PROSPECTUS

Definition
Prospectus" means any prospectus, notice, circular, advertisement or other document inviting offers
from the public for the subscription on purchase of any shares in, or debentures of, a body corporate.
Prospectus to be in writing
Invitation to public
Offer to the public
Dating of prospectus
Sec 55 - A prospectus issued by or on behalf of a company or in relation to an intended company shall be
dated, and that date shall, unless the contrary is proved, be taken as the date of publication of the
prospectus.
Signing of the prospectus In case the prospectus is issued by an intended company, it has to be signed
by the proposed directors of the company or by their agents authorized in writing. In case of existing
companies, the prospectus has to be signed by every person who is named therein as director of the
company or by his agent authorized in writing.
Registration of prospectus (sec. 60)
Can be issued only when a copy thereof has been delivered to the registrar for registration
Must be made on or before the date of publication. Copy must be signed by every person who is named
as director or proposed director or by his authorized agent.
Must be issued within 90 days of the date on which a copy thereof is delivered for registration
Penalty for non-registration of prospectus the company and every person, who is knowingly a party to
the issue of the prospectus, shall be punishable with fine which may extend to Rs. 50,000
Objects of registration of prospectus
1. To keep an authenticated record of the terms and conditions of issues of shares or debentures, and
2. To pinpoint the responsibility of the persons issuing the prospectus for statements made by them in the
prospectus.
Shelf Prospectus (Sec 60A)
Any public financial institution, 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.
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 by the Central Government, prior to making of a second or subsequent offer of
securities under the shelf prospectus.
An information memorandum shall be issued to the public along with shelf prospectus filed at the stage
of the first offer of securities and such prospectus shall be valid for a period of one year from the date of
opening of the first issue of securities under that prospectus:
Provided that where an update of information memorandum is filed every time an offer of securities is
made, such memorandum together with the shelf prospectus shall constitute the prospectus.
Explanation.For the purpose of this section,
financing means making loans to or subscribing in the capital of, a private industrial enterprise engaged
in infrastructural financing or, such other company as the Central Government may notify in this behalf;
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.
Information memorandum (Sec 60B)
A public company making an issue of securities may circulate information memorandum to the public
prior to filing of a prospectus.
A company inviting subscription by an information memorandum shall be bound to file a prospectus
prior to the opening of the subscription lists and the offer as a red-herring prospectus, at least three days
before the opening of the offer.
Red-herring prospectus means a prospectus which does not have complete particulars on the price of
the securities offered and the quantum of securities offered.
CONTENTS OF PROSPECTUS/DISCLOSURES IN PROSPECTUS
The Golden Rule as to framing of prospectus Those who issue prospectus holding out to the public
the great advantages which will accrue to persons who will take shares in a proposed undertaking, and
inviting them to take shares on the faith of the representations therein contained are bound to stat
everything with strict and scrupulous accuracy and not only to abstain from stating as fact that which is
not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect
the nature or extent and quality of the privileges and advantages which the prospectus holds as
inducement to take shares.
i) As per Companies Act, 1956
ii) Disclosures as per SEBI guidelines
AS PER COMPANIES ACT, 1956
Sec 56 - Matters to be stated and reports to be set out in prospectus.
Every prospectus issued by or on behalf of a company, or

 by or on behalf of any person who is or has been engaged or interested in the formation of a
company,
shall state the matters specified in Part I of Schedule II and
set out the reports specified in Part II of Schedule II
Schedule II
1.

Part I of Schedule II

2.

Part II of Schedule II

3.

Part III of Schedule II

Part I of Schedule II

General Information

Capital structure of the company

Terms of the present issues

Particulars of the issues

Company, management and project

Particulars in regard to the company and other listed companies under the same management

Outstanding litigation

Management perception to risk factor

Part II of Schedule II
General information
Financial reports

Report by the auditors

Reports by the accountants

Statutory and other information

Offer for sale (sec 64)
DOCUMENT CONTAINING OFFER OF SHARES OR DEBENTURES FOR SALE TO BE DEEMED
PROSPECTUS.
Where a company allots or agrees to allot any shares in or debentures of the company with a view to all
or any of those shares or debentures being offered for sale to the public, any document by which the offer
for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company

 (2) For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or
an agreement to allot, shares or debentures was made with a view to the shares or debentures being
offered for sale to the public if it is shown (a) that an offer of the shares or debentures or of any of them for sale to the public was made within six
months after the allotment or agreement to allot; or
(b) that at the date when the offer was made, the whole consideration to be received by the company in
respect of the shares or debentures had not been received by it.
if it required a prospectus to state in addition to the matters required by that section to be stated in a
prospectus (a) the net amount of the consideration received or to be received by the company in respect of the shares
or debentures to which the offer relates; and
(b) the place and time at which the contract under which the said shares or debentures have been or are to
be allotted may be inspected.
Section 60 as applied by this section shall have effect as if the persons making the offer were persons
named in a prospectus as directors of a company.
Where a person making an offer to which this section relates is a company or a firm, it shall be sufficient
if the document referred to in sub-section (1) is signed on behalf of the company or firm by two directors
of the company or by not less that one-half of the partners in the firm, as the case may be; and any such
director or partner may sign by his agent authorized in writing.
Offer for sale (sec 64)
1. Prospectus by implication
2. Intention to offer shares or debentures to the public
3. Additional information
a) Consideration and time and place of inspection of contract
b) Issuing House to be deemed director
c) Signing of prospectus
MISSTATEMENTS IN PROSPECTUS AND THEIR CONSEQUENCES
1. CIVIL LIABILITY
2. CRIMINAL LIABILITY
Liability for misstatements in prospectus
1. CIVIL LIABILITY
I.

Against the company

i.

Rescission of contract

ii.
II.

Claim for damages

Against the directors, promoters and experts

i.

Damages
a. For fraudulent misrepresentation
b. For innocent misrepresentation

ii.

Compensation under sec. 62 with sec. 56

iii.

Damages for non-compliance

2. CRIMINAL LIABILITY

CIVIL LIABILITY: Remedies against the company

1. Rescission of contract
Apply for the rescission within a reasonable time and before the company goes for liquidation
Will have to surrender to the company the shares allotted
Conditions to be satisfied 1. The statement must be a material misrepresentation of fact
2. The statement must have induced the shareholder to take the shares
3. The statement must be untrue
4. The deceived shareholder is an allotted and he must have relied on the statement in the prospectus
5. The omission of material fact must be misleading before rescission is granted
6. The proceedings for rescission must be started as soon as the allottee comes to know of misleading
statement in the prospectus on he faith
2. Damages for deceit
must prove the same matters in claiming damages for deceit as in claiming rescission of the
contract
CIVIL LIABILITY: Remedies against the directors, promoters and experts
Directors at the time of the issue of the prospectus
Persons who have authorized themselves to be named as directors in the prospectus
Promoters and
Persons who have authorized the issue of the prospectus
Remedies against the directors, promoters and experts

1. Liability for damages for mismanagement in prospectus (sec. 62) - the directors, promoters and every
person who has authorized the issue of the prospectus shall be liable to pay compensation to every person
who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may
have sustained by reason of any untrue statement included therein,
Defenses of directors and promoters etc.
a) Withdrawal of consent
b) Absence of consent
c) Ignorance of untrue statement
d) Reasonable ground for belief
e) Statement of expert
Right of contribution - Every person who, becomes liable to make any payment by virtue of sec 62,
may recover contribution from any other guilty persons who are for fraudulent misrepresentation in the
prospectus.
Remedies against the directors, promoters and experts (contd)
2. Liability for damages for non-compliance with sec. 56 if omission from the prospectus of a matter
required to be included by sec. 56, even if the omission does not make the prospectus false or misleading
3. Liability under the general law
CRIMINAL LIABILITY
Punishable with imprisonment which may extend to 2 years or with fine which may extend to Rs. 50,000
or with both.
He will not be liable if he proves either
That the statement was immaterial, or
That he had reasonable ground to believe that the statement was true
Penalty for fraudulently inducing persons to invest money
Sec. 68 - Any person who, either by knowingly or recklessly making any statement, promise or forecast
which is false, deceptive or misleading, or by any dishonest concealment of material facts, induces or
attempts to induce another person to enter into, or to offer to enter into (a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting shares or
debentures; or
(b) any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the
yield of shares or debentures, or by reference to fluctuations in the value of shares or debentures;
shall be punishable with imprisonment for a term which may extend to five years, or with the fine which may
extend to ten thousand rupees, or with both.
Issue and allotment of shares in fictitious names [sec. 68-A]

(1) Any person who (a) makes in a fictitious name an application to a company for acquiring, or subscribing for, any shares therein,
or
(b) otherwise induces a company to allot, or register any transfer of shares therein to him, or any other person in
a fictitious name, shall be punishable with imprisonment for a term which may extend to five years.
(2) The provisions of sub-section (1) shall be prominently reproduced in every prospectus issued by the company
and in every form of application for shares which is issued by the company to any person.
Statement in lieu of prospectus (sec. 70)
Where a public company does not invite public to subscribe for its shares, but arranges to get money
from private sources, it need not issue a prospectus to the public. Promoters are required to prepare a
draft prospectus known as a statement in lieu of prospectus, which should contain the information
required to be disclosed by Schedule III of the Act.
Statement in lieu of prospectus (sec. 70)
A company having a share capital, which does not issue a prospectus, shall not allot any of its shares or
debentures unless at least 3 days before the allotment of shares or debentures there has been delivered to
the Registrar for registration a statement in lieu of prospectus.
Section 70 does not apply to a private company.
Commencement of business (Sec. 149)
Restriction on commencement of business

Public company issuing a prospectus

1. Allotment up to minimum subscription
2. Payment of application and allotment money by every director
3. No liability to repay any money to application for shares or debentures
4. Filing of a duly verified declaration with the Registrar

Public company not issuing a prospectus

Can commence business or exercise any borrowing powers if the following conditions are fulfilled:

Filling of a statement in lieu of prospectus

Payment of application and allotment money by every director

Filling of a duly verified declaration with the registrar

Underwriting Commission and Brokerage (Sec.76)

Underwriting Commission: underwriting means that a person agrees to take shares or debentures
specified in the underwriting agreement, if the public fail to subscribe for them.