Prospectus | Company Law - CLAT PG PDF Download

Definition of Prospectus

• A prospectus is an information booklet or offer document that guides investors in making decisions about investing in the securities of a company.
• According to Section 2(70) of the relevant legislation, a prospectus includes any document described or issued as such. This encompasses various types of prospectuses, such as:
• Red Herring Prospectus(as per Section 32): A prospectus that does not provide complete details about the quantity or price of the securities.
• Shelf Prospectus(as per Section 31): A prospectus for securities that are issued for subscription in one or more tranches over a period without the need for a new prospectus each time.
• Additionally, any notice, circular, advertisement, or document inviting public offers for the subscription or purchase of securities is also considered part of the prospectus definition.

Key Types of Prospectus

• Red Herring Prospectus: This type of prospectus does not disclose the complete details regarding the quantity or price of the securities being offered. It provides preliminary information to potential investors.
• Shelf Prospectus: A shelf prospectus is used when securities or a class of securities are offered for subscription in multiple issues over a specific period. This allows companies to issue securities without the need for a new prospectus for each individual offering.

Matters to be Stated in the Prospectus

• The prospectus must include specific information and financial reports as mandated by the Securities and Exchange Board of India (SEBI) in consultation with the Central Government.
• Until SEBI specifies these details, the existing regulations under the Securities and Exchange Board of India Act, 1992, will apply.

Shelf Prospectus

A Shelf Prospectus allows a company to issue securities for public subscription over a period without the need for a new prospectus for each issue. It is essentially a single prospectus covering multiple public offerings.

Key Features of Shelf Prospectus:

• Multiple Offerings: A Shelf Prospectus enables the issuer to offer and sell securities to the public in multiple tranches without issuing a separate prospectus for each offering.
• Validity Period: The prospectus indicates a validity period not exceeding one year from the date of the first offer of securities. This period commences from the opening date of the first offer.
• Information Memorandum:A company filing a Shelf Prospectus must submit an information memorandum containing material facts such as:
  • New charges created
  • Changes in the financial position of the company between offers
  • Any other prescribed changes
• Filing Requirements: The information memorandum, prepared in Form PAS-2, must be filed with the Registrar along with the prescribed fee within one month prior to the issue of a second or subsequent offer of securities under the Shelf Prospectus.
• Investor Protection: If a company receives applications for allotment of securities along with advance payments before any changes occur, it must inform the applicants of the changes. If applicants wish to withdraw their applications, the company must refund all subscription monies within fifteen days.

Regulatory Framework:

• Companies, as specified by SEBI regulations, can file a Shelf Prospectus with the Registrar.
• The Shelf Prospectus is submitted at the time of the first offer of securities, indicating the period of validity.

Red Herring Prospectus

• A Red Herring Prospectus is a type of prospectus that contains most of the information about a company’s operations and prospects but leaves out key details such as the price and number of shares being offered.
• Section 32 of the relevant law allows a company to issue a Red Herring Prospectus before finalizing these details.
• The company must file the Red Herring Prospectus with the Registrar at least three days before the subscription list opens.
• A Red Herring Prospectus carries the same legal obligations as a regular prospectus, and any differences must be clearly highlighted.
• After the offer closes, a final prospectus is filed with the Registrar and the Securities and Exchange Board, detailing the total capital raised and other specifics not included in the Red Herring Prospectus.

Abridged Prospectus

• Abridged Prospectus as per Section 2(1) of the Act, refers to a memorandum that contains the key features of a prospectus as specified by the Securities and Exchange Board through regulations.
• Section 33 of the Act mandates that any application form for purchasing a company's securities must be accompanied by an abridged prospectus.
• A copy of the prospectus must be provided to any person who requests it before the subscription list and offer close.
• However, this requirement does not apply if the application form is issued in connection with a genuine invitation to enter into an underwriting agreement or for securities not offered to the public.
• Companies failing to comply with these provisions may face a penalty of fifty thousand rupees for each default.

Offer for Sale

• A Public Offer, or an Offer for Sale (OFS), involves selling securities to the public by an existing shareholder through a prospectus.
• According to Section 25 of the Act, when a company allots or agrees to allot securities with the intention of offering them for sale to the public, the document used for this purpose is considered a prospectus issued by the company.
• In simpler terms, any document used to offer or sell shares or debentures to the public is treated as a prospectus.
• The "Offer for Sale" document invites the general public to purchase shares of a company through an intermediary, such as an issuing house or a merchant bank.
• A company may allocate shares or debentures to an "Issue House" without planning to make them available directly to the public through a prospectus. The issue house then makes an "Offer for Sale" to the public.
• All laws and rules regarding the contents of a prospectus and liability for misstatements or omissions in a prospectus also apply to Offer for Sale.
• The Offer for Sale document must include additional information required in a prospectus, such as:
• The net amount of consideration received or to be received by the company for the securities.
• The time and place where the contract for the securities can be inspected.
• To qualify as an "Offer for Sale," one of the following conditions must be met:
• The offer to the public was made within six months of the allotment or agreement to allot.
• At the time of the offer, the company had not received the full consideration for the securities.
• For signing the Offer document, if the offer is made by a company or a firm, it is sufficient for the document to be signed by two directors of the company or by half of the partners in the firm.

In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd.

• The Supreme Court ruled that the stock exchange was not obligated to file a return for forfeited shares under Section 75(1) of the Companies Act, 1956 (now Section 39 of the Companies Act, 2013) when these shares were re-issued.
• The Court explained that when shares are forfeited and then re-issued, there is no allotment in the traditional sense of allocating shares from the authorized and unappropriated capital.
• The Court supported the views of Harries C.J. in S.M. Nandy’s case, clarifying that upon forfeiture, the specific shareholder's rights vanish, but the shares as units of issued capital persist and remain in suspension until a new shareholder is found.

Alote Estate v. R.B. Seth Hiralal Kalyanmal Kasliwal

• In cases of inadequate consideration, shares are deemed not fully paid, and the shareholder is responsible for paying the full amount unless the contract is fraudulent.
• Payments that are currently enforceable against the company, such as consideration for property purchased, will be considered payment in cash.
• Allotment of shares against promissory notes is invalid.