Company Law

Kinds of Prospectus

THE AMITY UNIVERSITY, DUBAI

BATCH:2020- 2025

COURSE CODE:
LAW322
SUBMITTED BY: ISRAA ZAIDI
PROGRAMME NAME: B.A L.L. B (H)
AUD14779

I-
 I- Introduction of prospectus
A prospectus is a legal document that provides essential information about a business and the
securities it is offering to the public for subscription or purchase. It is a vital source of
knowledge for prospective investors to use while making investment selections.
It is a document that contains crucial information about the company's operations. It contains
information that is sent to potential investors through brokers and underwriters to help them
make an investment decision, including management details, corporate performance
disclosure, any litigation data, and other information. The prospective buyer might decide on
the financial offer after doing their research.
According to Section 2(70) of CA 2013, prospectus is "Any document released for advertising
or other document requesting bids from the general public for the subscription or acquisition
of any stocks of a body corporate". The provisions of Section 30 of CA 2013 pertain to the
prospectus advertising.
Due to their smaller share counts and limited share transferability due to their smaller size,
private companies are unable to issue prospectuses, which results in low stock liquidity.
An individual who is, has been, or has expressed interest in starting a public business may
release a prospectus on their behalf or on behalf of a public company in relation to the formation
of the company. The person is referred to as the company's "promoter."
The importance of a prospectus is that:
The corporation intends to raise funds and provides a prospectus. The prospectus gives
investors all the necessary information about the securities that are being offered to the public
for sale, enabling them to make a well-informed choice.
The prospectus is required to be filed with the regulator each time the company issues one.
The prospectus contains information about the company's operations and financial statements.
1. To make the public aware of the problem
2. To officially document the company's position on the parameters of the issue and
allocation procedure
3. To demonstrate responsibility on the part of the company's directors and promoters
Section 26 of the Companies Act, 2013 outlines the components of a prospectus as well as the
civil and criminal penalties for any misstatements made in the prospectus.
Additionally, the SEBI has added new disclosure requirements. Name, address, registered
office, business activities, Board of Directors, capital, subscription opening and closing dates,
brokers, and the prospectus should contain additional information about underwriters,
minimum subscription requirements, and other things.
The transaction is carried out in full view of the general public, and the general investing public
is contacted. A non-discriminatory distribution of the total sum is made to applicants. However,
this process is very expensive. Among other things, administrative costs include stamp duty,
listing fees, registration fees, bank expenditures, prospectus printing charges,
advertising/publicity expenses, accounting expenses, legal expenses, bank expenses, document
filling expenses, mortgage deed registration expenses, and postage.

II – Kinds of prospectus

1. Red Herring prospectus

When a company aims to raise funds from the public, through an Initial public offering (IPO)
it must mandatorily file and submit a Draft Red Herring Prospectus to SEBI.
This draft document is also known as a 'preliminary registration document' or ‘offer
document’. Once it gets approval from SEBI, the ROC, and the stock exchanges –, it would
into a Red Herring Prospectus, also known as the 'final prospectus.
A Red Herring Prospectus offers all the important details about the business that plans to sell
shares to the public to raise money for it. It contains important details about the company's
backers, activities, development plans, and finances. It also outlines the company's fundraising
goals and potential risks for investors.
Process of the red herring process are as follows:
• An issuing company needs to make an announcement of the upcoming IPO in
newspapers once it has submitted its RHP to SEBI. It can be in any newspaper- Hindi,
English or Regional.
• You can find the Red Herring Prospectus on the SEBI website. You can find these on
the filings page under ‘Public Issues’.
• You can access them via stock exchange websites.
• Potential investors can also find them on the chosen merchant banker's website.

2. Shelf
Without the requirement for a new prospectus to be issued, a shelf prospectus offers securities
for subscription in one or more issues over a particular period. To avoid the expenditure of
submitting a fresh prospectus each time, this is often done in projects where the issue size is
significant and big sums of money must be raised.
Any company may submit a shelf prospectus to the Registrar at the time of the initial offering
of securities. The prospectus's validity period, which starts on the opening date of the initial
offering of securities covered by the prospectus and includes subsequent offers of securities
made during the period of validity of the prospectus in accordance with SEBI guidelines, shall
not exceed one year. The offering of securities does not necessitate the issuing of a new
prospectus.

3. Abridged prospectus
The prospectus is a lengthy, extensive document. An abbreviated prospectus contains the key
components of the prospectus memorandum. a summary of a prospectus submitted to the
registrar. It is a condensed prospectus that contains all the information found in a complete
prospectus. An abbreviated prospectus condenses all the information in the prospectus so that
a buyer can quickly learn all the important information. The protection of investors' interests is
its primary goal. Since it is less expensive than a prospectus, it lowers the cost of a public
capital offering. By enabling them to swiftly extract the most important information from the
whole prospectus, it saves buyers a lot of time.

4. Deemed Prospectus
A deemed prospectus is a document that is assumed to represent a company’s prospectus. A
deemed prospectus is a document that contains an offer for sale made by the intermediary or
issuing house on behalf of a company that allots or agrees to allot its shares or securities through
an intermediary, such as a merchant bank, another business, or an issuing house. A company
usually opts for a deemed prospectus to avoid complying with regulations issued by the SEBI.
If a presumed prospectus satisfies any of the following requirements, it is regarded as a
document of offer for sale:
- Within six months of issuing the shares, the intermediary made an offer to sell them to the
public;
-the corporation that issued the shares to the intermediary did not receive payment in exchange
for the shares at the time the offer was made to sell them.

III- Liability for misstatement of prospectus

The SEBI Complaints Redressal System (SCORES), introduced by SEBI, requires all listed
businesses to address shareholder complaints.
The SEBI’s centralized online grievance redress system allows investors to file complaints,
follow up on them, and see the progress of their resolution from any location. The SEBI Act,
1992, imposes penalties on the corporation for non-compliance. The liabilities for misstatement
in a prospectus can be classified into civil liability under Section 35 and criminal liability under
Section 34 of the CA, 2013.According to Sections 35 and 34 of the 2013 CA, there are two
types of obligations for misstatements in prospectuses: civil and criminal.

Civil Liability
A subscriber to the securities must demonstrate that both the claims made in the prospectus
were false and that the prospectus was actually issued by the corporation. A subscriber to a
company's securities has the following options for reimbursement for misstatements in the
prospectus:
- The company,
- The company's director,
- A person who has given their approval to be designated as a director of a company or
who has agreed to do so, either right away or after a certain amount of time,
- Each shareholder of the company's securities who has suffered loss or harm may be
entitled to compensation from the promoter, the person who authorized the prospectus's
release, or an expert under Section 26.

Criminal Liability
Any statement in a prospectus that is incorrect, false, deceptive, or likely to mislead in any
way, context, or omission in which it is offered is a violation of Section 447, and the person
who approves its distribution is responsible.

It exempts anyone who can demonstrate that the statement or omission was meaningless, that
they had good cause to believe it was accurate, or that it was significant at the time the
prospectus was released.
 REFERENCES

https://blog.ipleaders.in/types-of-prospectus/
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https://www.5paisa.com/stock-market-guide/ipo/what-is-an-abridged-
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change%20Board.

https://upstox.com/learning-center/ipo/what-is-rhp-red-herring-prospectus-meaning-importance/

https://www.indiainfoline.com/knowledge-center/ipo/what-is-shelf-
prospectus#:~:text=Among%20the%20various%20types%20of,memorandum%20in%20Form%20PAS
%2D2.

https://legalserviceindia.com/legal/article-9298-prospectus.html

https://lawbhoomi.com/types-of-prospectus/

https://tavaga.com/tavagapedia/prospectus/