ICAI Notes: Prospectus and Allotment of Securities | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
    
 
CHAPTER 
3 
 
 
PROSPECTUS 
AND ALLOTMENT 
OF SECURITIES 
 
 
 
At the end of this chapter, you will be able to: 
? 
Define prospectus 
? 
Understand various types of prospectus  
? 
Explain the procedure for issue of prospectus and other 
related concepts 
? 
Know about the criminal and civil liability for mis- statements 
in prospectus and punishment for fraudulently inducing 
persons to invest money 
? 
Understand the procedure for allotment of securities by 
companies 
? 
Know the procedure of private placement of securities 
  
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
    
 
CHAPTER 
3 
 
 
PROSPECTUS 
AND ALLOTMENT 
OF SECURITIES 
 
 
 
At the end of this chapter, you will be able to: 
? 
Define prospectus 
? 
Understand various types of prospectus  
? 
Explain the procedure for issue of prospectus and other 
related concepts 
? 
Know about the criminal and civil liability for mis- statements 
in prospectus and punishment for fraudulently inducing 
persons to invest money 
? 
Understand the procedure for allotment of securities by 
companies 
? 
Know the procedure of private placement of securities 
  
© The Institute of Chartered Accountants of India
 
 
 
 
CORPORATE AND OTHER LAWS 3.2 
?   
 
This chapter explains the provisions of Chapter III of the Companies Act, 2013
1
 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 23 to 
42 dealing with the prospectus and allotment of securities. Due to the inherent 
differences between the nature of public and private companies in addition to 
restrictions on the later, Chapter III of the Act contained the provisions for issue 
of securities under two distinct headings (parts): 
Part I - Public offer (Section 23-41);  
Part II - Private placement (Section 42). 
The provisions contained in Part I and part II are supplemented by the Companies 
(Prospectus and Allotment of Securities) Rules, 2014. 
Following diagram depicts the arrangement of relevant sections:  
 
* Section 447 contains provisions relating to ‘punishment for fraud’. 
  
 
1
 Act 18 of 2013 
Prospectus and Allotment of 
securities [Sec. 23-42]
Issue of Prospectus and related 
matters [Sec. 23, 26, 29, 31, 32, 
25, 28, 27 & 40]
Allotment of securities [Sec. 39]
Penalties [Sec. 34, 35, 36, 37 & 
447*]
Private Placement [Sec. 42]
In a Public 
company
In a Private 
company
CHAPTER OVERVIEW CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
    
 
CHAPTER 
3 
 
 
PROSPECTUS 
AND ALLOTMENT 
OF SECURITIES 
 
 
 
At the end of this chapter, you will be able to: 
? 
Define prospectus 
? 
Understand various types of prospectus  
? 
Explain the procedure for issue of prospectus and other 
related concepts 
? 
Know about the criminal and civil liability for mis- statements 
in prospectus and punishment for fraudulently inducing 
persons to invest money 
? 
Understand the procedure for allotment of securities by 
companies 
? 
Know the procedure of private placement of securities 
  
© The Institute of Chartered Accountants of India
 
 
 
 
CORPORATE AND OTHER LAWS 3.2 
?   
 
This chapter explains the provisions of Chapter III of the Companies Act, 2013
1
 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 23 to 
42 dealing with the prospectus and allotment of securities. Due to the inherent 
differences between the nature of public and private companies in addition to 
restrictions on the later, Chapter III of the Act contained the provisions for issue 
of securities under two distinct headings (parts): 
Part I - Public offer (Section 23-41);  
Part II - Private placement (Section 42). 
The provisions contained in Part I and part II are supplemented by the Companies 
(Prospectus and Allotment of Securities) Rules, 2014. 
Following diagram depicts the arrangement of relevant sections:  
 
* Section 447 contains provisions relating to ‘punishment for fraud’. 
  
 
1
 Act 18 of 2013 
Prospectus and Allotment of 
securities [Sec. 23-42]
Issue of Prospectus and related 
matters [Sec. 23, 26, 29, 31, 32, 
25, 28, 27 & 40]
Allotment of securities [Sec. 39]
Penalties [Sec. 34, 35, 36, 37 & 
447*]
Private Placement [Sec. 42]
In a Public 
company
In a Private 
company
CHAPTER OVERVIEW CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
 
 
PROSPECTUS AND ALLOTMENT OF SECURITIES
    
 
3.3 
1. INTRODUCTION  
Chapter III Consists of sections 23 to 42 as well as the Companies 
(Prospectus and Allotment of Securities) Rules, 2014. 
 
One of the advantages that a company has over other forms of business is its 
ability to raise capital, either from the public at large or from a set of identified 
persons. When the capital is raised from the public at large, it is done through a 
‘Public Offer’ and when it is raised from a selected group of identified persons it 
is carried out through a ‘Private Placement’ of securities. Where the capital is 
raised from the public at large through ‘Public Offer’, an advertisement shall be 
issued in accordance with applicable provisions to protect the prospective 
investors from fraud. Securities are allotted against those applications that are 
received in full and in accordance with the advertisement issued. Such securities 
may be listed on an appropriate segment of a recognised stock exchange.  
This chapter will explain the provisions relating to raising of capital i.e. issue of 
prospectus, allotment of securities, and other matters incidental thereto.  
2. PUBLIC OFFER AND PRIVATE PLACEMENT 
[SECTION 23] 
As per Section 23 (1), a public company may issue securities;  
a. To public through prospectus (herein referred to as “public offer”) by 
complying with the provisions specified in Section 23 to Section 41 of the 
Act; or  
b. Through private placement by complying with the provisions specified in 
section 42 of the Act; or 
c. Through a rights issue or a bonus issue in accordance with the provisions of 
the Act and in case of a listed company or a company which intends to get 
its securities listed also with the provisions of the Securities and Exchange 
Board of India Act, 1992
2
 and the rules and regulations made thereunder.  
 
 
 
2
 Act 15 of 1992 
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
    
 
CHAPTER 
3 
 
 
PROSPECTUS 
AND ALLOTMENT 
OF SECURITIES 
 
 
 
At the end of this chapter, you will be able to: 
? 
Define prospectus 
? 
Understand various types of prospectus  
? 
Explain the procedure for issue of prospectus and other 
related concepts 
? 
Know about the criminal and civil liability for mis- statements 
in prospectus and punishment for fraudulently inducing 
persons to invest money 
? 
Understand the procedure for allotment of securities by 
companies 
? 
Know the procedure of private placement of securities 
  
© The Institute of Chartered Accountants of India
 
 
 
 
CORPORATE AND OTHER LAWS 3.2 
?   
 
This chapter explains the provisions of Chapter III of the Companies Act, 2013
1
 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 23 to 
42 dealing with the prospectus and allotment of securities. Due to the inherent 
differences between the nature of public and private companies in addition to 
restrictions on the later, Chapter III of the Act contained the provisions for issue 
of securities under two distinct headings (parts): 
Part I - Public offer (Section 23-41);  
Part II - Private placement (Section 42). 
The provisions contained in Part I and part II are supplemented by the Companies 
(Prospectus and Allotment of Securities) Rules, 2014. 
Following diagram depicts the arrangement of relevant sections:  
 
* Section 447 contains provisions relating to ‘punishment for fraud’. 
  
 
1
 Act 18 of 2013 
Prospectus and Allotment of 
securities [Sec. 23-42]
Issue of Prospectus and related 
matters [Sec. 23, 26, 29, 31, 32, 
25, 28, 27 & 40]
Allotment of securities [Sec. 39]
Penalties [Sec. 34, 35, 36, 37 & 
447*]
Private Placement [Sec. 42]
In a Public 
company
In a Private 
company
CHAPTER OVERVIEW CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
 
 
PROSPECTUS AND ALLOTMENT OF SECURITIES
    
 
3.3 
1. INTRODUCTION  
Chapter III Consists of sections 23 to 42 as well as the Companies 
(Prospectus and Allotment of Securities) Rules, 2014. 
 
One of the advantages that a company has over other forms of business is its 
ability to raise capital, either from the public at large or from a set of identified 
persons. When the capital is raised from the public at large, it is done through a 
‘Public Offer’ and when it is raised from a selected group of identified persons it 
is carried out through a ‘Private Placement’ of securities. Where the capital is 
raised from the public at large through ‘Public Offer’, an advertisement shall be 
issued in accordance with applicable provisions to protect the prospective 
investors from fraud. Securities are allotted against those applications that are 
received in full and in accordance with the advertisement issued. Such securities 
may be listed on an appropriate segment of a recognised stock exchange.  
This chapter will explain the provisions relating to raising of capital i.e. issue of 
prospectus, allotment of securities, and other matters incidental thereto.  
2. PUBLIC OFFER AND PRIVATE PLACEMENT 
[SECTION 23] 
As per Section 23 (1), a public company may issue securities;  
a. To public through prospectus (herein referred to as “public offer”) by 
complying with the provisions specified in Section 23 to Section 41 of the 
Act; or  
b. Through private placement by complying with the provisions specified in 
section 42 of the Act; or 
c. Through a rights issue or a bonus issue in accordance with the provisions of 
the Act and in case of a listed company or a company which intends to get 
its securities listed also with the provisions of the Securities and Exchange 
Board of India Act, 1992
2
 and the rules and regulations made thereunder.  
 
 
 
2
 Act 15 of 1992 
© The Institute of Chartered Accountants of India
 
 
 
 
CORPORATE AND OTHER LAWS 3.4 
Public offer includes initial public offer (IPO) or further public offer (FPO) of 
securities to the public by a company, or an offer for sale of securities (OFS) to the 
public by an existing shareholder, through issue of a prospectus. 
Students are advised to note; that Further Public Offer also known as Fellow-on 
Public Offer, whereas OFS is sometimes called deemed Public Offer. 
As per Section 23(2), a private company may issue securities; 
a. By way of rights issue or bonus issue in accordance with the provisions of 
the Act; or  
b. Through private placement by complying with the provisions specified in 
section 42 of the Act.  
Summary of modes (for issue of securities)  
*For a listed company or a company proposed to be listed. 
Various modes of issue of securities available to a public company or a private 
company are depicted in the following diagram for better understanding; 
 
Issue of 
securities
Public 
Company
Prospectus/ 
Public Offer
IPO
FPO
OFS
Private 
Placement
Right Issue
Bonus 
Issue
Private 
Company
Private 
Placement
Right Issue
Bonus 
Issue
Mode of Issue 
Public Company Private Company 
Public Offer (including IPO, FPO or OFS) Yes No 
Private Placement Yes Yes 
Rights issue / Bonus Issue Yes Yes 
Compliance with SEBI rules & 
regulations 
Yes* No 
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
    
 
CHAPTER 
3 
 
 
PROSPECTUS 
AND ALLOTMENT 
OF SECURITIES 
 
 
 
At the end of this chapter, you will be able to: 
? 
Define prospectus 
? 
Understand various types of prospectus  
? 
Explain the procedure for issue of prospectus and other 
related concepts 
? 
Know about the criminal and civil liability for mis- statements 
in prospectus and punishment for fraudulently inducing 
persons to invest money 
? 
Understand the procedure for allotment of securities by 
companies 
? 
Know the procedure of private placement of securities 
  
© The Institute of Chartered Accountants of India
 
 
 
 
CORPORATE AND OTHER LAWS 3.2 
?   
 
This chapter explains the provisions of Chapter III of the Companies Act, 2013
1
 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 23 to 
42 dealing with the prospectus and allotment of securities. Due to the inherent 
differences between the nature of public and private companies in addition to 
restrictions on the later, Chapter III of the Act contained the provisions for issue 
of securities under two distinct headings (parts): 
Part I - Public offer (Section 23-41);  
Part II - Private placement (Section 42). 
The provisions contained in Part I and part II are supplemented by the Companies 
(Prospectus and Allotment of Securities) Rules, 2014. 
Following diagram depicts the arrangement of relevant sections:  
 
* Section 447 contains provisions relating to ‘punishment for fraud’. 
  
 
1
 Act 18 of 2013 
Prospectus and Allotment of 
securities [Sec. 23-42]
Issue of Prospectus and related 
matters [Sec. 23, 26, 29, 31, 32, 
25, 28, 27 & 40]
Allotment of securities [Sec. 39]
Penalties [Sec. 34, 35, 36, 37 & 
447*]
Private Placement [Sec. 42]
In a Public 
company
In a Private 
company
CHAPTER OVERVIEW CHAPTER OVERVIEW
© The Institute of Chartered Accountants of India
 
 
PROSPECTUS AND ALLOTMENT OF SECURITIES
    
 
3.3 
1. INTRODUCTION  
Chapter III Consists of sections 23 to 42 as well as the Companies 
(Prospectus and Allotment of Securities) Rules, 2014. 
 
One of the advantages that a company has over other forms of business is its 
ability to raise capital, either from the public at large or from a set of identified 
persons. When the capital is raised from the public at large, it is done through a 
‘Public Offer’ and when it is raised from a selected group of identified persons it 
is carried out through a ‘Private Placement’ of securities. Where the capital is 
raised from the public at large through ‘Public Offer’, an advertisement shall be 
issued in accordance with applicable provisions to protect the prospective 
investors from fraud. Securities are allotted against those applications that are 
received in full and in accordance with the advertisement issued. Such securities 
may be listed on an appropriate segment of a recognised stock exchange.  
This chapter will explain the provisions relating to raising of capital i.e. issue of 
prospectus, allotment of securities, and other matters incidental thereto.  
2. PUBLIC OFFER AND PRIVATE PLACEMENT 
[SECTION 23] 
As per Section 23 (1), a public company may issue securities;  
a. To public through prospectus (herein referred to as “public offer”) by 
complying with the provisions specified in Section 23 to Section 41 of the 
Act; or  
b. Through private placement by complying with the provisions specified in 
section 42 of the Act; or 
c. Through a rights issue or a bonus issue in accordance with the provisions of 
the Act and in case of a listed company or a company which intends to get 
its securities listed also with the provisions of the Securities and Exchange 
Board of India Act, 1992
2
 and the rules and regulations made thereunder.  
 
 
 
2
 Act 15 of 1992 
© The Institute of Chartered Accountants of India
 
 
 
 
CORPORATE AND OTHER LAWS 3.4 
Public offer includes initial public offer (IPO) or further public offer (FPO) of 
securities to the public by a company, or an offer for sale of securities (OFS) to the 
public by an existing shareholder, through issue of a prospectus. 
Students are advised to note; that Further Public Offer also known as Fellow-on 
Public Offer, whereas OFS is sometimes called deemed Public Offer. 
As per Section 23(2), a private company may issue securities; 
a. By way of rights issue or bonus issue in accordance with the provisions of 
the Act; or  
b. Through private placement by complying with the provisions specified in 
section 42 of the Act.  
Summary of modes (for issue of securities)  
*For a listed company or a company proposed to be listed. 
Various modes of issue of securities available to a public company or a private 
company are depicted in the following diagram for better understanding; 
 
Issue of 
securities
Public 
Company
Prospectus/ 
Public Offer
IPO
FPO
OFS
Private 
Placement
Right Issue
Bonus 
Issue
Private 
Company
Private 
Placement
Right Issue
Bonus 
Issue
Mode of Issue 
Public Company Private Company 
Public Offer (including IPO, FPO or OFS) Yes No 
Private Placement Yes Yes 
Rights issue / Bonus Issue Yes Yes 
Compliance with SEBI rules & 
regulations 
Yes* No 
© The Institute of Chartered Accountants of India
 
 
PROSPECTUS AND ALLOTMENT OF SECURITIES
    
 
3.5 
Security is a wider term, not restricted to equity, preference, or debenture. 
Meaning of Securities  
As per section 2 (81), the term ‘securities’ means the securities as defined in 
clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956
3
. The 
definition given thereunder provides, “Securities” include; 
(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other 
marketable securities of a like nature in or of any incorporated company or 
other body corporate; 
(ia) Derivative; 
(ib) Units or any other instrument issued by any collective investment scheme to 
the investors in such schemes; 
(ic)  Security receipt as defined in clause (zg) of section 2 of the Securitisation 
and Reconstruction of Financial Assets and Enforcement of Security Interest 
Act, 2002
4
. 
(id)  Units or any other such instrument issued to the investors under any mutual 
fund scheme.  
 Explanation - For the removal of doubts, it is hereby declared that 
“Securities” shall not include any unit linked insurance policy or scrips or any 
such instrument or unit, by whatever name called, which provides a 
combined benefit risk on the life of the persons and investment by such 
persons and issued by an insurer referred to in clause (9) of section 2 of the 
Insurance Act, 1938
5
. 
(ie)  Any certificate or instrument (by whatever name called), issued to an investor 
by any issuer being a special purpose distinct entity which possesses any 
debt or receivable, including mortgage debt, assigned to such entity, and 
acknowledging beneficial interest of such investor in such debt or receivable, 
including mortgage debt, as the case may be; 
(ii) Government securities; 
(iia) Such other instruments as may be declared by the Central Government to 
be securities; and 
(iii)  Rights or interests in securities. 
 
3
 Act 42 of 1956 
4
 Act 54 of 2002 
5
 Act 4 of 1938 
© The Institute of Chartered Accountants of India