CORPORATE LAW – I

TOPIC – PROSPECTUS AND ITS

CONTENTS

BY-
AYUSH AGRAWAL
B. A. LLB. (HONS)
VI SEM, REGULAR
ROLL NO. 16
INTRODUCTION
Where a company intends to issue a public appeal for subscription of its shares or debentures, it
is essential for it to issue a prospectus. Section 25 of the Companies Act , 2013 requires that no
application for shares or debentures of a company can be invited unless the appeal is
accompanies with a prospectus.

A public company may issue securities to public through public offer which is referred to as
Prospectus. A private company may issue securities by way of rights issue or bonus issue to the
existing share holders, through issue of prospectus.1

Definition of Prospectus
Section 2(70) of the Companies Act, 2013 defines the Prospectus as, prospectus means any
document described or issued as a prospectus and includes a red herring prospectus referred to in
section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or
other document inviting offers from the public for the subscription or purchase of any securities
of body corporate.

A shelf prospectus means a prospectus in respect of which the securities or class of securities
included therein are issued for subscription in one or more issues over a certain period without
issue of a further prospectus.

A red-herring prospectus means a prospectus which does not include complete particulars of the
quantum or price of the securities included therein.

The essential ingredients of a prospectus are:

1. There must be an invitation offering to the public

2. The invitation must be made by or on behalf of the company or in relation to an intended
company
3. The invitation must be “ to subscribe or purchase” and
4. The invitation may relate to shares or debentures.

Prospectus must be Issued to the Public

The prospectus of a company may be said to be an advertisement through which the Company
invites public to purchase its shares or debentures. The forms for purchase of shares or
debentures can’t be issues by the company unless an advertisement in the form of prospectus is
issued and published in the newspapers. In view of the high cost incurring on the advertisement

1
Section 23(2)
of detailed prospectus, the concept of ‘abridged prospectus’ was introduced in the company law
by the Companies (Amendment) Act, 1998 in which only broad features of the prospectus were
required to be stated in brief.

In the case Nash v. Lynde2, several copies of a document marked “strictly confidential” and
containing particulars of a proposed issue of shares, were sent accompanied by application form
by the managing director of a company to a co-director; who sent a copy to a solicitor who, in
turn, gave it to a client who passed it onto a relation. Thus, the document was passed privately
through a small group of friends of the directors. The House of Lords ruled that there had been
no issue to the public and therefore, no action for compensation of loss caused to the allottees
would sustain.

When prospectus need not be Issued

The issue of prospectus under Section 26 of the Companies Act, 2013 is not necessaryin the
following circumstances even though the shares are offered and application forms issued to
public by the company:

1. Where a person is a bona fide invitee to enter into an underwriting agreement with regard
to shares or debentures.
2. Where shares or debentures are not offered to the public.
3. Where the shares or debentures offered are all in respects uniform with shares or
debentures already issued and quoted at a recognized Stock Exchange.
4. Where the shares or debentures are offered to the existing holders of shares or debentures
respectively
5. Where a prospectus is published as a newspaper advertisement, it is not necessary to
specify the contents of the memorandum, or the names etc. of the signatories to the
memorandum or the number of shares subscribed for by them.

TYPES OF PROSPECTUS UNDER COMPANIES ACT, 2013

Abridged Prospectus
According to Section 2(1) of the act, ―abridged prospectus means a memorandum containing
such salient features of a prospectus as may be specified by the Securities and Exchange Board
(SEBI) by making regulations in this behalf. It means that a company can’t issue application
form for purchase of securities unless such form is accompanied by an abridged prospectus.

2
1929 AC 158
Deemed Prospectus
According to Section 25(1) of the Act, where a company allots or agrees to allot any securities of
the company with a view to all or any of those securities being offered for sale to the public. Any
document by which such offer for sale to the public is made is deemed to be a prospectus by
implication of law.

Shelf Prospectus
According to Section 31 of the Act, Shelf prospectus is a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one or more issues
over a certain period without the issue of a further prospectus. Only the companies which have
been prescribed by the SEBI can issue a Shelf prospectus with the Registrar.

Red Herring Prospectus

According to Section 32 of the act, a red herring prospectus means a prospectus which does not
have complete particulars on the price of the securities offered and quantum of securities to be
issued. A company may issue an RHP prior to the issue of a prospectus. The company shall file
red herring prospectus with Registrar at least three days prior to the opening of the subscription
list and the offer. A red herring prospectus carries the same obligations as are applicable to a
prospectus and any variation between a red herring prospectus and a prospectus shall be
highlighted as variations in the prospectus.

Registration of Prospectus [Section27(7)]

Section 27(7) of the act provides that no prospectus shall be issued by or on behalf of a company
or in relation to an intended company unless, on or before the date of publication there has been
delivered to the Registrar for registration a copy thereof signed by every person who is named
therein as a director or a proposed director of the company or by his agent authorized in writing.
It must accompany the following documents

(a) The consent of the expert, if his report is to be published in the prospectus
(b) A copy of every contract relating to the appointment or remuneration of managerial
personnel
(c) A copy of every material contract not being a contract entered into the ordinary course of
business of the company entered into within two years of the date of issue of prospectus
(d) A written statement relating to the adjustments, if any, in respect of figures of any profits
or losses, and assets and liabilities
(e) The consent in writing of the person, if any, named in the prospectus as auditor, legal
adviser, attorney, solicitor, issue house banker or broker of the company to act in that
capacity
(f) The consent of director in respect of new directors, if any , named therein
 (g) A copy of the underwriting agreement, if any, should also be filed along with the
prospectus.

CONTENTS OF PROSPECTUS
The prospectus must contain a statement that a copy has been delivered for registration,
indicating the requisite documents delivered therewith. It must be issued within 90 days of
registration, either by newspaper advertisement or otherwise.

Section 26 of the Companies Act, 2013 enumerates the matters to be stated in the prospectus

(1) Every prospectus issued by or on behalf of a public company either with reference to its
formation or subsequently, or by or on behalf of any person who is or has been engaged or
interested in the formation of a public company, shall be dated and signed and shall—
(a) state the following information, namely:—
(i) names and addresses of the registered office of the company, company secretary, Chief
Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other
persons as may be prescribed;
(ii) dates of the opening and closing of the issue, and declaration about the issue of allotment
letters and refunds within the prescribed time;
(iii) a statement by the Board of Directors about the separate bank account where all monies
received out of the issue are to be transferred and disclosure of details of all monies including
utilised and unutilised monies out of the previous issue in the prescribed manner;
(iv) details about underwriting of the issue;

(v) consent of the directors, auditors, bankers to the issue, expert‘s opinion, if any, and of such
other persons, as may be prescribed;

(vi) the authority for the issue and the details of the resolution passed therefor;
(vii) procedure and time schedule for allotment and issue of securities;
(viii) capital structure of the company in the prescribed manner;
(ix) main objects of public offer, terms of the present issue and such other particulars as may be
prescribed;
(x) main objects and present business of the company and its location, schedule of
implementation of the project;

(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) deadlines for completion of the project; and
(E) any litigation or legal action pending or taken by a Government Department or a statutory
body during the last five years immediately preceding the year of the issue of prospectus against
the promoter of the company;
(xii) minimum subscription, amount payable by way of premium, issue of 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

(b) set out the following reports for the purposes of the financial information, namely:—
(i) reports by the auditors of the company with respect to its profits and losses and assets and
liabilities and such other matters as may be prescribed;
(ii) reports relating to profits and losses for each of the five financial years immediately
preceding the financial year of the issue of prospectus including such reports of its subsidiaries
and in such manner as may be prescribed:

Provided that in case of a company with respect to which a period of five years has not elapsed
from the date of incorporation, the prospectus shall set out in such manner as may be prescribed,
the reports relating to profits and losses for each of the financial years immediately preceding the
financial year of the issue of prospectus including such reports of its subsidiaries;

(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 five financial years immediately preceding issue and
assets and liabilities of its business on the last date to which the accounts of the business were
made up, being a date not more than one hundred and eighty days before the issue of the
prospectus:

Provided that in case of a company with respect to which a period of five years has not elapsed
from the date of incorporation, the prospectus shall set out in the prescribed manner, the reports
made by the auditors upon the profits and losses of the business of the company for all financial
years from the date of its incorporation, and assets and liabilities of its business on the last date
before the issue of prospectus; and

(iv) reports about the business or transaction to which the proceeds of the securities are to be
applied directly or indirectly;

(c) make 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 Securities
Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India
Act, 1992 (15 of 1992) and the rules and regulations made thereunder; and

(d) state such other matters and set out such other reports, as may be prescribed.

(2) Nothing in sub-section (1) shall apply—

(a) to the issue to existing members or debenture-holders of a company, of a prospectus or form

of application relating to shares in or debentures of the company, whether an applicant has a
right to renounce the shares or not under sub-clause (ii) of clause (a) of sub-section (1) of section
62 in favour of any other person; or

(b) to the issue of a prospectus or form of application relating to shares or debentures which are,
or are to be, in all respects uniform with shares or debentures previously issued and for the time
being dealt in or quoted on a recognised stock exchange.

(3) Subject to sub-section (2), the provisions of sub-section (1) shall apply to a prospectus or a
form of application, whether issued on or with reference to the formation of a company or
subsequently.

Explanation.—The date indicated in the prospectus shall be deemed to be the date of its publication.
(4) No prospectus shall be issued by or on behalf of a company or in relation to an intended
company unless on or before the date of its publication, there has been delivered to the Registrar
for registration, a copy thereof signed by every person who is named therein as a director or
proposed director of the company or by his duly authorised attorney.
(5) A prospectus issued under sub-section (1) shall not include a statement purporting to be made
by an expert unless the expert is a person who is not, and has not been, engaged or interested in
the formation or promotion or management, of the company and has given his written consent to
the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of
the prospectus to the Registrar for registration and a statement to that effect shall be included in
the prospectus.
(6) Every prospectus issued under sub-section (1) shall, on the face of it,—
(a) state that a copy has been delivered for registration to the Registrar as required under sub-
section (4); and
(b) specify any documents required by this section to be attached to the copy so delivered or
refer to statements included in the prospectus which specify these documents.

(7) The Registrar shall not register a prospectus unless the requirements of this section with
respect to its registration are complied with and the prospectus is accompanied by the consent in
writing of all the persons named in the prospectus.
(8) No prospectus shall be valid if it is issued more than ninety days after the date on which a
copy thereof is delivered to the Registrar under sub-section (4).
(9) If a prospectus is issued in contravention of the provisions of this section, the company shall
be punishable with fine which shall not be less than fifty thousand rupees but which may extend
to three lakh rupees and every person who is knowingly a party to the issue of such prospectus
shall be punishable with imprisonment for a term which may extend to three years or with fine
which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or
with both.

Voluntary statements in Prospectus

In addition to the compulsory particulars, any other information is usually considered voluntary.
Such information may relate to the terms of the issue of share application to deal with shares of
the company on the Stock Exchange. The prospective buyer is entitled to all true disclosures in
the prospectus. The prospectus must reflect the company’s real position and true nature of its
venture. This is known as the ‘Golden Rule’ as to the framing of prospectus and described as
golden legacy by Pagewood in Henderson v. Lacon3.

The essence of the rule is that it is obligatory on the part of those responsible for the issue of
prospectus not only to state accurately all the relevant facts bit also not to omit any fact which
may be relevant to the prospective investor to know about the company.

Variations in terms of contract or objects of prospectus [Section 27]

(1) A company shall not at any time, vary the terms of a contract referred to in the prospectus
or objects for which the prospectus was issued, except subject to the approval of, or
except subject to an authority given by the company in general meeting by way of special
resolution

Provided that the details, as may be prescribed, of the notice in respect to such resolution
to shareholders, shall also be published in the newspapers in the city, where the registered
office of the company is situated indicating clearly the justification for such variation :

Provided further that such company shall not use any amount raised by it through
prospectus for buying, trading or otherwise dealing in equity shares of any other listed
company

(2) The dissenting share-holders who have not agreed to proposal to vary the terms of
contracts or objects referred to in the prospectus, shall be given an exit offer by promoters
or controlling share-holders at such exit price, and in such manner and conditions, as may
be specified by SEBI by making regulations in this behalf.

LIABILITY FOR OMISSION OR FRAUDULENT MIS-STATEMENT

IN PROSPECTUS
Omission
Any omission from a prospectus of those matters which are required to be stated as per Section
26 shall render the director or any other person responsible for the issue of prospectus, liable to
fine not less than Rs 50,000, which may extend to three lakh rupees. In addition to this, the
director or the official concerned may also incur civil or criminal liability for non-disclosure.

It must be stated that for mere omission, not being deliberate falsity, the subscriber for shares or
debentures has no right to rescind the allotment nor any other remedy against the company. He
3
(1867) 17 LT 527
can, however, claim damages for loss suffered against the directors or other persons responsible
for omission. In order to succeed, he has to prove that he applied for shares or debentures on the
faith of the prospectus and would not have done so if the prospectus had complied with the
provisions of Section 56 of the Act.4

Fraudulent Mis-statements

Any person who has been induced to invest money in a company relying on a fraudulent
statement in the prospectus can sue the director or the person responsible for issuing it and claim
damages. In order to prove a fraud the aggrieved investor has to prove that the false
representation was made by the company (a) knowingly, (b) without belief in its truth, or (c)
recklessly and careless statement in the prospectus without bothering about the truth or false of
it.

Regarding liability for fraudulent mis-statements in the prospectus, following generalizations

may provide sufficient guidelines to proceed in an action for fraud or deceit.

Firstly, the aggrieved party has to prove that the person making the suggestion knew that what he
is stating in the prospectus is not true or did not believe it to be true or it is an active concealment
of some material fact. However, if a person making the statement honestly believes it to be true,
he is not guilty of fraud even if the statement is not true. This principle has been enunciated by
House of Lords in Deery v. Pee5.

Secondly, the false representation must relate to some existing facts which are material to the
contract of purchasing shares. This has been held in the case Edgington v. Fitznaurice6.

Thirdly, in order to succeed in an action for fraud in prospectus it is necessary that the plaintiff
should have taken the shares or debentures directly from the company by allotment and not from
any intermediary agency or open market. This in other words means that only the allottees can
have remedy against the directors. This rule was for the first time laid down in Peek v. Gurney7.

Fourthly, in the absence of a contractual relationship a person who makes a statement owes a
duty of care to anyone whom he knows or has reasonable grounds for expecting will rely on his
statement. If he fails in that duty of care and the party which is misled suffers loss, he shall be
liable for negligence.

4
In Re South of England Natural Gas and Petroleum Co. Ltd, 1911 1 Ch 573
5
1889 14 AC 337
6
1885 29 Ch D459
7
1873 43 LJ 19
Who can be sued

It may be reiterated that Section 26 of the Companies Act, 2013 imposes liability for omissions
which are required to be undisclosed in the prospectus whereas Section 35 imposes liability for
mis-statements or untrue statements.

The persons liable for mis-statements are enumerated in Section 35(1) of the Act. Thus, a person
who has subscribed for any shares or debentures on the faith of an untrue statement in the
prospectus and sustained any loss or damages may sue for compensation, all or any of the
following

(a) The directors at the time of issue

(b) Persons named in the prospectus as present or future directors
(c) The promoters
(d) Persons who have authorized the issue of prospectus
(e) An expert referred to in Section 26(5)

The mis-representation should be in respect of some material fact. What is a material statement
of fact shall, however, depend on the circumstances of each case. Thus a statement in the
prospectus that a particular mine was in operation and making large profits and that no
promotion money was to be paid, were held to be material statements of fact and the directors
were held liable for making untrue statement.

Civil liability [Section 35]

The inadequacy of action for damages for deceit came to light in the House of Lords decision in
Derry v. Peek, and this remedy was found to be inadequate to protect the interests of investors. It
was realized that a common investor is hardly concerned whether the mis-statement in the
prospectus was a deliberate falsehood or made by the directors in good faith innocently. What he
is concerned with is that he should be compensated for the loss caused to him due to mis-
representation. It is for this reason that within a year of the decision, an Act called the Director’s
Liability Act, 1890 was passed in England whereby the directors were made liable for mis-
statement in the prospectus although they might have believed that the Statement was
substantially true. Subsequently, this provision was incorporated in Section 43 of the English
Companies Act,1948 and a corresponding provision to this effect is to be found in Section 35 of
the Companies Act, 2013

The section provides that the directors, promoters and every other person who is authorized to
issue the prospectus of a company shall be liable to pay compensation to the investor for any loss
sustained by him due to untrue statements in the prospectus. The liability of the directors or
promoters, as the case may be, is joint and several and they may recover contribution from others
who are guilty of misrepresentation.
Defences to Civil Liability [Section 35(2)]

Section 35(2) of the Companies Act provides that a person shall not be liable to pay
compensation for any mis-statement in the prospectus in the following circumstances:

1. Withdrawal of consent- If he proves that having consented to become a director or

promoter, he withdrew his consent before the issue of prospectus and that it was issued
without his consent or authority.
2. Without knowledge – A director may also escape liability if he proves that the prospectus
was issued without his knowledge or consent, and on becoming aware of its issue, he
promptly gave a public notice to that effect.
3. Ignorance of untrue statement- A director may initially be ignorant about the untrue
statements made in the prospectus. But if after the issue of prospectus and before
allotment thereunder, he becomes aware of the untrue statement and withdraws his
consent by a reasonable public notice, he shall not be liable.
4. Has reasonable ground for belief – A director can also escape liability if he proves that as
regards every untrue statement not purporting to be made on the authority of an expert or
of a public official document or statement, he had reasonable ground to believe and did
upto the time of allotment of shares or debentures believe, that the statement was true.
5. Reliance on expert’s opinion – The director shall also be protected if he proves that as
regards the untrue statement purporting to be made by an expert, it was a correct and fair
representation of the statement.
6. Statement based on public official document – The director shall not be liable if he
proves that as regards every untrue statement purporting to be a statement made by an
official person or from public official document, it was correct and fair extract from the
document.

Criminal liability for Misrepresentation [Section 34]

Apart from civil liability for mis-statements in the prospectus, the company law also provides for
criminal liability under Section 34 of the Companies Act, 2013. The section says that where
prospectus includes any untrue statement, every person who has authorized the issue of the
prospectus shall be punishable under Section 447 of the Act, which provides punishment for
fraud. Any person found guilty of fraud may be punished with
 (a) Imprisonment for a term which may not be less than six months but which may extend to
ten years, and
(b) Fine which shall not be less than the amount involved in the fraud, but which may extend
to three times the amount involved in the fraud, or
(c) Both imprisonment and fine.

CONCLUSION
As it can be seen, a prospectus is a mandatory document for limited companies to commence
their business, but it’s complicated procedure delays the operation of any business, therefore a
number of organizations hesitate to issue prospectus to the general public for subscription of
share capital & debentures.

BIBLIOGRAPHY
BOOKS-

 The New Company Law by Dr. N. V. Paranjape, VIth Edition 2014

ARTICLES-

 https://blog.ipleaders.in/information-prospectus-company/

 https://freebcomnotes.blogspot.com/2017/02/prospectus-meaning-contents-types.html