> Chapter 5 Prospectus PROSPECTUS Definition ‘A public company, but not a private company, is entitled, by issuing 9 rospectus, to invite applications for its shares or debentures. “Prospectus” prdcfined by Section 2(70) in the following words: ““Prospectus’ means any document described or issued as a prospectus and includes a red her- ction 32 or shelf prospectus referred to in ring prospectus referred to in Se Section 31 or any notice, circular, advertisement or other document inviting offers from the public for subscription or purchase of any securities of a body corporate.” ‘An abridged prospectus means a memorandum containing such salient fea- tures of a prospectus as may be specified by SEBI by making regulations. [S.2(0)] Application forms [S. 33] Application forms for securities cannot be issued unless they are accom- panied by a memorandum containing such salient features of a prospectus as may be prescribed. This is known as abridged prospectus. The purpose is to reduce the expense-burden of a public issue. The full “prospectus” has to be maintained in the office of the company. This requirement is not to apply if itis shown that the form of application was issued () in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to securities; or () in relation to securities which are not offered to the public. [S. 33(1)] A copy of the prospectus has to be given to a person who requests for d the subscription list. [S. 33(2)] A default in it before closing of the offer an complying with the provisions of the section makes the company liable to a Penalty of Rs 50,000 for each default. [107]a er 5 Prospectus Ss. 23 a Public offer and private placement [S. 23] A public company may issue securities | to public through Prospectus ( referred to as “public offer” by complying with the provisions of pa 9 Chapter 3 on Prospectus and Allotment of Securities). [Ss. 23-41) Tt may oe be done through private placement by complying with the Provisions «7 Part Il of Chapter 3, [S. 42] It may also be done through rights issue orton issue by complying with the provisions of the Act and in case of listed cage panies by complying with the provisions of the SEBI Act, 1992, and ruis ) and regulations made under it. In APL Industries Ltd v Securities ang Exchange Board of India,’ SEBI ordered refund of monies with interest to subscribers where public issue of shares was unsubscribed. The court fur ther ordered that after 2 decades of litigation on the matter, the issue of refund along with interest cannot be delayed any further. A private company may issue securities by way of rights issue or bonus issue or through private placement by complying with the provisions of Part II of Chapter 3. [S. 42] An Explanation to the section says that a public offer includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus. Documents containing offer of securities for sale, deemed prospectus [S. 25] Where a company allots or agrees to allot any securities of the company with a view to those securities being offered for sale to the public, any doc- ument by which the offer for sale is made to the public is to be deemed for all purposes as a prospectus issued by the company. All enactments and rules of law as to contents of prospectus and as to liability for misstate- ment in and omissions from prospectus or otherwise relating to prospe™ tus are to become applicable. This is subject to modifications specified 2 Section 25(3) and (4). The original allotment is presumed to have been ma a with a view of offering them to the public where (1) shares are offere i the public within six months of allotment and (2) where at the date of of to the public the whole of the consideration has not been received by " company. [S. 25(2)] 5 Section 26 which provides for matters to be stated in the prospectus . applicable to the offer for sale with the following additional requitemt @) a statement of the net amount received or to be received as consider for the securities to which the offer relates; (b) the time and place at bee the underlying contract for allotment may be inspected; and (¢) the Pew making the offer were named in the prospectus as directors of the comp: [S. 25(3)] suff Where the person making the offer is a company or firm, it is © P° vo Gient if the offering document is signed on behalf of the company PY, directors or by not less than one-half of the partners of the firm. [7 1, (2017) 200 Comp Cas 440 (Del), 4ea $.26 rovisions of the Act relating to prospectus and the penal provisions ittvacted only when the prospectus has been issued. “Issued” means are ato the public. “Public” includes any section of the public, whether issued as members or debenture holders of a company concerned or as cli- sel : ‘of the person issuing prospectus or in any other manner. Thus, where mp copies were distributed among the members of certain gas companies atiy, it was held to be an offer of shares to the public? But where a compa- ny’s prospectus was given toa solicitor of the company and he forwarded jtro one of his clients, this did not amount to an issue to the public and aaordingly the provisions of the Act relating to liability for omissions, etc were not attracted.’ The term “issue” is not satisfied by a single private com- jnunication. There must be some measure of publicity, however modest. Where a rights issue is made to existing members with a right to renounce infavour of others, if the number of such others exceeds fifty, it also becomes adeemed prospectus.* Contents of prospectus (Matters to be stated in prospectus) [S. 26] Every prospectus issued by or on behalf of a company either on its for- mation or subsequently or by or on behalf of a person engaged or interested in the formation of a public company has to be dated and signed and has tostate the following information: Sub-section (1)(a) contains (i) names and addresses of the registered office of the company, company secretary, chief financial officer, auditors, legal advisers, bankers, trustees, if any, under- writers and such other persons as may be prescribed; (ji) dates of opening and closing of the issue and declaration about issue of allotment letters and tefunds within the prescribed time; (iii) statement by the Board of directors about the separate bank account where receipts of issue are to be kept and details of utilisation and non-utilisation of receipts of previous issues; (iv) underwriting details; (2) consent of directors, auditors, bankers to the issue, ©pert’s opinion and of such other person as may be prescribed; (vi) author- v for the issue and details of resolution passed for it; (vii) procedure and ee schedule for allotment and issue of securities; (viii) capital structure of ny in the manner which may be prescribed; (ix) main objects of re Offer, terms of the present issue and such other particulars as may be i scribed () main objects and present business and its location, schedule nei en anon of the project; (xi) particulars relating to (A) management Proje on of risk factors specific to the project; (B) gestation period of the of the. ©) extent of progress in the project; (D) deadlines for completion cove oleet, and (E) any litigation or legal action pending or taken by aerial Department or a statutory body during the last five years Moterof ey receding the year of the issue of prospectus against the pro- °f Premiuy ‘¢ Company; (xii) minimum subscription, amount payable by way m, issue of shares otherwise than on cash; (xiii) details of directors Meludi 7 'n8 their appointments and remuneration, and such particulars of the The Pp South 2FEngland Natural Gas and Petroleum Co Ltd, re, (1911) 1 Ch $73: 104 LT 378, lash ray. LY"de, 1929 AC 158: 140 LT 146 (HL). 2 3N, 4. SEB v Ktonnamkutam Paper Mills Ltd, (2013) 178 Comp Cas 371 (Ker), ee Prospectus 109ter 5 Prospec 8.2% nature and extent of their interests in the company as may be and (xi) disclosures in stich manner as may be prescribed abou eri the promoters’ contribution. Sou (b) Reports.—Following reports for the purposes of the financi, mation have to be set out, namely: (i) reports by the auditors of the = ; about its profits and losses and assets and liabilities and such ee as may be prescribed; (ii) reports relating to profits and losses for ao ve financial years (or less as the case may be) immediately precedi financial year of the issue of prospectus including such reports of its sidiaries and in such manner as may be prescribed; (iii) reports made ne prescribed manner by the auditors upon profits and losses of business ft each of the five financial years (or less period), immediately preceding the issue and assets and liabilities of business on the last date of the accounts not exceeding 180 days before the issue; (iv) reports about the business or transaction as to which proceeds of the securities are to be applied directly or indirectly; () a statement about compliance of provisions of the Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of the Act, Securities Contracts (Regulation) Act, 1956 and SEBI ‘Act, 1992 and rules and regulations made under it; (d) such other matters and other reports as may be prescribed. (2) Sub-section (2) provides that nothing in sub-section (1) is to apply (@ to issue to existing members or debenture holders of a prospectus ot form of application relating to shares or debentures, whether the applicat has a right to renounce the shares or not [under S. 62] in favour of any other person; or (b) issue of a prospectus or form of application relating te shares or debentures which is in all respects uniform with shares or debentur™ previously issued and for the time being dealt in or quoted on a recog stock exchange. g*** (4) Filing of copy with Registrar.—Sub-section (4) provides that o dee spectus is to be issued by or on behalf of or in relation to an intend a pany unless on or before the date of its publication a copy has been oa ; to the Registrar for registration. The copy should be signed by ever” fs who is named in the prospectus as a director or proposed director °° duly authorised attorney. (5) Statement of independent expert.—A prospect statement purporting to be made by an expert unless who is not and has not been engaged in the formation, agement of the company and has given his consent to ¢ tus and has not withdrawn his consent before deliver! ospect™ Registrar. A statement to that effect has to be included in the et Juer ° eel va bed, Tes of for. a . include us is not to on ne expert is @ path promotio Oe ne issue Of PA ie y of a 5. The term “expert” has been defined in S, 2(38) as including a" oe perso” Di tered accountant, company secretary, cost accountant, and any OUT" ho ime the power or authority to issue a certificate in pursuance of any law '0 force.ce gs. 26-28 Delivery of copy to Registrar [S. 26(6)].—The prospectus has to state on the face of it that a copy has been delivered to the Registrar. The statement ne also to specify the documents which have been delivered along with the copy of the prospectus. Registration of prospectus by Registrar [S. 26(7)].—The Registrar is not to register a prospectus unless the requirements of section with respect to registration have been complied with and it is accompanied by consent in writing of all the persons named in the prospectus. Date of issue after registration [S. 26(8)]—No prospectus is to be valid sfitisissued more than 90 days after the date on which a copy was delivered to the Registrar. Penalty for contravention [S. 26(9)].—If a prospectus is issued in contra- vention of the provisions of the section, the company becomes punishable with fine of not less than Rs 50,000 but extending up to Rs 3,00,000. Every person who is knowingly a party to such a prospectus is punishable with imprisonment for a term which may extend to three years or with fine of not ess than Rs 50,000 but extending up to Rs 3,00,000 or both. Variation in terms of contract or objects stated in prospectus [S. 27] The terms of a contract referred to in the prospectus or objects for which the prospectus has been issued can be varied only with the authority of the company given by it in general meeting by way of special resolution. The prescribed details of the notice which has to be given to the shareholders are to be published in newspapers (one in English and one in vernacular language) circulating in the city where the registered office of the company is situated indicating clearly the justification for such variation. The second proviso to sub-section (1) also prescribes that such company is not to use any amount raised by it through the prospectus for buying, trading or other- wise dealing in equity shares of any other listed company. Sub-section (2) provides that the dissenting shareholders, i.e. those who did not agree to the variation are to be given an exit offer by promoters or controlling shareholders at such exit price and in such manner and condi- tions as may be specified by SEBI by making regulations for this purpose. Offer of sale of shares of certain members [S. 28] _ Where certain members of a company, in consultation with the Board of directors, and in accordance with applicable law, propose to offer the whole ora part of their holding of shares to the public, they may do so in accord- ance with the prescribed procedure. [Sub-s (1)] , Qub-section (2) provides that any document by which the offer of sale = shares to the public is made is to be deemed a prospectus issued by the li eae and, therefore, all requirements as to contents of prospectus and ability for misstatements and omissions become applicable. 6 ‘ a date of issue is important for many reasons, one of them being the value of securities ‘eeps changing. Prospectuss (5 Prospectus co 29.5) responsibility in the matter of sale [S. 28(3)].—The Taal or bodies corporate or both, whose shares ara public, have collectively to authorise the co Members whether ind to be offered to the ‘cir behalf for carrying out the transaction, They al take all actions on th have to reimburse the company for all expenses made by it on this pa r Public offer of securities to be in dematerialised form [S. 29] Every company making a public offer and, such other class or classe of companies as may be prescribed, have to issue their securities only Gematerialised form by complying with the provisions of the Depositorie ‘Act, 1996 and regulations made under it.’ [S. 29(1)] Any other company may convert its securities into dematerialised form or issue its securities in physical form. [S. 29)] Members Proposed ™MPany ty Advertisement of prospectus [S. 30] Where an advertisement of a company’s prospectus is published in any manner, it is necessary to specify in it the contents of the company’s memo- randum as regards the objects, liability of members and the amount of the company’s share capital, the names of signatories to the memorandum and the number of share subscribed by them and its capital structure. Shelf prospectus [S. 31] Securities and Exchange Board of India (SEBI) has to provide by mak ing regulations for any class or classes of companies which may file a shelf prospectus with the Registrar at the stage of first offer of securities. Tt has to indicate a period not exceeding one year as the period of validity of such prospectus. The period is to commence from the date of opening of the fist offer of securities under such prospectus. In respect of any second or sub- sequent offer of such securities issued during the period of validity of such prospectus, no further prospectus is required. [S. 31(1)] Information Memorandum [S. 31(2)l—A company filing a shelf PO spectus is required to file an information memorandum containing 2 material facts relating to new charges created, changes in the financial post tion of the company occurring since the first offer of securities cor betwee" the preceding offer and succeeding offer. Other particulars may also D° ail scribed. Filing has to be done with the Registrar within the prescribed at prior to the issue of second or subsequent offer of securities ‘under the § a prospectus. The proviso to the sub-section has it that where a COMP, any other person has received applications for allotment of securitie with advance payments of subscription before the occurrence © any gt? change, information of the change must be given to him. If they express pe desire to withdraw their application, within 15 days, their money - refunded to them. : ies 8 After filing of an information memorandum, if any offer of Sta made, the memorandum together with shelf prospectus is dee" . ‘oformatio® 7. Mukesh Malhotra v SEBI, (2005) 124 Comp Cas 336 (SAT), failure to furnish infor _—gs. 32, 35 a prospectus. The Explanation to sub-section (3) says that for the purposes of the section, the expr ssion ‘shelf prospectus” means a prospectus in respect of which the securit or class of securities included in it are issued for subscription in one or more issues over a certain period without the issue of further prospectus, Red herring prospectus [S. 32] A company proposing to make an offer of securities may issue a red her- ring prospectus prior to the issue of a prospectus. [S. 32(1)] Such prospectus has to be filed with the Registrar at least three days before the opening of the subscription list and the offer. [S. 32(2)] A red herring prospectus car- ries the same obligations as are applicable to a prospectus. Any variation between the red herring prospectus and a prospectus is to be highlighted as variations in the prospectus. [S. 32(3)] Upon closing of the offer of securi- ties, the prospectus has to state the total capital raised, whether by way of debt or share capital and the closing price of securities and any other details which are not included in the red herring prospectus has to be filed with the Registrar and SEBI. [S. 32(4)] The Explanation to the section says that for the purposes of the section, the expression “red herring” means a prospectus which does not include complete particulars of the quantum or price of the securities. Remedies for misrepresentation The fear of heavy liability and criminal sanctions have controlled the directors’ tendency of “using extravagant terms and flattering description”. The law allows the following remedies for misrepresentation. 1. Damages for deceit—Those who issue a prospectus with fraudulent statements are liable to pay damages to anyone who purchased shares on the faith of the prospectus. In Derry v Peek, the prospectus of a company Stated that the company had been authorised to use steam power in mov- ing its trams. The authority was in fact subject to the approval of the Board of Trade, which refused its approval. Yet the directors were held to be not Builty of fraud, because they were honest, whereas fraud requires a state- ment which the maker knows to be false, or does not believe it to be true or 's too reckless as to its truth. The company may also be sued for damages Provided that the fraudulent statement was made by its officers within the Scope of their authority, though in that case as laid down by the House °f Lords in Houldsworth v City. of Glasgow Bank, the contract of allotment = first be rescinded. But the (UK) Misrepresentation Act, 1967, now “enti- Sethe Court to award damages in lieu of rescission”. The provisions of “ction 75, Indian Contract Act, 1872 are to the same effect. 2. Compensation under Section 35.—The acquittal of the directors by the ae of Lords in Derry v Peek caused such widespread resentment that ithin a year the Directors Liability Act, 1890 was passed which rendered 8: (1889) Li 14 a¢ C337 (HL). (1880) LR 5 App Cas 317: 42 LT 194 (HL), Prospex1 5 Prospectus 8.35 directors liable for false statements, although they Might hay, their assertions to be substantially true. The provisions of thie lieveg re-enacted in Section 62, Indian Companies Act, 1956, Now th Act : in Section 35 of the 2013 Act. Following persons are liable under than (J) every person who is a director at the time of the issue of the prot @)every person who has authorised himself to be named ag ahr Pes the prospectus; (3) every promoter of the company; (4) every an in has authorised the issue of the prospectus; (5) every person who is a referred to in Section 26(5). Their liability is joint and several, The who is made liable may recover contribution from others equally pu They are liable to compensate the investor for any loss sustained by Rat” reason of any statement. Subject to the special defences allowed under the section, they are liable for every untrue statement. A person sued under the section is entitled to the following specal defences: (1) That he withdrew his consent to be a director before the pro spectus was issued and that it was issued without his authority or consent (2) That the prospectus was issued without his knowledge or consent andon becoming aware he forthwith gave reasonable public notice to that effect. 3) That he was ignorant of the untrue statement and on becoming aware ofiit, he withdrew his consent by a reasonable public notice. This must obviously be done before allotment. (4) That “he had reasonable ground to believe and did up to the time of allotment believe the statements to be true”. In Derryv Peek, the directors were held not liable because they honestly believed thei statement to be true. But under Section 62 of 1956 Act and present Section35 mere honesty was and is not enough, the honest belief must be based ‘upon reasonable grounds. Thus, where a prospectus was issued by the director under the assurance given by the promoters that everything was alright they were held liable for untrue statements because to put faith upon P™ moters is not reasonable.” (5) That the untrue statement was one the report of an expert and he had reasonable ground to believe and did to the time of allotment believe the expert to be competent and, if it wa some public official document, that it was a correct and fair represen of the document. The points from (8) to (5) are not there in the new S But they will become applicable as a matter of common law. gett? 3. Rescission for misrepresentation.—The shareholder can als° Fiscal company for rescission of the contract. Under this remedy the contre % celled and the money given by the shareholder refunded. Under a Contract Act, a person who lawfully rescinds a contract is entitle yilme™ pensation for any damage which he has sustained through no" 7 of the contract. The right is lost in the following circumstances ap (© By affirmation—1f the allottee with full knowledge of teat resentation upholds the contract, he cannot afterwards rescind. "py ! may be express or implied. An implied affirmation takes P* 10. Adams v Thrift, 0915)2.Ch 24.113 Lt 569 (CA) —_$.37 shareholder's conduct, where, for example, he endeavours to sell his shares, attends meetings of the company, receives dividends or pays calls."' (b) By unreasonable delay.—"Any man who claims to retire from a company on the ground that he was induced to become a member by mis- representation, is bound to come at the earliest possible moment after he becomes aware of the misrepresentation.” An action after five months was held to be too late.” (c) By commencement of winding up.—The right of rescission is lost on the commencement of the winding up of the company. “But where a share- holder has started active proceedings to be relieved of his shares, the pass- ing of the winding up order during their pendency would not prevent his getting the relief.” When statement deemed to be untrue A statement is deemed to be untrue if it is false in the form and context in which it is included. Omissions which are calculated to mislead shall also render the prospectus false. In R v Kylsant, a prospectus correctly dis- closed that the company had paid dividends from 1911 to 1927, but did not disclose that the company had suffered losses from 1921 onwards and div- idends had been paid out of war-time profits. Thus, although what the pro- spectus said was true, it was held to be a misleading prospectus and those who issued it were held liable to punishment. Where a statement is true at the time of the issue of the prospectus, but ceases to be so when allotment is made, the allotment is voidable. Further, it is necessary to avail of the above remedies that the plaintiff should have purchased his shares on the faith of the prospectus directly from the company. A purchaser of shares in the open market has no remedy against the company or its officers even if he was influenced by the prospectus. But where a company has so placed its laa as to induce purchases of shares in the open market, the liability follows. Who can sue under Sections 34, 35 and 36 [S. 37] A suit may be filed or any other action can be taken under Sections 34, 35 or 36 by any person or group of persons or any association of persons affected by any misleading statement or for the inclusion or omission of any matter in the prospectus. Placement without prospectus The process of issuing securities through such method is a kind of pri- vate placement. The other documents and application form are not issued to the public in general. They are circulated among selected persons for their Personal use and with no right to pass them on to others. This method is 11. Dunlop Truflault Cycle and Tube Mfg Co, re, ex p Shearman, (1896) 66 L] Ch 25: 75 LT 385. 12. Christineville Rubber Estates Ltd, re, (1911) 81 LJ Ch 63: 106 LT 260: 1911 WN 216. 13. Dusat in Shiromani Sugar Mills Ltd v Debi Prasad, ALR 1950 All 508: (1950) 20 Comp Cas vi 296: 1950 All L 836. (1932) 1 KB 442: 101 LJ KB 97 (CCA). ProspectSS 8.3 r 5 Prospectus gradually slipping into the hands of banking and financial inst, functioning is in the name of book building process, Orders a from investment bankers and larger investors based on an indy’ leceg SEBI guidelines have been issued." Even in the case of a public at” Price ation through book building is allowed to the extent to which = pe. in issues is permissible. It will be identified separately in the places t¥3tion tion. Where the issue is above one crore rupees, book building i - be used to the extent of 100 per cent. The process is advantageous fe can the demand for and value of the company’s securities is discovereq bye viding price flexibility and bidding. Pro. Most companies have, however, to issue a public appeal for subscript This involves the issue of a prospectus. No applications for shares or deh tures of a company can be invited unless the appeal is accompanied” memorandum containing such salient features of a prospectus as ing prescribed, and complying with the requirements of the section. ‘tions, 7, re Disclosures should give true and fair view of company’s position Above all, the golden rule as to the framing of prospectus must be observed. The rule was laid down by Kinpersety VC in New Brunswick and Canada Railway and Land Co v Muggeridge™ and was described asa “golden legacy” by Pacz Woop VC in Henderson v Lacon.” Briefly, the rule is this: i Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Publicis invited to take shares on the faith of the represent tions contained in the prospectus. The public is at the mercy of company promoters. Everything must, therefore, be stated with strict and ean pulous accuracy. Nothing should be stated as fact which is not so no fact should be omitted the existence of which might in any ee affect the nature or quality of the privileges and advantages which rue prospectus holds out as inducement to take shares. In a word, the # nature of the company’s venture should be disclosed. oe This golden legacy has condensed in few words the whole doc! to the rule of conduct between shareholders and directors." oo 15, Clarification XIII, 12-12-1995; Clarification XVII, 9-12-1996 and Clarification 23-10-1997. 16. (1860) 3 LT 651: 30 LJ Ch 242. 17, (1867) LR 5 Eq 249: (e (1867) LR 5 Eq 249: 17 LT 527: 59 Ly Ch 794, these eat, 18, Henderson v Lacon, (1867) LR 5 Eq 249: 17 LT 527: 59 LJ Ch 794. In addition to they ments of the Companies Act, SEBI’s guidelines for disclosures in Prospects gop sEBh to be observed. See, SEBI Guidelines for Disclosure and Investor ProtectiO® © ye with headquarters at Bombay, was established under the SEBI Act, 1992 t0 i Issues _ supervision of the capital market from the erstwhile Controller of CAP! cry i fu" was functioning under the now repealed Capital Issues Control Act, 1947 "1 primaty tioning by sub-dividing its workload into two divisions, one for controlling ngaction, market, namely issue of securities and the other for controlling the market gel in securities, the secondary market. For issue of securities it has laid OW", vet as to disclosures in accordance with which prospectus must be prepa"