PROSPECTUS UNIT 2 [CORPORATE LAW] © Tobe dort ea INTRODUCTION @ not fy bt A prospectus is a legal document through which the Public Company raises funds after its Incorporation The prospectus is a notice, document, circular, advertisement through which a public company appeals for a fund from the public[Under the Companies Act the right to issue a prospectus is only given to the Public Companies with share capitals Thus a Private Company is not entitled to issue a prospectus, to invite application for its shares or debentures. The prospectus includes various information's regarding the company such as financial performance of the Company, directors, promoters, and the sector in which the company deals. [The main objective of prospectus is to ensure that the company provides the essentialminimum information about its position to the public. The company is required to disclose the relevant facts fully and fairly to the public so that the investors can assess the risk and prospects of the investment. / Definition The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined as “any document which is described or issued as a prospectus”. This also includes any notice, circular, advertisement or any other document acting as an invitation to offers from the public. Such an invitation to offer should be for the purchase of any securities of a corporate body.|Shelf prospectus and red herring prospectus are also considered as a prospectus. _ssentials for a document to be called as a prospectusIt should satisfy two conditions. 1)The document should invite the subscription to public share or debentures, or it should invite deposits. 2)Such an invitation should be made to the public. Offer to the public| x only 4 oakod Section 42 lays down Essentials of an invitation to public: 1. An invitation to the public shall include an invitation to any section of the public. An Invitation can be given to members or debenture holders of the company or clients of the person issuing the prospectus or in any other manner. However, a document, issued to invite existing members or debenture holders to subscribe to shares or debentures by way of right is not a prospectus. Single private communication does not amount to issue to the public. Nash v. LyndeIn this case, several copies of a documents marked ‘strictly confidential and containing particulars of a proposed issue of shares, were sent by the managing director of a company to a co-director, who further sent a copy to a solicitor, which gave it to a client who in turn passed it on to a relation. Thus a document was passed on privately through a small circle of friends of the directors. The House of Lords held that there had been no issue to the public. 2. The offering of shares to kith and kin of a director is not an invitation to the public to buy shares- Rattan Singh v. Managing Director, Moga Transport, the court observed that the determination of the question of an offer being made to the public depends upon the facts and language of the notice and the particular circumstances of each casé.) 7 Lontents of ProspectusFor filing and issuing the prospectus of a public company, it must be signed and dated and contain all the necessary information as stated under section 26 of the Companies Act,2013 ij) Name and registered address of the office, its secretary, auditor, legal advisor, bankers, trustees, etc. ii) Date of the opening and closing of the issue. iii) Statements of the Board of Directors about separate bank accounts where receipts of issues are to be kept. iv) Statement of the Board of Directors about the details of utilization and non-utilisation of receipts of previous issues. v) Consent of the directors, auditors, bankers to the issue, expert opinions. vi) Authority for the issue and details of the resolution passed for it. vii) Procedure and time scheduled for the allotment and issue of securities.viii) The capital structure of the in the manner which may be prescribed. ix) The objective of a public offer. x) The objective of the business and its location. xi) Particulars related to risk factors of the specific project, gestation period of the project, any pending legal action and other important details related to the project. xii) Minimum subscription and what amount is payable on the premium. xiii) Details of directors, their remuneration and extent of their interest in the company. xiv) Reports for the purpose of financial information such as auditor's report, report of profit and loss of the five financial years, statement of compliance with the provisions of the Act and any other report. { bee to be set out in the Prospectus}on} zi he prospectus must also set out the following reports:(a) Reports of Auditors- A report by the auditors of the company with respect to assets and liabilities of the company as the last date to which the accounts were made up; the profits and losses of the company the rates of dividends (in respect of each class of shares) paid for each of the five financial years preceding the is the prospectus. The auditor's report must also state separately the profits and losses and assets and liabilities of its subsidiaries and also as a whole with the combined profits and losses, and assets and liabilities of the company and its subsidiaries. (b) Report by Accountants: A report by accountants (named in the prospectus) as so the profits or losses of the business for each of the five financial years immediately preceding the issue of the prospectus; and the assets and liabilities of the business at last date, being a date not more than 180days before the date of the issue of the prospectus. This report is required if the company proposes so acquire a business with the proceeds. \J viiling of copy with the registrar As stated under S.26(4) of the Companies Act, 2073, the prospectus is not to be issued by a company or on its behalf unless on or before the date of publication, a copy of the prospectus is delivered to the registrar for registration. (The copy should be signed by every person whose name has been mentioned in the prospectus as a director or proposed director or the assigned attorney on his behalf. It must be accompanied with the following documents: ont Satelite (a) Any concern to the issue of the Prospectus required from any person as expert. sep(b) In case of a prospectus issued generally, also (i) A copy of memorandum or every contract appointing of fixing the remuneration of a managing director or manager. (ii) A copy of or memorandum of every material contract, unless it is entered into in the ordinary course of the business carried on by the company or a contract into more than two year before the date of the prospectus. (iii) A written statement signed by a person who has made report required by part ll of schedule II, setting out any adjustments as respects she figures of any profits or assets and liabilities and giving reasons thereof. (c) The consent in writing of the persons, if any named in the prospectus as the auditor, legal advisor attorney, solicitor, banker or broker of the company or intendedcompany, to act in that capacity. | c Seip As per section26(6) of the Companies Act 2013, the prospectus should mention that its copy has been delivered to the registrar on its face. The statement should also mention the document submitted to the registrar along with the copy of the prospectus. Registration Acc. to S.26(7), a registrar can register a prospectus when: 1) It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013; and 2) It contains the consent of all the persons named in the prospectus in writing.\Miisstatement of a Prospectus The prospectus is a trusted legal document on which people can rely before subscribing or purchasing securities from the company. But any misstatement that occurs in the prospectus leads to punishment in the form of a fine or imprisonment. Misstatement includes an untrue or misleading statement, non-disclosing facts, which is issued in the prospectus. ability for mis-statement It could be either civil(S.35) or criminal liability(S.34)1. Civil Liability (S.35) According to S.35, civil liability arises when a person who has subscribed for securities on the faith of the misleading prospectus has remedies against the company and the directors, promoters, experts & every person who authorized the issue of prospectus. (1) Remedies against Company:- (a) Rescind the Contract- The person who purchases the shares can rescind the contract if he found any misstatement in the prospectus and the money will be refunded to him which he pays to the company while purchasing securities. Right to rescind or terminate the contract is available if the person proves the following: i) Statement must be Untrue - The recession of the contract can be claimed if there is a false representation in the prospectus. Falserepresentation induced both the positive mis- statement or omission of a fact. A statement included in prospectus shall be deemed to be untrue, if it is misleading in the form and context, in which it is included. In/Rex v. Kylsant, A prospectus was issued by a company stating that the company had paid a dividend every year between 1921 and 1927(years of depression) thus giving the impression of a financially stable company. However, the company had in each of those years incurred considerable trading losses and was able to pay dividends only out of realized capital profits. This fact was suppressed. Held, the prospectus was false in a material particular in that if conveyed a false impression:) Skip jy Mistepresentation must be of a fact - The misrepresentation must be of a fact and not of law, in case of mis-representation law the deceived persons shall be having noremedy. | ot) The material statement of facts - The statement must be material oné]The following false statement have been held to be material statement of fact that more than one-half of the first issue of shares have been subscribed for {that the company was the sole manufacture of asbestos in the country and had a practical monopoly) ww) Statement relied upon - The statement should have been relied upon by the allottee. He is not bound to verify the statement before acting upon it\ However, he cannot complain of mis-representation if he knows that the statement is false one. Loss of the right of Rescission C only Bd ) The right of rescission is lost in the following circumstances. &) By unreasonable delay - An allottee who discovers that he has been deceived by themisrepresentation in the prospectus, he should rescind the contract of allotmént within reasonable time depending upon the facts and circumstances of each case] ® By ratifications - An allottee may also lose his right to rescind by implied ratification} An implied ratification may take place by his conduct, e.g. by paying calls or receiving dividends, or in any other manner. (i) By commencement of winding up {After the commencement of the winding up the right to rescind is lost\unless allottee has commenced legal proceedings to enforce rescission before that date. (fpyClaim Damages for Fraud - Any allottee of shares and debentures is entitled to recover damages from the company for the fraudulent misrepresentation in the prospectus. The section is based upon the tort of deceit.{However in practice, action for damages against the company have rarely been brought. The usual claim against the company has been rescission of contract of allotment, sxip WI Remedies against the directors, promoters and experts :- The persons who are liable to pay compensation for any loss or damage to subscribers for any shares or debentures on the faith of a prospectus containing untrue statements are the (a) Directors at the time of the issue of the prospectus; (b) Persons who have authorized themselves to be named as directors in the prospectus; (c) Promoters; and (d) Persons who have authorized the issue of the prospectus. Their liability may be studied under thefollowing heads: AM) Liability for damages for misstatement in prospectus(S.36) Every director, promoter and every person who authorized to issue the prospectus is liable to pay compensation to the aggrieved party for loss or damage he may have incurred by reason of any untrue statement in the prospectus. The directors, promoters, etc. shall not be liable if he puts up the following defences: J Omly RL (a¥ Withdrawal of consent: A director, etc. is not liable if he withdraw his consent before the issue of the prospectus and it was issued without his authority or consent. And on becoming aware of its issue, he forthwith gave reasonable public notice of that fact. (2) Absence of consent: Where a prospectus was issued without a director's, etc., knowledge or consent, and on becomingaware of its issue, he forthwith gave reasonable public notice of that fact, he is not liable. (y Ignorance of untrue statement: A director, etc., may sometimes be ignorant of the untrue statement contained in the prospectus. If after the issue of the prospectus and before allotment there under, he on becoming aware of any untrue statement therein withdraw his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reasons therefore, he is not liable. (dy Reasonable ground for belief: If a director, etc. has reasonable ground to believe that the statement was true and he in fact believed it to be true up to the time of allotment, he is not liable. But it is not enough for a director to say that he was honest, he has to show that his honest belief was based on reasonable grounds. (9¥ Statement of official document or expertetc: If the statement is a correct and fair representation or extract or copy of official document or is made by an expert or an official person who is competent to make it and had given his consent and had not withdrawn it, the director, etc. is not liable. \ ston to contribution: Every person who ecomes liable to make any payment under Section 35 may recover contribution from other guilty persons who are liable for fraudulent misrepresentation in the prospectus] (II)Liability for damages for non-compliance with S.26: {The omission from the prospectus of a matter required to be included by S.26 may give rise to an action for cee the instance of a subscriber for sharés who has suffered loss thereby. [According to it, a director or other person)responsible for the issue of a prospectusjis not liable if: (aj he is ignorant of the matter not disclosed; (@) The non-compliance arises from an honest mistake of fact on his part; or (6 The non-compliance is not material, and the court thinks he ought to be excused. ( Liability under the general law: Under the eneral law, a shareholder can hold all or any of the persons responsible for the issue of a prospectus liable for any misstatement or fraud on their or his part if he was actually deceived by reason of his having acted on the faith of the misstatement or fraud in the prospectuspaccording to S.17 of the Indian Contract Act, 1872, A person can only be liable in fraud ina prospectus where he makes a statement to be acted upon by others, which is false and is made: (a) Knowingly;(b) Without belief in its truth; or (c) recklessly, not caring whether it was true or false. ‘Tthe remedy under general law is also available: (a) Where the right of rescission as against the company is lost either through laches or negligence; and (b) Where the company goes into liquidation. ] Criminal Liability here a prospectus contains any untrue statement, every person who authorized the issue of the prospectus is punishable with imprisonment which may extend to 2 years, or with fine which may extend to Rs. 50000 or with both. He will not be liable if he proves either: (1) That the statement was immaterial; or (2) That he had reasonable ground to believe that the statement was true.Jyesuing an application for shares or debentures not accompanied with a memorandum containing salient feature of a prospectus punishable with fine not be less than Rs. 50,000/- but which may extend to three lakh rupees and every person who is knowingly a party to the issue of prospectus shall be punishable with imprisonment which may extend to three years (S.26(9)) (ilPenalty for fraudulently inducing persons to invest money (S.36).|A person shall not (i) either knowingly or recklessly by making any statement, promise or forecast which is false, deceptive or misleading, or (ii) by any dishonest concealment of material facts, induce or attempt to induce another person to invest money. J’ Issue and allotment of shares/securities in fictitious names (S.38) - A person shall bepunishable with imp. for a term which may extend to 10 years if he: (1) Makes an application to a company for acquiring, or subscribing for any securities in a fictitious name or (2) Induce a company to allot, or register any transfer of securities to him, or any other person in a fictitious name. (3) These provisions shall be prominently reported in every prospectus issued by the company and in every form of application for securities which is issued by the company to any person. SHELF PROSPECTUS(o “WY | antl) According to Section 31 of the Companies Act, 2013, Shelf Prospectus is a prospectus in respect of which the securities or the class of securities included therein are issued for subscription in 1 or more issues over a certain period without the issues of a further prospectus. This prospectus may be issuedby any class or classes of companies at the Securities & Exchange Board of India (SEBI) may provide by regulations on this behalf. The validity period of the shelf prospectus is not more than one year. For the subsequent offer of securities with the given period, no further issuance of the prospectus is required. In the case of Shelf Prospectus, the company shall require to file an Information Memorandum with the registrar before making a subsequent offer of securities. Red Hearing Prospectus: ( 0 orl 'f oon!) Se According to the provision of Section 32 of the Companies Act, 2013, a Red Hearing Prospectus is a prospectus with a view issued by a Public Company may before issuing an actual prospectus (Section 32 (1)) to explore the demand for securities and price at which securities may be offered.It is a prospectus that does not include complete particulars of the quantum or price of the securities included therein. According to Section 32 (3), the red herring prospectus shall file it with the registrar at least 3 days before the opening of the subscription list. Section 32 (3) states that, in case of any variation between red hearing and actual prospectus, then in the Actual prospectus the variation shall be highlighted and the heading shall be “As Variations”. SUMMARY A prospectus plays a crucial role for any customer who aims to buy shares, debentures or other instruments from the company. The issuance of prospectus must be under the provisions of the Companies Act2013. The public relies on the statements issued by the company and takes the major investment decisions so it should be true and correct in nature, any misleading prospectus shouldn't be published and therefore the person answerable for its issuance must be punished under the given provisions. A prospectus for being a valid one it must contain essential requisites and it must be registered. If any prospectus is not registered, it is considered as an invalid one. Such contravention is punishable under S.26(9). The public company must issue a prospectus for raising funds but, in case of private company converts into public then they should issue a prospectus or statement in lieu of prospectus with the memorandum of association (MOA) on its conversion into a public company.