Prospectus | Company Law - CLAT PG PDF Download

Introduction to Prospectus in Companies Act, 2013

A prospectus is a crucial document in the context of the Companies Act, 2013, as it serves as an invitation to the public to subscribe to shares or debentures of a company. Understanding the definition, essentials, types, and legal implications of a prospectus is vital for anyone involved in company law or securities issuance.

What is a Prospectus?

• A prospectus, as defined in Section 2(70) of the Companies Act, 2013, refers to any document described or issued as a prospectus. This includes notices, circulars, advertisements, or any other document inviting offers from the public for the purchase of securities of a corporate body.
• Types of prospectus include shelf prospectus and red herring prospectus.

Essentials of a Prospectus

• Invitation to Subscribe: The document must invite subscription to public shares, debentures, or deposits.
• Public Invitation: The invitation should be made to the public.
• Issuance by Company: The invitation should be made by the company or on its behalf.
• Relevant Securities: The invitation should relate to shares, debentures, or similar instruments.

Statement in Lieu of Prospectus

• A public company must either issue a prospectus or file a statement in lieu of prospectus. This requirement does not apply to private companies.
• When a private company converts to a public company, it must file a prospectus or a statement in lieu of prospectus.
• The provisions regarding the statement in lieu of prospectus are outlined in Section 70 of the Companies Act, 2013.

Advertisement of Prospectus

• Section 30 of the Companies Act, 2013 governs the advertisement of the prospectus.
• When advertising a prospectus, it is mandatory to include specific details from the company's memorandum, such as the object of the company, member's liabilities, share capital, signatories, number of shares subscribed, and capital structure.

Types of Prospectus

• Shelf Prospectus: A shelf prospectus is issued by public financial institutions, companies, or banks for one or more issues of securities. It allows the issuer to offer or sell securities without issuing a separate prospectus for each offering.
• Red Herring Prospectus: A red herring prospectus is a preliminary prospectus that contains most of the information a prospective investor needs, but it does not include the final price of the securities being offered.
• Abridged Prospectus: An abridged prospectus is a concise version of the full prospectus, providing key information to potential investors.
• Deemed Prospectus: A deemed prospectus is treated as a prospectus even if it is not formally titled as such, based on the contents and purpose of the document.

Shelf Prospectus in Detail

• A shelf prospectus allows public financial institutions, companies, or banks to issue securities without the need for a separate prospectus for each offering.
• The provisions related to shelf prospectus are outlined in Section 31 of the Companies Act, 2013.
• The Securities and Exchange Board of India (SEBI) regulates the filing of shelf prospectus for certain classes of companies at the stage of the first offer of securities to the registrar.
• The prospectus specifies a validity period not exceeding one year, starting from the opening date of the first offer of securities. For subsequent offers, no separate prospectus is required.

Information Memorandum

• Companies filing a shelf prospectus must include an information memorandum detailing any new charges created and changes in the company's financial position since the first offer of securities or between two offers.
• The information memorandum should be filed with the registrar within three months before the issue of the second or subsequent offer under the shelf prospectus, as per Rule 4CCA of Section 60A(3) of the Companies (Central Government's) General Rules and Forms, 1956.
• If a company or individual receives an application for the allotment of securities with advance payment of subscription before any changes are made, they must be informed of the changes. If they wish to withdraw the application within 15 days, the money must be refunded to them.

Types of Prospectus

1. Red Herring Prospectus

• Definition: A red herring prospectus is a preliminary prospectus that does not include complete details about the price of the securities being offered.
• Usage: Companies issue a red herring prospectus when they plan to make an offer of securities before finalizing the details.
• Filing Requirement: It must be filed with the registrar at least three days before the subscription list or offer opens.
• Obligations: The obligations of a red herring prospectus are the same as those of a full prospectus.
• Variations: If there are differences between the red herring prospectus and the final prospectus, these variations should be highlighted in the final prospectus.
• Closing Details: Once the offer of securities closes, the prospectus must state the total capital raised, the closing price of the securities, and any other details not included in the prospectus, which need to be registered with the registrar and SEBI.
• Right to Withdraw: Applicants or subscribers have the right to withdraw their application under Section 60B(7) within 7 days of any intimation of variation, and this withdrawal should be communicated in writing.

2. Abridged Prospectus

• Definition: An abridged prospectus is a concise summary of a full prospectus filed with the registrar.
• Purpose: It provides all the essential information in a brief format, making it easier and quicker for investors to access important details.
• Legal Requirement: According to Section 33(l) of the Companies Act, 2013, an abridged prospectus must accompany any form for the purchase of securities.
• Benefits: By offering material information succinctly, an abridged prospectus helps investors make informed decisions and reduces the cost of public capital issues compared to a full prospectus.

3. Deemed Prospectus

• Definition: A deemed prospectus, as per Section 25(1) of the Companies Act, 2013, is a document that is considered a prospectus for legal purposes when a company offers securities for sale to the public or agrees to allot securities.
• Implications: The document is treated as a prospectus, and all the legal provisions and liabilities associated with a prospectus apply to it.
• Legal Precedent: In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was ruled that a rights issue made to existing members with the option to renounce in favor of others becomes a deemed prospectus if the number of such others exceeds fifty.

Process for Filing and Issuing a Prospectus

Application Forms

• According to Section 33, application forms for securities can only be issued when they are accompanied by a memorandum containing all the features of a prospectus, referred to as an abridged prospectus.
• Exceptions: There are exceptions to this rule, including:
• When an application form is issued as an invitation to enter into an underwriting agreement regarding securities.
• When the application is for securities not offered to the public.

The issuance of a prospectus is a crucial step for a public company in raising funds from the public. The prospectus serves as a formal document that provides potential investors with essential information about the company and the securities being offered. It is important to ensure that the prospectus complies with the legal requirements set forth in the Companies Act, 2013.

Requirements for Filing and Issuing a Prospectus

1. The prospectus must be signed and dated.
2. It should contain all necessary information as per Section 26 of the Companies Act, 2013.

Here are the key requirements that need to be included in the prospectus:

1. Company Information

• Name and registered address of the company.
• Details of the company secretary, auditor, legal advisor, bankers, trustees, etc.

2. Issue Details

• Date of opening and closing of the issue.
• Statements by the Board of Directors regarding separate bank accounts for issue receipts.

3. Utilization of Receipts

• Details of utilization and non-utilization of receipts from previous issues.

4. Consent and Authority

• Consent of directors, auditors, bankers, and expert opinions.
• Authority for the issue and details of the resolution passed.

5. Allotment Procedure

• Procedure and timeline for allotment and issue of securities.

6. Capital Structure and Objectives

• Capital structure of the company as prescribed.
• Objectives of the public offer and the business location.

7. Risk Factors and Project Details

• Particulars related to risk factors, gestation period of the project, pending legal actions, and other important project details.

8. Subscription and Directors' Details

• Minimum subscription and premium payment details.
• Information about directors, their remuneration, and interests in the company.

9. Financial Reports

• Reports for financial information such as auditor's report, profit and loss reports for the past five years, business and transaction reports, and compliance statements.

By including all these details in the prospectus, a public company can ensure compliance with legal requirements and provide potential investors with the necessary information to make informed decisions.

Filing of Copy with the Registrar

As per sub-section 4 of section 26 of the Companies Act, 2013, a copy of the prospectus must be delivered to the registrar for registration before or on the date of publication. The prospectus cannot be issued by the company or on its behalf unless this requirement is met.

The copy of the prospectus should be signed by every person whose name is mentioned in the prospectus as a director, proposed director, or the authorized attorney on their behalf.

Delivery of Copy of the Prospectus to the Registrar

According to section 26(6) of the Companies Act, 2013, the prospectus must state on its face that a copy has been delivered to the registrar. This statement should also include the documents submitted to the registrar along with the copy of the prospectus.

Registration of Prospectus

Section 26(7) of the Companies Act, 2013, outlines the conditions under which the registrar can register a prospectus. The registrar can register a prospectus if it:

• Meets the requirements specified in section 26 of the Companies Act, 2013.
• Contains the written consent of all the persons named in the prospectus.

Issue of Prospectus After Registration

If a prospectus is not issued within 90 days from the date a copy was delivered to the registrar, it is considered invalid.

Contravention of Section

If a prospectus is issued in violation of the provisions of section 26 of the Companies Act, 2013, the company may face penalties under section 26(9). The penalties for contravention include:

• A fine ranging from Rs. 50,000 to Rs. 3,00,000.

If an individual becomes aware of the prospectus being issued in contravention of section 26 after the fact, they may be subject to the following penalties:

• Imprisonment for up to 3 years, or
• A fine exceeding Rs. 50,000 but not exceeding Rs. 3,00,000.