Presented By :Group-2 Section F

As defined in Section 2(36) of the Companies Act it means any document issued to invite deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate.

Can be issued as , notice, circular, advertisement or other document

It is not an offer in itself but an invitation to make an offer.

Applicable only when accepted by the company

Golden Rule of Prospectus There should be full frank and honest disclosure of all

facts in the prospectus. These facts should be scrupulously accurate. There should not be any error of commission (mis-statements) nor any error of omission (non disclosure of relevant facts).

Dating of prospectus – Prospectus must be dated Registration of prospectus - the prospectus

must not be issued more than 90 days after the date on which a copy of it is delivered to the Registrar for Registration

Approval of prospectus by various agencies : The draft prospectus has to be approved by various agencies before filing. in the prospectus.

The lead financial institution underwriting the issue, if applicable: Although the prospectus is vetted by SEBI to ensure adequacy of disclosures but SEBI does not take any responsibility for the correctness of the statements made or opinions expressed.

Prospectus must be approved from following authorities

All the lead managers to the issue. Each of the stock exchanges where the

shares of the company are listed and where the shares/debentures are proposed to be listed.

The lead financial institution underwriting the issue, if applicable.

As per Section 56 of the Companies Act,1956, the issue of a Prospectus is not necessary in the following cases:

When shares or debentures are offered to existing holders of shares or debentures

When the issue relates to shares or debentures uniform in all respects with shares or debentures previously issued and dealt in or quoted in a recognized stock exchange

Where a person is bona fide invited to enter into an underwriting agreement

Where shares are not offered to the public. When shares/debentures are offered to 50 or less

persons. Cases :

• Nash v Linde• Pramatha Nath Sanyal Vs Kali Kumar Dutt

Matters specified in part I of Schedule II –General information like name and address of the company, its objects, number and classes of shares, particulars of directors, and auditors, underwriters, details regarding the securities being issued, outstanding litigation, management perception of risk factors and details on any issue within past 3 years .

Matters listed in Part II of schedule II – Reports by the auditors and the accountants, consent of directors, auditors, auditors etc. and some other statutory information.

Matters given in Part III of schedule II – This would include:

• For a company carrying on business for less than 5 financial years, then the reference is to the number of financial years for which the business has been carried on.

• If the prospectus is issued more than 2 years after the date at which the company is entitled to commence business, particulars and details of preliminary expenses need not be given

• Statements by experts

The term expert includes an engineer, a valuer, an accountant, and any other person whose profession gives authority to a statement made by him

Will be liable by reason of having given his consent under section 58 to the issue of the prospects containing a statement made by him

Expert is not liable if he can prove that : He withdrew it in writing before the delivery of a copy of the

prospectus for registration, or. After the delivery of a copy of the prospectus for resignation

but before allotment, he on becoming aware of the untrue statement withdrew his consent in writing and gave reasonable public notice thereof and the reason therefore.

He was competent to make the statement and he had reasonable ground to believe and did up to the time of allotment of the shares or debentures believe, that the statement was true. (Section 62 (3).

Any person who takes shares on the faith of statement of facts contained in a prospectus can rescind the contract if those statements are false or untrue.

A Statement is said to be untrue if The statement is misleading in the form and

context in which it is included. Where the omission from a prospectus of any

matter is calculated to mislead Cases : Royal Mail Steam Packet Company Rex v. Kylsant

Director will not be liable If he can prove that He (having consented to become a director) had withdrawn his

consent to become a director before the issue of the prospectus. Prospectus was issued without his authority or consent; and that

on becoming aware of its issue, he forthwith gave reasonable public notice of the issue having been made without his knowledge or consent.

After the issue of the prospectus and before allotment there under he, on becoming aware of any untrue statement therein, had withdrawn his consent and given a reasonable public notice of the withdrawal and of the reasons therefore; or

Untrue statement, purporting to be a statement by an expert or contained in a report or valuation of an expert was a correct and fair representation of the expert’s statement and he had reasonable ground to believe and, until issue of prospectus, did believe that the expert was competent to make it and the expert had given and had not withdrawn his consent to the issue of the prospectus and had not withdrawn it before delivery of a copy of the prospectus for registration; and

Untrue statement, arising from the statement made by an official person or from the public official documents was a correct and fair representation or correct copy or correct and fair extract of the document. (Case : Derry vs. Peek )

It is a contract entered into between the company and certain parties (called underwriters) before the shares or debentures are offered to the public for subscription.

The underwriters expose themselves to a great risk in ‘placing’ the shares before the public. And in return for this exposure to the risk the underwriters get commission.

Conditions to be satisfied: The payment of commission authorized by the

articles. The names and addresses of the underwriters

and the number of shares or debentures underwritten by each of them should be disclosed in the prospectus.

The amount of commission should not exceed, in the case of shares, 5% of the

Price at which the shares have been issued or the amount or rate authorized by the articles whichever is less, and in the case of debentures it should not exceed 2-1/2%.

A copy of the contract for the payment of the commission should be delivered to the registrar along with the prospectus or the statement in lieu of prospectus for registration.

In order to avoid the rigorous requirements of prospectus, one practice was to issue shares to another person. Such other person (often called ‘Issue House’) would then make further offer of sale of their shares to public by advertisements, etc.

offer of sale’ or advertisement of such ‘Issue House’ will be deemed to be prospectus issued by the company. This is called deemed prospectus.

  The ‘offer of sale’ by Issue House will not be considered as

‘Prospectus’ only when Company receives full consideration in respect of shares/debentures

allotted to Issue House or agreed to be allotted to them. Offer of sale is made at least 6 months after the shares were allotted

to them Additional information to be stated in such documents are

Net amount of consideration received or to be received by the company in respect of shares or debentures to which offer relates and

Place and time at which the contract under which the shares or debentures have been allotted or are to be allotted may be inspected [Section 64(3)].

As per Section 2(1) of the Companies (Amendment) Act, 2000 “abridged prospectus means a memorandum containing such salient features of a prospectus as may be prescribed.”

Necessary for issuing application forms for shares or debentures.

The abridged prospectus and the share application form should bear the same printed number.

Not required in following cases Where the offer is made in connection with a

bona fide invitation to a person to enter into an undertaking agreement with respect to the shares or debentures.

Where the shares or debentures are not offered to the public.

Where the offer is made only to the existing members or debenture holders of the company.

Where the shares or debentures offered are in all respects uniform with shares or debentures already issued and quoted on a recognized stock exchange.

Where a prospectus is issued as a newspaper advertisement,

Public companies does not invite public to subscribe for its shares, but arranges to get money from the private sources, it need not issue a prospectus to the public.

In such cases the promoters are required a draft prospectus known as “statement in lieu of the prospectus”.

The statement in lieu of prospectus must be filed with the Registrar at least three days prior any allotment of shares or debentures are made.

‘Shelf Prospectus’ means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus.

Any public financial institution, a public sector bank or scheduled bank whose main object is financing, shall file a shelf prospectus.

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 a period of validity of such shelf prospectus.

It shall be required to file an information memorandum.

An information memorandum shall be issued to the public along with shelf prospectus

Issued to the public prior to filing of a prospectus. Bound to file a prospectus prior to the opening of

the subscription lists and offer as red-herring prospectus,(RHP) at least three days before the opening of the offer.

Both IM & RHP shall carry same obligations as are applicable in the case of a prospectus.

Any variation between IM & RHP shall be highlighted as variations by the issuing company.

Each variation should be individually intimated to the persons invited to subscribe to the issue of securities.

  The issuing company or the underwriters to the

issue, in case of received advance subscription by way of cash or post-dated cheques or stock invest, shall not encash such subscription moneys or post-dated cheques or stock invest before the date of opening of the issue.

The applicant shall exercise his right to withdraw from the application on any intimation of variation within seven days from

Upon the closing of the offer of securities, a final prospectus stating therein the total capital raised whether by way, of debt or share capital and the closing price of the securities and any other details as were not complete in the red-herring prospectus shall be file.

A prospectus which does not have complete particulars on the price of securities and the quantum of securities offered.

A company making an issue of securities may circulate information memorandum to the public prior to filing of prospectus.

Total capital raised whether by way of debts, or share capital and the closing price of securities and any other details as were not complete in red-herring prospectus should be included in final prospectus.

The prospectus will be filled with ROC and also with SEBI in case of listed company.

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