Prospectus of the Company
The article Prospectus of the Compa elucidates the features of a prospectus in-depth and states remedies for misrepresentation of the prospectus. The article contains important provisions of the Companies Act, 2013 pertaining to the prospectus. The author has cited relevant case laws to make the concept of the prospectus easy for the readers to understand. The article deals… Read More »
The article Prospectus of the Compa elucidates the features of a prospectus in-depth and states remedies for misrepresentation of the prospectus. The article contains important provisions of the Companies Act, 2013 pertaining to the prospectus. The author has cited relevant case laws to make the concept of the prospectus easy for the readers to understand. The article deals with different types of prospectus along with their key characteristics.
A Brief Introduction: Prospectus
The prospectus of the company is one of the key documents that serve as the face of the company and helps in creating that first impression that induces the investors to invest in the securities of the company and provides the financial impetus. It is a quintessential document that is an invitation to offer, inviting the general public for making public subscription of the securities of the company.
The prospectus is basically an invitation to offer that invites the public for making a subscription of shares, debentures, or any other securities of a body corporate.
The prospectus is an invitation to offer and not an offer as the discretion lies with the company whether to accept or reject the subscription money in certain exceptional situations, unlike an offer where the offeror is bounded by the terms of the contract once the acceptance is given by the offeree.
The Companies Act, 2013 has defined prospectus in Section 2(70). It includes any circular, notice, advertisement, or other documents that invites a public offer for subscription or purchase of securities of a company. The term prospectus includes a red herring prospectus referred to in Section 32, a Shelf prospectus referred to in Section 32, and an abridged prospectus, specified in Section 2(1)of the Companies Act,2013. Section 33(2) prescribes that a copy of the prospectus has to be given to each person who requests the same, before the closure of the offer and subscription list.
- A prospectus is issued only by a public company and not a private company for inviting applications for shares and debentures, i.e. public offer. Private Companies have the option of the rights issue, bonus issue, or private placement under Section 42 of the Companies Act for issuing securities [APL Industries Ltd v. Securities And Exchange Board of India (2017) 200 Del].
- The terms of the contract or the objects stated in the prospectus can be varied by the company only by way of a special resolution passed in the company’s general meeting. The dissenting shareholders may be given the option of exit price for their incumbent shares.
- If the existing shareholders propose to sale off their shares, they are authorized to do so by virtue of the Companies Act, in consultation with the Board of directors. Any document through which the shares are offered for sale by them is deemed as a prospectus issued by the company; therefore, all the requirements for prospectus and liability of omissions and misstatements become applicable.
Contents of Prospectus
Section 26 of the Companies Act, 2013 chalks out the matter which is to be stated in the prospectus and other related nuances. The prospectus which is issued by or on behalf of the company whether before its formation or subsequently after, has to be dated and signed by the directors of the company. A host of diverse details are stated on the prospectus, broad details of which are extracted and mentioned below:
Requirements under Section 26(1) (a ) of the Companies Act,2013
- Name and address of the registered office of the company, CFO, Auditors, Company Secretary, legal advisors, bankers, trustees, underwriters
- Declaration of the allotment letters, refund amount, if any, and opening and closing date of issue.
- Statement by the Board of directors about the bank account details wherein the receipts of the issue are to be kept.
- Details of underwriting.
- Authority for the issue and details of the resolution passed by it.
- The capital structure of the company and the procedure and time schedule for issue and allotment of the securities.
- Details of minimum subscription amount payable by way of cash and premium.
- Requisite details of directors, including their terms of appointments and remuneration.
- Consent of directors, auditors, bankers, and other persons as may be prescribed.
- The key objective of the public offer of securities and the terms of its present issue
- Other miscellaneous particulars relating to the schedule of the implementation of the project, gestation period of the project, deadlines, and progress, if any, and details of any legal action pending against the promoter of the company since last five years immediately preceding the year of issue of prospectus.
Requirements under Section 26(1) (b) of Companies Act, 2013
- Report by the auditor of the company regarding the profit and loss position of the company, for each of the five financial years preceding the financial year of the issue of prospectus.
- Report by the auditor regarding the asset and liability position of the company on the last date of accounts, not exceeding 180 days before the issue.
- Report about the business and its transaction in the context of which the securities are to be issued.
The above-enumerated details of the prospectus are not to be complied with if the prospectus is being issued to the existing share or debenture holders of the previously issued prospectus or, if the current issue of prospectus, in the context of shares or debentures is uniform in all aspect with regards to shares or debentures previously issued.
Further, no prospectus can be issued unless a true copy of it has not been delivered to a registrar for its registration. Such a copy of the prospectus has to be signed by each of the directors or proposed director of the company. It is only after a due and valid registration with the registrar that a prospectus can be issued to the general public.
However, a prospectus is deemed valid only if it is issued within 90 days of the delivery of the copy of the prospectus to the registrar. Contravention of the above rules may lead to a fine amounting up to Rs 3,00,000 or imprisonment of up to three years or both.
Types of Prospectus
- Red Herring prospectus
- Shelf prospectus
- Abridged prospectus
- Deemed Prospectus
Red Herring prospectus
Section 32 of the Companies Act deals with the Red Herring prospectus. It is issued by the companies planning to offer securities, before the actual issue of the prospectus. It is filed with the registrar, at least three days before the opening of the subscription list and the offer. It is basically a preliminary prospectus, that informs the investors about the potential offering of the company and indicates that a company has filed for an IPO.
Red Herring prospectus does not mention the exact price and quantity of the securities offered, whereas, the prospectus has to mention the quantum and the price of the total capital raised, the closing price of the securities, and other details, as soon as the offer is closed which is not included in the red herring prospectus. Any variation between the red herring prospectus and the actual prospectus has to be highlighted in the prospectus.
Filing of a Draft Red Herring Prospectus with SEBI has been made mandatory for the companies so that the SEBI can review the disclosures and the documents and suggest requisite recommendations and variations before filing the prospectus with the registrar.
Section 31 of the Companies Act,2013 regulates the issue of shelf prospectus. It is basically a prospectus that is issued for raising multiple rounds of funds in the form of bonds.
SEBI regulates the market issue of shelf prospectus which is filed with the registrar at the first offer of securities. The validity of such prospectus remains in force for one year and if there are multiple rounds of issue, in course of that one year, then there is no need of filing any new prospectus.
The company issuing shelf prospectus is required to file an information memorandum with the registrar disclosing the material facts pertaining to the new charges created, changes in the financial position of the company since its last offer, and other requisite information. It is to be noted that filing of information memorandum has to be done prior to the issue of a second or subsequent offer of securities under the shelf prospectus. The information memorandum, along with the shelf prospectus, are together deemed as prospectus if any subsequent offer of securities is made after filing of the information memorandum.
An abridged prospectus is a memorandum that contains salient features of a prospectus as per the specifications prescribed by SEBI. Application forms of securities cannot be issued unless they are accompanied by the abridged prospectus. The purpose of issuing such an abridged prospectus is to reduce the public burden of a public issue of securities. However, it is mandatory to maintain the ‘full’ prospectus in the company’s registered office.
Section 25 of the Companies Act,2013 enumerates that any document through which the allotted securities of the company are offered for sale, such documents are deemed as the prospectus and all the liabilities and omissions for misstatements in the prospectus also become applicable to them. It is to be noted that the ‘issue’ of shares involves some measure of publicity and not a single act of private communication to any one party.
Misstatement in Prospectus
Prospectus serves as a means to collate funds from the general public. Given its prima facie importance in the finance-driven corporate infrastructure, it is used as a convenient tool to manipulate and con innocent stakeholders and defraud them by stating untrue facts in the prospectus. This is known as a misstatement. Misrepresentation is a facet of misstatement which means representing something as true when it is actually false, with the intention to deceive the opposite party.
Companies Act facilitates the filing of suit for misrepresentation under Section 34, 35, 36 of the Companies Act,2013 by any person or group of person who is affected by any misleading statement.
Remedies for Misstatement
Stringent provisions and heavy liability under the Companies Act have discouraged heavy litigation in the arena of misrepresentation and have led to trust building among the community of business stakeholders.
Damages for fraud or deceit
Deceit basically means fraud. Hence, issuers of the prospectus are liable to pay damages to the ones who have been fraudulently deceived by them to purchase shares in the faith of the prospectus. Fraud is said to have been committed if any statement is made knowingly, without belief in its truth; or carelessly without knowing its veracity. The person who has been defrauded has the remedy of claiming compensation for the losses sustained by him due to fraud. The burden of proof lies on the plaintiff to prove his case.
Compensation under Section 35
In the case of Derry v Peek  UKHL 1, the court held that the directors cannot be held liable for damages if they acted honestly, and in good faith. However, this concept of honest belief led to widespread resentment within the investors’ community as it failed to protect their interests in these cases of passive deceit. As a result, liability for imputation of false statements was recognized by the Directors Liability Act 1890 and the directors were held liable for misstatements, even if they acted under an honest belief.
Section 35 of the Companies Act 2013, incorporates this concept and holds all the people involved in the issue of prospectus jointly and severally liable. If the representation made is false, then the directors cannot escape their liability even if made in good faith, and the advantage to the plaintiff is that he does not have to prove the fraud and the onus lies on the other party to disprove the representations.
Recession for misrepresentation
Besides monetary damages, the aggrieved party is entitled to rescind the contract in lieu of damages. Under this, the contract between the shareholder and the company is cancelled and the allotment money is refunded to the shareholder. Section 75 of the Indian Contract Act,1872 entitles the aggrieved to rescind the contract and obtain compensation for damages suffered due to the nonfulfillment of the contract. The right of cancelling or receding the contract is lost by affirmation to the act of misrepresentation by the allottee/aggrieved, unreasonable delay in reporting of misrepresentation, and commencement of winding up of the company.
A prospectus is one of the key facets of the commercial transaction of the corporate world. The Companies Act 2013 has carved out the requisite provisions to safeguard the interests of the shareholders and protect them against fraudulent activities. Inculcation of stricter penal provisions and enhanced liabilities have led to minimization of the deceitful activities and have sought a balance between the interest of the company and the stakeholders respectfully.
 The Companies Act 2013, Available Here
 Indian Contract Act, 1872, Available Here