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Prospectus and Allotment of Securities

3.1 Modes of Raising Funds through Issue of Securities [Sec 23]

Modes

Public Company Private Company

Public Offer Private Placement

Private Placement Right (or Bonus)

Rights (or Bonus)

3.2 Private Placement [Sec 42 read with Rule 14 of Companies (Prospectus and Allotment of
Securities) Rules, 2018]
Frequency Theoretical 1 Expected
Importance High Applicative
in Exam Practical - Question Type
Analysis & This section has just recently started being tested and rules have been introduced. ICAI sample
Expectation MCQs also cover this topic significantly. Particular emphasis should be placed on the limit of 50
(now 200) and how it is to be calculated. Also, the implication of being deemed a public offer on
breach of this limit is an important aspect.

A private placement is a way of raising capital by issuing securities to a select group of persons who have been
identified by the Board, whose number shall not exceed 50 or such higher number as prescribed.

This limit has to be seen

As per PAS Rules, 200 persons - per FY
has been prescribed. - per security (equity,
preference & debentures)

Non applicabilty of limit to

Exclude from such counting
- QIBs
- ESOPs allottees
- NBFCs (RBI regd)
- Housing Finance Cos
(National Housing Bank regd)

If the aforementioned limit of persons is exceeded, then it is deemed public offer. Provisions of SEBI Act, 1992
and SCRA, 1956 shall apply.
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Procedure
Step 1
Resolution required to be passed and filed with ROC

General Rule
NCDs within 180(1)(c) limit
SR for each offer or invitation (also, Expl. Statement) i.e. PSC + FR + SP
Note - In case of NCDs and QIBs, SR can be passed once a Board Resolution
year for entire amount to be raised during the year.

Step 2

Private Placement cum Application (PAS 4) Identified person

Company (addressed
Within 30 days of recording name of such person specifically)
Co. to maintain records of name & address (PAS5)

Only such identified person can apply along with subscription money
Reqd. to be made from person’s bank account (cheque/ DD/ Banking Channel; not cash) only
If joint holder à then whose name is written first

Step 3
Allotment to be made within 60 days from receipt of application money

If not alloted, refund within 15 days from expiry of 60 days

If not refunded, interest @ 12% p.a from expiry of 60th day

Step 4
Company shall need to file Return of Allotment (PAS 3) within 15 days from allotment with the ROC providing
complete list of full names, address, number of securities etc.

Step 5
Company can utilize the money

Important Points
• No fresh offer or invitation can be made unless allotments have been completed against previous offer/
invitation or such has been withdrawn or abandoned by the company.
• No public advertisement etc. can be made.

3.3 Prospectus [Sec 2(70)]

Prospectus means any document described or issued as a prospectus and includes
• red herring prospectus (Sec 32)
• shelf prospectus referred (Sec 31)
• any notice, circular, advertisement or other document inviting offers from the public for the subscription
or purchase of any securities of a body corporate.

Note – Issue of prospectus is required in case of Public Offers.

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3.4 Legal Rules w.r.t. Prospectus [Sec 26]

Legal Rules w.r.t. Prospectus (issued on formation or subsequently)

Matters to be Stated Delivery of Prospectus to ROC Inclusion of

Dated and Experts
signed [Sec 26(1)] statement
Such date on or before Signed by
deemed to Such info and reports date of every Cover Page not engaged/
be date of on Financial info publication director / (i.e. face) interested in
publication specified by SEBI in proposed state F/P/M of co
consulatation with Prospectus director/ prospectus
CG (until then, needs to be authorised along with
Regulation made by issued within attorney reqd does Written
SEBI to apply) 90 days of submitted to consent given
filing of copy ROC & not
with ROC withdrawn
Declaration stating before filing
compliance with Cos of prospectus
Act, SCRA & SEBI with ROC (+)
(Act, Rules & Statement to
Regulations) such effect

Not required
- Right issue
- Same class of
shares and debn
already issued and
listed on recog stock
exchange

Note - Contents to be included in an Advertisement of Prospectus [Sec 30]

o objects
o liability of members, amount of share capital & capital structure
o names and number of shares subscribed by signatories to the MOA

3.5 Variation in terms of contract or objects in prospectus [Sec 27]

SR passed in GM [Postal Ballot required]

Important Points
1. Dissenting Shareholders shall need to be given an exit option by Promoter/ controlling shareholder. Price and
terms to be decided by SEBI Regulations.
2. Notice for GM (PAS 1) including justification for variation shall need to be published in 2 newspaper (English
and vernacular language circulating in city in which registered office of company is situated) and on website
of company, if any.
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3.6 Shelf Prospectus [Sec 31]

Frequency Theoretical 6 Expected
Importance Moderate Theory
in Exam Practical - Question Type
Analysis & Generally, a question from Shelf Prospectus, Red Herring Prospectus or Deemed Prospectus is
Expectation seen in exams.

Prospectus through which securities are issued over a certain period without issue of further prospectus

Procedure

First Time Subsequent Time

Shelf prospectus with max
validity of 1 year from
opening of first offer of
securities under that
prospectus
No further prospectus reqd, but Information Memorandum reqd
(1st Prospectus + Info Mem is deemed as prospectus)
Info Mem (PAS 2) to be filed with ROC 1 month prior to
subsequent offer - containing all material facts w.r.t.

new charges created

changes in financial info

other prescribed info about changes

Note – In case of any change after application but before allotment, intimation of such change shall need to be
made and option to get refund shall be available. Refund needs to be made within 15 days.

3.7 Red Herring Prospectus [Sec 32]

Frequency Theoretical 3 Expected
Importance Moderate Theory
in Exam Practical - Question Type
Analysis & Generally, a question from Shelf Prospectus, Red Herring Prospectus or Deemed Prospectus is
Expectation seen in exams.

Prospectus not including complete particulars about quantum or price of securities issued therein

File prospectus with closing price

At least 3 days prior to ROC & SEBI

RHP filed Opening Closing

with ROC of offer of offer

Highlight any
variations
Note – RHP carries same obligations as Prospectus. It is also called as the Book Building Process.

3.8 Abridged Prospectus [Sec 2(1)]

A memorandum containing such salient features of a prospectus as may be specified by SEBI i.e. it is a
summarised form of actual prospectus.
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3.9 Offer for Sale [Sec 28]

Such member(s) shall authorize company to take all actions in

such respect and they shall reimburse expenses incurred in this
behalf.

Document through which offer for sale is made is deemed to be

Certain member(s) in Prospectus. (All laws and rules shall apply.)
consultation with BOD
offer whole or part of their
holding to the Public Non applicable provisions
- Minimum subscription
- Minimum application value
- Statement on utilization of money
- Any other info that cannot be compiled by offeror with detailed
justification

3.10 Deemed Prospectus [Sec 25]

Frequency Theoretical 2 Expected
Importance Moderate Theory
in Exam Practical - Question Type
Analysis & Generally, a question from Shelf Prospectus, Red Herring Prospectus or Deemed Prospectus is
Expectation seen in exams.

Where a company allots or agrees to allot any securities

+
Securities offered for sale to public

Any document by which offer for sale to public is made

Deemed Prospectus

Matters to be stated
Offer for sale is made is deemed in following cases Signing, in case
(unless proved to the contrary) i. Sec 26 person making offer
i. Offer for sale to public is made by such entity ii. Net consideration to public is
within 6 months after allotment / agreement to allot received /to be received i. company - 2
ii. At the date when the offer was made, the whole iii. Time and place for directors
consideration to be received by the company in inspection of contract ii. firm - at least 1/2
respect of the securities had not been received by it under which allotted/ of the partners
proposed to be allotted
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3.11 Underwriting Commission [Sec 40]

Frequency Theoretical 3 Expected
Importance High Applicative
in Exam Practical 4 Question Type
Analysis & This section has last been tested in May 2018, hence has high probability of being tested again.
Expectation The percentage limits are significantly important for MCQs as well.

Max Limit

Auth by
AOA Shares Debentures
Can be paid out of
proceeds of issue/
profits/ both
Not allowed if securities 5% of issue price 2.5% of issue price
not offered to public or or
Deliver copy of contract to ROC Rate as per AOA Rate as per AOA
along with delivery of prospectus
for registration w.e.L w.e.L

3.12 Dematerialisation of Securities [Sec 29]

Company making public offer

Requirement
Mandatory

Every unlisted public company except

- Nidhis
- Government co
- WOS

Situations

Before Transfer of Subscription of securities

- issue of any securities securities on/ after (whether private placement/
2nd october 2018 rights/ bonus) on/ after 2nd
- buyback of securities October 2018
- issue of bonus shares
- rights offer Tranferor to get
demat before transfer Subscriber shall ensure all
existing securities are held in
Company shall ensure that entire demat
holding of promoters, directors & Company can issue only new in
KMP has been demat demat

Note – Company shall need to file PAS 6 certified by CA/ CS in practice within 60 days of each half year. In
case of any difference between issued and demat, company shall need to bring it to the notice of depository. In
case of any grievances, file before IEPF authority, who will take action after consulting SEBI.
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Summary of Co’s Responsibilities

For demat form Procedural

Timely payment of fees (adm/

New Existing
Issue only in Demat Facilitate transfer to demat form by
making application under Dep Act and
obtain ISIN (International Security
Identification Number) for each type of
security holders of the facility
annual to depository &
Registrar to issue and share
transfer agent (+) Security
deposit for at least 2 years fees
Comply with SEBI &
Depository
(in case of non compliance, no
issue or buyback)

3.13 Misstatement in Prospectus [Sec 34 & 35]

Frequency Theoretical 4 Expected Theory/
Importance High
in Exam Practical 8 Question Type Applicative
Analysis & What is the penalty, on whom will it be levied and defenses available are 3 important points to
Expectation be remembered. Also, the aspect that benefit under Sec 35 shall not be available to investor who
purchases the securities from the stock market is heavily tested.

Liability for Misstatement

Criminal Liability [Sec 34] Civil Liability [Sec 35]

Every Defense Punishable Every Defenses Compensation

person who u/s 447 person who to investor
authorised authorised
issue of issue of Withdrew consent to be
prospectus Immaterial prospectus director before issue of Only if loss
prospectus suffered
(+)
Reasonable Company
ground to (+) Prospectus was issued Not
believe and without his knowledge/ available to
uptil issue of Director, consent and on becoming one buying
prospectus Proposed aware of such unauthorised from
believed Director, issue, he forthwith gave a secondary /
such to be Promoter, public notice stating such stock
true Expert market
(Peek vs
Defence to person making Gurney)
statement on basis of
report of expert provided
- statement made by
person was fair
representation of expert's
report -
person making the
statement had reasonable
ground to believe that
expert was competent
- expert had given consent
and not withdrawn it
before filing copy of
prospectus with ROC
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Punishment for Fraud [Sec 447]

Fraud involving < Rs. 10 lakh rupees or 1% of

turnover, whichever is lower (Public Interest Otherwise
not involved)
Fine - Amount of fraud to 3 times
Fine upto Rs. 50 lakhs amount of fraud

OR AND

Imprisonment upto 5 years Imprisonment - 6 months to 10 years

(Minimum 3 years if public interest
OR involved)

Both

Other Points
• Where it is proved that a prospectus has been issued with intent to defraud the applicants, every person
referred to Sec 35(1) shall be personally responsible, without any limitation of liability, for all or any of the
losses or damages that may have been incurred by any person who subscribed to the securities on the basis of
such prospectus. [Sec 35(3)]
• Sec 36 prescribes punishment u/s 447 in case of fraudulently inducing persons to enter into various agreements.
• For taking actions under Sec 34, 35 or 36, a suit may be filed individually or group of persons (Class action
suit). [Sec 37]

3.14 Miscellaneous Points

Frequency Theoretical 2 Expected
Importance Low Small Theory
in Exam Practical - Question Type
• Every company making public offer shall, before making such offer, make an application to one or more
recognised stock exchange(s) to obtain permission for the securities to be dealt with in such stock exchange(s).
The prospectus shall also state the name of such stock exchange. [Sec 40]
• All monies received on application from the public shall be kept in a separate bank account in a scheduled
bank and shall be only utilized for adjustment against allotment or refund of such money in case of inability
to allot. [Sec 40]
• It is on allotment that the shares come into existence.
• Minimum subscription specified as per Cos Act à Amount stated as such in prospectus
In case of non-receipt of minimum subscription within 30 days from issue of prospectus, refund within 15 days
from closure of issue. Otherwise, directors jointly and severly liable to pay 15% p.a. interest.
• Minimum amount payable on application à 5% of the nominal amount of security or as specified by SEBI

3.15 Definition of Securities [Sec 2 (81)]

Securities means the securities as defined in clause (h) of section 2 of Securities Contracts (Regulation) Act, 1956.

As per section 2 (h) of SCRA, Securities include –

(i) Shares, scrips, stocks, bonds, debentures, debenture stock etc.
(ia) derivative
(ib) units issued by any collective investment schemes
(ic) security receipt as per SARFAESIA, 2002 (Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002)
(id) units under any mutual fund scheme except Unit Linked Insurance Policy (ULIPS)
(ie) certificate issued by a special purpose distinct entity debt or receivable
(ii) Government securities
(iia) other instruments declared by CG as securities
(iii) rights or interests in securities.