of such prospectus shall
liable under section 447
 Provided that nothing in this section shall apply to a person if he shows that
such statement or omission was immaterial or that he had reason to believe, and
until the prospectus was filed, he believed that the statement was true or that
the addition or omission was necessary.

According to section 34(1) of the Act, a statement included in a prospectus

shall be deemed to be untrue:
a. if the statement is misleading in the form or context in which it is
included; or
b. if it is likely that something will be added or omitted in the prospectus
may mislead.

In Rex v. Kylsant[12], all the statements included in the prospectus issued by

the company were literally true. One of the statements disclosed the rates of
dividends paid for a number of years. But dividends had been paid not out of
105 Prospectus trading profits but out of realised capital profits. This material
fact was not disclosed. Held, that the prospectus was false in material particular
and Lord Kylsant, the managing director and chairman, who knew that it was
false, was held guilty of fraud.

A mere silence cannot be a sufficient foundation of setting aside the allotment

of shares. The concealment of facts should be such that if it is not mentioned it
will make what is presented absolutely false. In Peek v. Gurney[13], the
prospectus issued did not mention about certain liabilities. This created a false
impression about the company being very prosperous. The prospectus was held
untrue.

Section 34 of the Companies Act states that if a prospectus is published,

circulated, or distributed and contains any statements that are false, misleading
in the context in which they are included, or if any information is included or
omitted that could be construed to be misleading, Anyone who approves the
distribution of such a prospectus faces consequences with a minimum term of
six months' imprisonment, but a term that may last up to ten years, and there
will also be a fine that cannot be less than less than the sum utilized in the
deception, but potentially up to three times the quantity utilized in the
deception.

2. Civil Liability (Section 35):

According to Section 35(1), if an individual purchased securities from a
company based on a misleading statement in the prospectus or on the inclusion
 or omission of any information, and they have incurred any loss or damage
consequently, the business and each individual who:
a. was a director of the business at the time the prospectus was released;
b. is listed in the prospectus as a and has given permission to be named
director of the business, or has consented to take on that role, either right
away or after a delay;
c. is a promoter for the business;
d. has given permission for the prospectus to be issued; and
e. is the expert mentioned in section 26 subsection (5), shall be responsible
for compensating the parties in addition to facing penalties under section
36 everyone who has experienced such harm or loss.

Punishment for fraudulently inducing persons to invest money (Section 36) -

Section 36 of the Act provides that any person who:

1. Either knowingly or recklessly makes any statement, promise or forecast which

is false, deceptive or misleading,
2. Or deliberately conceals any material facts, to induce another person to enter
into, or to offer to enter into:
a. contracts for the acquisition, delivery, subscription or guarantee of
securities or
b. any contracts whose purpose or alleged purpose is to secure a profit to
the party from the income of securities or is based on the fluctuation of
the value of securities; or
c. any agreement for, or with a view to obtaining credit facilities from any
bank or financial institution, will be held liable for action under section
447.

Defenses:
No one will be held accountable under Section 35 (1) if they can demonstrate either;

a. that they withdrew their consent to become a director of the company prior to
the prospectus's release, or
b. that the prospectus was released without their permission
c. that he was not informed or given permission for the prospectus to be issued,
and that as soon as he learned of the problem, he promptly issued a reasonable
public notice that he was not informed or given permission for its issuance.

Conclusion
The process of raising capital for a company is a crucial stage following its
establishment. Among the various steps involved, issuing a prospectus holds
significant importance, especially for public companies. A prospectus serves as
a comprehensive document informing potential investors about the company's
activities, financial status, management, and future prospects, among other
crucial details.

The prospectus, as defined by Section 2(70), encompasses various forms such

as a red herring prospectus, shelf prospectus, or even any document inviting
offers from the public for subscription or purchase of securities. Its contents, as
mandated by Section 26 and other regulations, outline extensive details,
including the company's financial information, management, objects of the
issue, and much more.

Importantly, the law imposes stringent obligations and liabilities regarding the
accuracy and completeness of the prospectus. Sections 34, 35, and 36 of the
Companies Act, 2013, hold individuals accountable for false statements,
misleading information, or material omissions in the prospectus. This includes
both criminal and civil liabilities, underscoring the necessity for accurate and
transparent disclosure in the prospectus.

Moreover, the paper has touched upon exemptions where a prospectus might
not be required, along with various types of prospectuses such as shelf
prospectus, red herring prospectus, abridged prospectus, and deemed
prospectus, each serving specific purposes within the realm of public offerings.

The legal framework outlined in the Companies Act, supported by cases and
provisions, emphasizes the importance of truthful and comprehensive
disclosures in a prospectus. It serves as a safeguard for investors' interests,
ensuring they have access to critical information before making investment
decisions.
In conclusion, the prospectus stands as a pivotal document in the corporate
landscape, offering transparency, safeguarding investor interests, and ensuring
compliance with legal obligations. Its issuance involves careful attention to
detail, accuracy, and adherence to regulatory requirements, ultimately
contributing to the integrity of capital markets and investor confidence. A
prospectus plays an important role for any public company and it must be under
the provisions laid down under the Companies Act 2013.