Issue of Prospectus by the Company

By | November 1, 2019

Issue of Prospectus by the Company | Overview

 Whenever a public company is willing to invite the applications for its debentures or shares, it is a mandate for it to issue prospectus. This requirement does not apply to private companies.

Sec 2(70) of the Companies Act, 2013 provides for the definition of the prospectus, such as, prospectus includes all those documents that are issued or described as a prospectus along with the red herring prospectus that is referred to in sec 32 or shelf prospectus that is referred to in sec 31 or any advertisement, circular, notice or any other kind of document that is meant for inviting offers from the public for purchase or subscription of any securities of a body corporate.

However, an abridged prospectus, as per sec 2(1) of the companies act, 2013, refers to a memorandum that contains salient features of a prospectus that are defined as per the SEBI by way of making regulations.


It is also necessary to issue application forms for the securities but these forms cannot be issued until and unless a memorandum is accompanying the form. The memorandum must be containing those salient features of the prospectus that may be prescribed. This is termed as an abridged prospectus. The main purpose behind it is to reduce the expense burden of a public issue. The office of the company is required to maintain a full prospectus.

This requirement does not apply if one can show that the form of the application was issued for two purposes. These purposes are as follows: firstly, it should be in relation to bona fide invitation to any person in order to enter into an underwriting agreement with respect to the securities or secondly, it should be in connection to those securities which are not being offered to the public. This was mandated by sec 33(1) of the companies act, 2013.

Further, as per the sec 33(2) of the companies act, 2013, it is a mandate over the companies to give a copy of the prospectus to all those persons who do request for it before the closing of subscription list or offer takes place. If any company makes a default in complying with the mandates as per the companies act, 2013, it has to bear the penalty of Rs 50,000 for each of the defaults.


A prospectus can be used by a public company for the purpose of issuing securities to the public in order to comply with the provisions of Part I of Chapter 3 on Prospectus and Allotment of Securities.[1]

This can also be done with the help of private placement by complying with the provisions of Part II of Chapter 3.[2]Further, there is another option of doing this by way of bonus issue or rights issue by complying with the provisions of the act and when it comes to the listed companies, one has to comply with the provisions of SEBI Act, 1992 and the rules and regulation made thereunder.


Where a company is of the view of allotting or agrees for allotting any securities of the company with the purpose of offering those securities for sale to the public, and any other document by which they offer for sale is being made to the public, such a document shall be considered for all purposes as a prospectus that was issued by the company.

All rules of laws and enactments as to the contents of the prospectus and for the liability for the misstatement in and omissions from the prospectus or otherwise in connection with the prospectus are to be made applicable. These all are subject to modifications as specified in Sec 25(3) and (4).

All the provisions that are contained in the act in connection to the prospectus or the penal provisions will be subject to attraction only when the prospectus is already issued by the company. Here, issued implies to all those prospectuses that are issued to the public. While public means any section of the public whether selected as either debenture- holders or members of the company concerned or as the clients of those persons that are issuing prospectus or in any other manner.

Thus, where there was a distribution of around 3000 copies among the members of a certain gas company only, it was held by the court that such a distribution will be considered as an offer to shares to the public.[3]

But when the prospectus was given to the solicitor of the company and he just forwarded it to one of his clients, such an offer was not considered to be issued to the public and henceforth, all the provisions of the Act that are in connection to the liability for omissions, not compliance and so on were not attracted.[4] For the satisfaction of the word issue, a single private communication is not enough. The company is required to take some measures for publicity, however modest in nature.


SEBI (Securities and Exchange Board of India) is conferred with the responsibility of providing the regulations for any class or classes of companies that are in the process of filing the prospectus with the registrar at the stage of the first offer of securities. It is required from these prospectuses to show the period of validity which may not exceed one year.

The commencement of the period is from the date of opening of the first offer of the securities under such prospectus. When it comes to any subsequent offer or second offer of such securities that got issued during the period of validity of such prospectus, there is no requirement of any such prospectus. These mandates are provided by virtue of sec 31 (1)of the companies act, 2013.


The company, which is planning to file a shelf prospectus, has to fulfil another mandate of filing an information memorandum. This information memorandum basically comprises of all the material facts that are in relation to the creation of new charges, changes that will be reflected in the financial position of the company that are occurring from the time when the securities were offered for the very first time or between the preceding offer and the one that is succeeding. However, there may be a prescription of other particulars also.

The filing of information memorandum has to be done with the Registrar of companies within the time that is prescribed but prior to the issue of second or subsequent offer of securities under the shelf prospectus. Sec 31 (2) of the companies act, 2013 provides for an information memorandum.

However, the proviso to the subsection provides that where any person or any company has received any application for getting the securities allotted along with the payment of subscription done in the advance notice before the occurrence of any such change, information of the change has to be given to such person or company. And if the company or the person comes up with the desire of withdrawing the application put forth by them, their money is entitled to be returned to them.


The prospectus does not provide any information or details regarding either a number of shares issued or the amount of issue or the price of those shares. This implies to the situation where even when the price of the shares is not disclosed, the organization had already revealed the number or quantity of shares that are issued and the lower and upper price bands. However, the issuer can choose to determine the number of shares later but it is necessary to state the size of the issue.

Further, the organizations are also provided with the option of filing the FPO and RHP with the Registrar of the Companies even without the price band. But in such a situation, it is important for the issuer to make a notification of a price band or the floor price with the help of an advertisement one day in advance from the date when the issues will be opened in the market.

When it comes to the issue of a book- built, the process of discovery of price is adopted while the determination of price cannot take place till the time the process of bidding gets completed. Thus, these are some of the details that are not shown there in the red herring prospectus that is filed with the Registrar of Companies as per the provisions provided in the Companies Act.

All the details regarding the final price will be included in the offer document only when the bidding process gets completed. Such an offer document, which is then filed with the Registrar of Companies, can be termed as a prospectus.


When the company comes with the plan to raise the money from the public at large, it issues a draft red herring. Such a draft prospectus covers all the information about the operations of the business and its finances in detail.

In addition to this, all the details about the promoters, the reason why the money is being raised, the method of using the money, all the risks that are associated with the investment of money in the company and much such information are covered by the draft prospectus. However, the information regarding the size of the offering or the price of the offering is not provided by this draft.


The companies are also provided with the option of issuing securities without any prospectus. Such a type of prospectus is known as a private placement. All the mandates of public issues such as application form and other related documents are no more important to be issued in this form of placement.

They are kept in circulation amongst the selected persons only for their personal use and they are not conferred with any right to pass the offer to any other person. Such a method is seen to gradually slip in the hands of banking institutions and financial institutions.

The functioning of the same is done in the name of the book-building process. The orders of larger investors or investment bankers that find its basis on the indicative price is collected. SEBI has issued its guidelines in this regard.[5]

Sometimes even in the case of public issues, the operation that can be done by the help of book building is allowed to the extent to which the reservation is permitted in the issues. This is subject to identification separately in the portion of the placement.

Where the company is planning to issue more than one crore rupees, the process called book building can be taken into use to the extent of 100 per cent. Such a process proves to be of advantage because the demand for as well as the value of the securities of the company can be discovered by providing flexibility in prices as well as the bidding.

[1]Sec 23- 41 of the companies act, 2013

[2]Sec 42 of the companies act, 2013

[3]South of England natural gas and petroleum co ltd., re, (1911) 1 Ch 573: 104 LT 378.

[4]Nash v Lynde, 1929 AC 158: 140 LT 146 (HL).

[5]Clarification XIII dated 12/ 12/ 1995; Clarification XVII dated 09/ 12/ 1996; and Clarification XXI dated 23/ 10/ 1997.

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Author: Akriti Gupta

Akriti Gupta is a student at Symbiosis Law School, NOIDA. She is a research enthusiast and possesses capable draftsmanship along with this, Akriti is a holder of various renounced publications and participated in prestigious national moots.

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