PROSPECTUS &

ALLOTMENT OF SECURITIES

CA DEEPIKA RATHI

CA DEEPIKA RATHI : CORPORATE LAW 1

 CHAPTER OVERVIEW

Chapter III of the Companies Act 2013

deals with the Prospectus & Allotment of
securities

PART I PART II
The issue of securities
The issue of securities
through public offer
through Private Placement
(Section 23 to 41)
(Section 42)

CA DEEPIKA RATHI : CORPORATE LAW 2

 Issue of Prospectus and
relate matters
(Section23,26,29,31,
32,25,28,27, & 40)

Private Placement Prospectus & Allotment of Allotment of securities

(Section 42) Securities (Section 23-42) (Section 39)

Penalties
(Section 34,35,36,37 &
447)

CA DEEPIKA RATHI : CORPORATE LAW 3

 Issue of securities by Public Company Section 23 (1)

A B C
To public through prospectus Through Private Palcement by Through Right Issue or Bonus
(Including IPO,FPO or OFS) by complying with the provisions Issue in accordance with
complying with the provisions of Part II Companies Act and SBI Act 1992
of Part I & Rules & regulation made
thereunder

CA DEEPIKA RATHI : CORPORATE LAW 4

 Initial Public Offer Offering the shares of company to public
(IPO) through Stock Exchange for the First Time

Further Issue of Shares to Public by Company

Further Public
Public Offer which has already listed and gone through the
Offer (FPO)
IPO process.

It is a mechanism where promoters or existing

Offer For Sale of shareholders of listed companies sell their
Securities (OFS) Shares directly to the public in a transparent
manner.

CA DEEPIKA RATHI : CORPORATE LAW 5

 Prospectus Section 2(70)

Any document described or issued as prospectus

Includes a Red herring prospectus referred to in section 32

Includes Shelf prospectus referred to in section 31

Includes any Notice/Circulars/Advertisement/other document inviting

offers from PUBLIC

CA DEEPIKA RATHI : CORPORATE LAW 6

 Matters to be stated in Prospectus (Section 26)

Following requirements should be fulfilled by a Public Company regarding issue of Prospectus

 Prospectus should be dated. The date mentioned in the prospectus shall be deemed to be the date of its
publication.

 Prospectus should be Signed by every person who is named therein as a director or proposed director of the
company or by its duly authorized attorney.

 Prospectus should contain such information and set out such reports on the financial information as may be
specified by the Securities and Exchange Board (SEBI) in consultation with Central Government.

 Declaration of Compliance: Prospectus should contain declaration that nothing in the prospectus is contrary to
the provisions of Companies Act 2013, the Securities Contracts (Regulation) Act 1956 and the Securities and
Exchange Board of India Act, 1992 and the rules and regulations made thereunder.

CA DEEPIKA RATHI : CORPORATE LAW 7

 Exception to section 26(1) : Not Applicable to

 The issue to the existing members or debenture-holders of a company, whether an applicant has a right to
renounce or not.
 The issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all
respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a
recognized stock exchange.

 Delivery to Registrar for filing : Copy of prospectus should be delivered to the Registrar for filing on or before the
date of its publication.

 Prospectus not to include Experts’ statement under certain circumstances : A prospectus issued under sub-section
(1) shall not include a statement purporting to be made by an expert unless

 Expert is *not engaged or interest in the formation or promotion or management of the Company
 Has given written consent to the issue of the prospectus and
 Has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for filing.

CA DEEPIKA RATHI : CORPORATE LAW 8

👉Expert means [section 2(38) Includes an engineer, a valuer, a CA, a CS, a Cost Accountant and any other person
who has power or authority to issue a certificate in pursuance of any law the time being in force.

 Certain formalities to mention on face of Prospectus:

 State that a copy has been delivered for the filing to the ROC and
 Specify list of all documents attached with the prospectus

 Validity of Prospectus : Up to 90 days from the date on which a copy thereof is delivered to the Registrar.

 Punishment in case of Contravention of section 26 :

Company : Fine Rs. 50 thousand to Rs. 3 lakhs
Any person Knowingly a party to issue of such prospectus: Fine Rs. 50 thousand to Rs. 3 lakhs

CA DEEPIKA RATHI : CORPORATE LAW 9

Matters to be stated in Prospectus Section 26

• Date indicated on Prospectus is deemed to be the date of prospectus

1

• Prospectus NOT to be issued unless copy has been filed with the
2 REGISTRAR for registration

• It is to be signed by every person NAMED THEREIN as DIRECTOR or

3 PROPOSED DIRECTOR

• Registrar NOT to register unless all compliances are over and all
4 PERSONS named in prospectus have filed their CONSENT in WRITING

CA DEEPIKA RATHI : CORPORATE LAW 10

 Contents of Prospectus

Dated Expert Statement Cover Page

Not Engaged in
Signed Formation
Directors/Proposed
A copy is delivered to ROC
Directors/ Attorney
Written Consent
List of documents
Information-26 (1) submitted to ROC
Given & Not
withdrawn

Report-26(2)

CA DEEPIKA RATHI : CORPORATE LAW 11

 Advertisement of Prospectus (Section 30)

Wherever there is advertisement of prospectus published, it must contain following details

 The objects stated in memorandum

 The liability of the members and the amount of share capital of the company.

 The name of signatories to the memorandum

 The number of shares subscribed for by the signatories

 The capital structure of the company

CA DEEPIKA RATHI : CORPORATE LAW 12

 Share capital of Object stated in Liability of
company memorandum Shareholders

Advertisement of
prospectus must
contain (Section 30)

Details of
signatories to Capital Structure
MOA & their
share subscribed

CA DEEPIKA RATHI : CORPORATE LAW 13

 Section 31 Shelf Prospectus
 Meaning: It is the prospectus with the shelf life, i.e., a validity period. It’s a type of prospectus, which shall
contain details of all the upcoming public issues, which company is going to make in next one year, to the
public without a separate prospectus for each act of offering.
 Max Period of validity is 1 year
 Information memorandum: Every subsequent offer requires issuing an ‘Information Memorandum’
containing the details of changes that took place from the previous issue.
o Financial changed
o New charges created
o Other material facts
Rule 10 of PAS Rules 2014 requires “Information Memorandum’’ to prepared in PAS- 2 and to be filed with
registrar within one month prior to the issue of a subsequent offer.

CA DEEPIKA RATHI : CORPORATE LAW 14

 Red Herring Prospectus (Section 32)

Meaning of Red Herring Prospectus

“Means a prospectus which does not include complete particulars of the quantum or price of the securities included
therein.”
• In this kind of public offering, the price and quantity of shares to be allotted are not included in prospectus. Thus
the prospectus is incomplete.

• Red Herring prospectus is issued prior to the issue of Prospectus.

• Red Herring prospectus must be filed with registrar at least 3 days prior to the opening of the subscription list and
the offer.

• A Red Herring Prospectus shall carry the same obligations as are applicable to a prospectus and any variation
between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

CA DEEPIKA RATHI : CORPORATE LAW 15

 Abridged Prospectus (Section 33)

Meaning of Abridged Prospectus

 The term ‘Abridged Prospectus’ has been defined by Section 2 (1)

“Accordingto it, ‘Abridged Prospectus’ means a memorandum containing such salient
features of a prospectus as may be specified by the Securities and Exchange Board by
making regulations in this behalf”.

 In fact, ‘Abridged Prospectus’ is a summarized form of actual prospectus.

CA DEEPIKA RATHI : CORPORATE LAW 16

Document Containing Offer of securities for Sale (OFS) to be Deemed Prospectus (section 25)

1. Documents which are deemed to a Prospectus :

The document inviting public to purchase securities of the company shall be Deemed Prospectus and all
provisions applicable to normal prospectus would apply.

2. Securities offered for the sale to the public : Treated as Deemed Offer of Securities for Sale to the public when
- Offer to sell securities to public is made within 6 months from original allotment or
- At the time of making offer, the whole consideration to be received by the company has not been received on
securities.

hence all the requirements applicable of issue of prospectus and this section must be followed.

CA DEEPIKA RATHI : CORPORATE LAW 17

4. Signing of Document in case of a company or a Firm: It shall be sufficient if the document signed by in
Company : Two directors of the company
Firm: Not less than one-half of the partners in the firm.

CA DEEPIKA RATHI : CORPORATE LAW 18

 Offer of Sale of Shares by Certain Members (section 28)

1. Offering of shares to public by certain members permitted:

Members may offer whole or part of their shareholding for sale to public provided Board of Directors approves.

2. Document offering sale to public is deemed to be a prospectus : Document offered to public inviting subscription
shall be Deemed Prospectus. All provisions applicable to normal prospectus shall apply.

3. Collective Authorization and reimbursement of expenses to company :

Individual or Body corporates whose shares are being proposed to be offered to public shall collectively
• Authorize the company to take all in respect of offer for sale action in their behalf and
• Reimburse the company all expenses incurred by its on this matter.

CA DEEPIKA RATHI : CORPORATE LAW 19

 Rule 8 of PAS Rules 2014: Offer of Sale by Members

4. Exception to certain Matters : The provisions of Part I of Chapter III namely “Prospectus and Allotment of
Securities” and rules made there under shall be applicable to an offer of sale referred to in section 28 expect
for the following namely:

a) The provisions relating to minimum subscription.

b) The provisions for minimum application value.
c) The provisions requiring any statement to be made by the Board of directors in resect of the utilization of money
and
d) Any other provision or information which cannot be complied or gathered by the offeror, with detailed
justifications for not being able to comply with such provisions.

5. Disclosure : The prospectus issued under section 28 shall disclose the name of the person or persons or entity
bearing the cost of making the offer of sale along with reasons.

CA DEEPIKA RATHI : CORPORATE LAW 20

 Allotment of Securities by Company
of section 39 (Section 39)

Allotment of Securities if
Refund of amount received if Where company makes an
allotment of securities
• Minimum Amount subscribed
• Minimum Amount not
subscribed • Company shall file a return of
• Application money have been
and allotment within 30 days with
paid and received by the
• Application money not registrar
company
received by the company
within 30 days from the issue
• Application money so received
of prospectus ,or such other
shall not be less than 5% of
period as specified by SEBI Default
issued value of security or
such other percentage or
• Amount shall be returned • Company & Officer in default
amount as specified by the
within 15 days from the shall be liable Rs. 1000/- per
SEBI
closure of issue day maximum up to Rs. 1 lakh.

CA DEEPIKA RATHI : CORPORATE LAW 21

 Summary of PAS Rule 11

If the minimum amount has not been subscribed and some payable is not received within the period specified

• The application money shall be repaid within 15 days from the closure of the issue

and

• If such money is not repaid within such period the directors of the company shall be jointly and severally be
liable to repay amount with interest of 15% P.A.

• The application money to be refunded shall be credited only to the bank account from which the subscription
was remitted.

CA DEEPIKA RATHI : CORPORATE LAW 22

 Summary of PAS Rule 12

Within 30 days of allotment File with Registrar a

Allotment of securities return of allotment in
FORM PAS-3

Attachments of PAS 3

• List of allottees stating their Name, Address, Occupation,

• Securities allotted
• A Certificate by the signatory of PAS 3
• A copy of the contract, duly stamped in case of securities (not being bonus shares) allotted as
fully or partly paid up for consideration other than cash.
• Where a contract is not reduced in writing , the company shall furnish complete particulars of the
contract stamped with the same stamp duty as would have been payable if the contract had
been reduced to writing.
• A report of registered valuer.
• In case of issue of bonus shares resolution passed in general meeting.

CA DEEPIKA RATHI : CORPORATE LAW 23

 Liability for Mis- Statement in Prospectus (Section 34 &35)
Criminal Liability (Section 34)
Involves Mens Rea (Guilty Mind) and loss
caused to the other party due to a untrue or
misleading statement or any inclusion or
omission of any matter.
Every person responsible for the issue of
prospectus shall be liable U/S 447
Exception / Defense:
(1) if proves such statement or omission is
immaterial
(2) Reasonable grounds to believe that the
statement was true/omission was necessary
Civil Liability (Section 35)
A person has subscribed for securities of a company acting on any statement
included or the inclusion or omission of any matter, in the prospectus which is
misleading and has sustained any loss or damage as a consequence thereof
Liability of company along with the following persons
- Director/Named director in prospectus
- Promoter
- Other person who authorized issue of prospectus
- Expert referred U/s 26
Liability: Pay all damages to every person + Penalty u/s 36
Exception/ Defense
1. Consent withdrawn before issue of prospectus & it was issued without his
authority
2. It was published without his knowledge and he forthwith gave a reasonable
public notice in this regard.
3. Person has relied on a expert’s statement included in prospectus U/s 26.
Unlimited liability when prospectus issued with intent to defraud, every person
shall be personally liable for all losses or damages incurred by any person.
CA DEEPIKA RATHI : CORPORATE LAW 24
 Punishment for Fraudulently Inducing Persons to Invest Money (Section 36)

Any person who either knowingly or recklessly makes any statement, promise of forecast which is false, deceptive or
misleading or deliberately conceals any material facts to induce another person to enter into or to offer or enter into-

a) Any agreement for or with view to, acquiring, disposing of, subscribing for,or underwriting securities or

b) any agreement, the purpose or the pretended purpose of which is to securea profit to any of the parties from
the yield of securities or by reference to fluctuations in the value of securities or

c) any agreement for, or with a view to obtaining credit facilities from any bankor financial institution

Shall be liable for action U/s 447

CA DEEPIKA RATHI : CORPORATE LAW 25

 Private Placement (Section 42)

1. Meaning of Private Placement

A private placement is a way of raising capital that involves the issue of securities to a relatively small number of
selected investors. It is different from a public issue.

2. Offer to be made only to a selected group of persons

• A private placement shall be made to a selected group of persons who have been identified by the Board ,whose
number shall not exceed fifty or such higher number as may be prescribed [* Prescribed Number is 200 in the
aggregate in a financial year (Rule 14 (2) of the PAS rules]

• Above limit excludes

- Employees offered securities under ESOP (Employee stock option plan)
- Securities issued to Qualified Institutional Buyers

• Above limit does not apply to

- Non Banking Financial Companies (NBFCs) registered with RBI
- Housing Finance Companies registered(HFCs) with National Housing Bank
if they are complying with regulations made by their respective authorities.

CA DEEPIKA RATHI : CORPORATE LAW 26

3. Manner of Issuing Private Placement Offer and Application

• ‘’Private placement offer cum application letter ‘’must be issued. Such offer letter does not contain right
renunciation ( No other person is entitled to buy securities using such offer letter other than the person named in
it)

• Requirement of Special resolution [Rule 14 (1) of the PAS Rules] Company shall not make an offer or invitation to
subscriber to securities through private placement unless the proposal has been previously approved by the
shareholders of the company by a special resolution for each offers or invitations.

CA DEEPIKA RATHI : CORPORATE LAW 27

• Applicable Application Form : A private placement cum application letter shall be in the form of an application
Form PAS-4 serially numbered and addressed specifically to the person to whom the offer is made shall be sent to
him, either in writing or in electronic mode within 30days of recording the name of such person pursuant to
section 42(3).

• Maintaining of Complete Record : The company shall maintain a complete record of private placement offers in
Form PAS-5

CA DEEPIKA RATHI : CORPORATE LAW 28

• Timing of issue of private placement offer cum application letter: A company shall issue private placement offer
cum application letter only after the relevant Special Resolution or Board Resolution has been filed in the
REGISTRY.

4. Manner of Subscribing to the Private Placement Issue

• Every identified person willing to subscribe to the private placement issue shall apply in the Private Placement
and application issued to such person along with subscription money paid either
-By cheque or
-By Demand Draft
-By other banking Channel
Not in Cash
Note : Company shall not utilize monies raised through private placement unless allotment is made and the
return on same is filed to Registrar in accordance section 42(8)

• Utilization of Bank Account :

Company shall keep record of the bank account from where such payment for subscription has been
received.

CA DEEPIKA RATHI : CORPORATE LAW 29

5. Limit on Fresh offer

• No fresh offer/ invitation can be made unless previous offer has been complied / withdrawn/ abandoned by the
company.

6. Time Limit for Allotment of Securities

• Company shall allot its securities within sixty (60) days form the date of receipt of application money for such
securities.
• If company is not able to allot the securities within Sixty(60) days, It shall repay the application money to the
subscribers within fifteen(15) days from the expiry of Sixty (60) Days.
• If company fails to repay the application money within 15 days from the expiry of 60 days its shall be liable to
- Repay Application Money with
- Interest at the rate of 12% per annum.
• Money received on application shall be kept in a separate bank account and shall not be utilized for any purpose
other than-
(a) For adjustment against allotment of securities or
(b) For repayment of monies where the company is unable to allot securities.

CA DEEPIKA RATHI : CORPORATE LAW 30

7. Prohibition on Public Advertisement

• Public advertisement or use of media marketing or distribution channels or agents to inform the public at large
about issue is not allowed.

8. Filing of Return of Allotment

• Company shall file return of allotment in Form PAS-3 within 15 days from the date of the allotment along with list
of allottees containing –
(i) The full name, address, Permanent Account Number and E-mail ID
(ii) The class of security held
(iii) The date of allotment of security
(iv) The number of securities held, nominal value and amount paid on such securities, and particulars of
consideration received if the securities were issued for consideration other than cash.

Within 15 days File with Registrar a

Allotment of
return of allotment in
securities
FORM PAS-3

CA DEEPIKA RATHI : CORPORATE LAW 31

9. Default in Filing the Return of Allotment

The company & Promoters/ Directors : Rs. 1000/- per day Maximum up to Rs.25 lakhs

10. Punishment for Contravening the Private Placement Provisions

• Company & Promoters/ Directors

Penalty lower of
-Amount involved in offer of invitation or
-Rs. 2 crore
• Company shall also refund all monies with interest to subscribers within a period of 30 days of the order imposing
the penalty

11. Deemed Public Offer

• Any offer made without complying section 42 shall be “deemed public offer” and relevant provisions of this Act
and SEBI Act 1992 shall apply.

CA DEEPIKA RATHI : CORPORATE LAW 32

S. No. Form Number Purpose

1 PAS 1 Advertisement giving details of notice of special

resolution for varying the term of Contract or
altering the objects
2 PAS 2 Information Memorandum
3 PAS 3 Return of Allotment
4 PAS 4 Private Placement Offer Letter
5 PAS 5 Record of Private Placement offers
6 PAS 6 Reconciliation of Share Capital

CA DEEPIKA RATHI : CORPORATE LAW 33