tax ki duniya

chapter 3
prospectus and allotment of securities

(Chapter III of the Companies Act, 2013 consisting of Sections 23 to 42, the
Companies (Prospectus and Allotment of Securities) Rules, 2014.

CHAPTER III OF THE COMPANIES ACT, 2013

PROSPECTUS AND ALLOTMENT OF SECURITIES
PART I : PUBLIC OFFER
Section Marginal Heading

23 Public offer and private placement

24 Power of Securities and Exchange Board to regulate issue and transfer

of securities, etc.

25 Document containing offer of securities for sale to be deemed prospectus

26 Matters to be stated in prospectus

27 Variation in terms of contract or objects in prospectus

28 Offer of Sale of shares by certain members of company

29 Public offer of securities to be in dematerialised form

30 Advertisement of prospectus

31 Shelf prospectus

32 Red herring prospectus

33 Issue of application forms for securities

34 Criminal liability for mis-statements in prospectus

3. 1
 tax ki duniya

35 Civil liability for mis-statements in prospectus

36 Punishment for fraudulently inducing persons to invest money

37 Action by affected persons

38 Punishment for personation for acquisition, etc., of securities

39 Allotment of Securities by company

40 Securities to be dealt with in stock exchanges

41 Global depository receipt

42 Offer or invitation for subscription of securities on private placement

3.1 DEFINITION OF PROSPECTUS Sec. 2(70)1

Prospectus means - any document described or issued as a

prospectus
Prospectus includes - shelf prospectus referred to in Sec. 31; or
a red herring prospectus referred to in Sec. 32; or
any notice, circular, advertisement or other
document inviting offers from the public for the
subscription or purchase of any securities of a body
corporate.

3.2 PUBLIC OFFER AND PRIVATE PLACEMENT (Sec.

23)

Issue of securities by A public company may issue securities –

a public company
[Sec. 23(1)] a) to public, by issuing a prospectus
(hereinafter referred to as ‘public offer’) by
complying with the provisions of this Part
(viz. Part I of Chapter III comprising of Sec.
23 to Sec. 41); or

3. 2
 tax ki duniya

b) by way of private placement by complying

with the provisions of Part II (viz. Part II of
Chapter III comprising of Sec. 42); or
c) By way of a right issue or a bonus issue in
accordance with the provisions of this Act
and in case of a listed company or a company
which intends to get its securities listed, also
with the provisions of the SEBI Act, 1992 and
the Rules and Regulations made thereunder.
Issue of securities by A private company may issue securities –
a private company
[Sec. 23(2)] a) by way of private placement by complying with
the provisions of Part II (viz. Part II of Chapter
III comprising of Sec. 42); or
b) By way of a right issue or a bonus issue in
accordance with the provisions of this Act.
Definition of ‘public The term ‘public offer’ includes –
offer’ [Explanation to
Sec. 23(2)1 a) initial public offer of securities to the public by a
company;
b) further public offer of securities to the public by
a company;
c) An offer for sale of securities to the public by an
existing shareholder, through issue of a
prospectus.

3.3 SECURITIES TO BE DEALT WITH IN STOCK

EXCHANGE (Sec. 40)

1. Application for Every company making public offer shall, before

permission for listing making such offer, make an application to one or
more recognised stock exchange or exchanges and
obtain permission for the securities to be dealt
with in such stock exchange or exchanges.
2. Disclosures in The prospectus shall state the name or names of
prospectus the stock exchange in which the securities shall be
dealt with.

3. 3
 tax ki duniya

3. Application moneys to a) All monies received on application from the

be kept in separate bank public for subscription to the securities shall be
account kept in a separate bank account in a scheduled
bank.
b) All such monies shall be utilised only when –

i. the securities have been permitted to be

dealt with in the stock exchange or stock
exchanges specified in the prospectus; and •
ii. the securities have been allotted.

c) If for any reason the company is unable to allot

the securities, the company shall repay all such
monies to the applicants within such time as
may be specified by SEBI.
4. No waiver Any condition purporting to require or bind any
applicant for securities to waive compliance with
any of the requirements of this section shall be
void.
5. Punishment for Fine on the Minimum fine of Rs. 5 lakh
contravention company Maximum fine of Rs. 50 lakh
Fine on every Minimum fine of Rs. 50,000
officer of the Maximum fine of Rs. 3 lakh
company who is
in default

3.4 UNDERWRITING COMIVIISSION (Sec. 40)

Nov. 2005 In what way does the Companies Act, 2013 regulate the
payment of ‘underwriting commission’? Explaining the
provisions of the Act, state the conditions to be complied
with before payment of such commission can be made to
underwriters of the company.
Nov. 2014 Define the term underwriting and state the circumstances in
which underwriting commission can be paid as per provisions
of (Modified) Section 40 of the Companies Act, 2013.
May 2018 TDL Ltd. a public company is planning to bring a public issue of
equity shares in June, 2018. The company has appointed
underwriters for getting its shares subscribed. As a Chartered

3. 4
 tax ki duniya

Accountant of the company apprise the Board of TDL Ltd.

about the provisions of payment of underwriter's commission
as per Companies Act, 2013.

(A) PROVISIONS CONTAINED IN SEC. 40 OF THE

COMPANIES ACT, 2013.

1. Meaning of Underwriter means an intermediary who

underwriter undertakes to subscribe to the securities offered by
the company in case these are not subscribed by the
public, in case of an underwritten issue.
2. Conditions for A company may pay commission to any person in
payment connection with the subscription to its securities
(whether absolute or conditional) subject to such
conditions as may be prescribed.
3. Punishment for Fine on the company Minimum fine of Rs. 5 lakh
contravention Maximum fine of Rs. 50 lakh
Fine on every officer Minimum fine of Rs. 50,000
of the company who Maximum fine of Rs. 3 lakh
is in default

(B) PROVISION CONTAINED IN RULE 13 OF THE

COMPANIES (PROSPECTUS AND ALLOTMENT OF
SECURITIES) RULES, 2014.

Conditions prescribed under the Rules for payment of

underwriting commission

a) The payment of underwriting commission shall be authorised by the

articles of the company.
b) The underwriting commission may be paid out of proceeds of the issue or
out of the profits of the company or both.
c) The rate of underwriting commission shall be as follows:

Nature of securities issued Rate of underwriting commission

Shares (whether equity or Lower of –
preference)
i. 5% of issue price of shares; or

3. 5
 tax ki duniya

ii. (ii) rate authorised by the

articles
Debentures Lower of-
(i) 2.5% of issue price of debentures;
or
(ii) rate authorised by the articles

d) The prospectus of the company shall disclose the following particulars:

i. The names of the underwriters.

ii. The rate and amount of the commission payable to the
underwriters.
iii. The number of securities underwritten by the underwriters,
whether absolutely or conditionally.

e) No underwriting commission shall be paid on securities which are not offered

to the public for subscription.
f) A copy of the underwriting agreement shall be delivered to the Registrar at the
time of filing of a copy of the prospectus with the Registrar.

Question 1

May 2003 whether underwriting commission of 5% can be paid if the articles

authorise maximum 3%? (Sec. 40)

P 3.4A. The Board of directors of a company decides to pay 5% of issue price as

underwriting commission to the underwriters. On the other hand the articles of
association of the company permit only 3% commission. The Board of directors
further decides to pay the commission out of the proceeds of the share capital.
Are the decisions taken by the Board of directors valid under the Companies Act,
2013?

Answer:

The company cannot pay since the rate of underwriting commission

underwriting cannot be more than 5% of issue price of
commission of 5% shares or such lower rate as prescribed
under the articles (3% in the present case);

3. 6
 tax ki duniya

Since the maximum permissible

The company may pay
underwriting
commission out of the
proceeds of the share
capital
underwriting commission in this case is
3%.
Since Rule 13 of the Companies (Prospectus
and Allotment of Securities) Rules. 2014
expressly permits payment of underwriting
commission out of the proceeds of the issue,
i.e. out of the proceeds of share capital.

Question 2

Nov.2008 whether payment of underwriting commission @5% is permissible if

the articles authorise (Sec. 40) payment of underwriting commission @4%?

P 3 4B. The Articles of Association of MSW Ltd. contained a provision that upto
4% of issue price of the shares may be paid as underwriting commission to the
underwriters. The Board of directors decided to pay 5% underwriting
commission. Can the Board of directors do so? State the provisions of law in this
regard as stated under the Indian Companies Act, 2013.

Answer:

Company cannot pay underwriting commission of 5%

 since the rate of underwriting commission cannot be more than 5% of issue

price of shares or such lower rate as prescribed under the articles (4% in
the present case);
 Since the maximum permissible underwriting commission in this case is
4%.

Question 3

Nov.2010 whether payment of underwriting commission @2.5% is permissible if

the articles authorise (Sec. 40) 1 payment of underwriting commission @2%?

P3.4C. Unique Builders Limited decides to pay 2.5 percent of the value of
debentures as underwriting commission to the underwriters but the Articles of
the company authorize only 2.0 percent underwriting commission on
debentures.

3. 7
 tax ki duniya

The company further decides to pay underwriting commission in the form of

flats. Examine the validity of the above arrangements under the provisions of the
Companies Act, 2013.

Answer:

The company cannot  since the rate of underwriting commission

pay underwriting cannot be more than 2.5% of issue price of
commission of 2.5% debentures or such lower rate as prescribed
under the articles (2% in the present case):
 Since the maximum permissible underwriting
commission in this case is 2%.
Payment of  since underwriting commission may be paid in
underwriting cash or in kind or in lump sum or by way of a
commission in the percentage
form of flats is [Booth v New Africander Gold Mining Co.J;
permissible
 Since there is no prohibition on payment of
underwriting commission in kind.

Question 4

Nov.2015 whether payment of underwriting commission @5% is permissible if

the articles authorise (Sec. 40) payment of underwriting commission @4%?

P 3.4D. Examine the validity of the following referring to the provisions of the
Companies Act, 2013 and/or Rules:
"The Articles of Association of X Ltd. contained a provision that upto 4% of issue
price of the shares may be paid as underwriting commission to the underwriters.
The Board of Directors of X Ltd. decided to pay 5% underwriting commission.”

Answer:

The company cannot pay underwriting commission of 5%

- Since the rate of underwriting commission cannot be more than 5% of

issue price of shares or such lower rate as prescribed under the articles
(4% in the present case):
- Since the maximum permissible underwriting commission in this case is
4%.

3. 8
 tax ki duniya

3.5 ALLOTMENT OF SECURITIES BY A COMPANY (Sec.

39)

May 2005 State briefly the provisions relating to minimum

subscription and consequence of non-receipt of minimum
subscription as per the Companies Act, 2013.
Nov. 2013 What is meant by ‘Minimum subscription'? State the
provisions of the Companies Act, 20T3 regarding the refund
and deposit of minimum subscription.

(A) PROVISIONS CONTAINED IN THE ACT.

1. Condition w.r.t. Where a company makes an offer to the public for

minimum subscription subscription of its securities, no allotment of any
securities shall be made unless the following 2
conditions are satisfied:

i. The amount stated in the prospectus as the

minimum subscription is subscribed.
ii. The sum payable on application in respect of
minimum subscription is received by the
company by cheque or other instrument.
2. Time limits w.r.t. a) The amount stated in the prospectus as the
minimum subscription minimum subscription must be subscribed and
the sum payable on application in respect of
minimum subscription must be received by the
company within –

i. 30 days of issue of prospectus; or

ii. Such other period as may be specified by
SEBI.

b) Otherwise, all moneys received by the company

shall be returned within such time and manner
as may be prescribed.
3. Amount of application The application money on every security shall not
money be less than –

a) 5% of the nominal amount of the security; or

3. 9
 tax ki duniya

b) Such other percentage or amount, as may be

specified by SEBI by making regulations in
this behalf.
4. Return of allotment i. Whenever a company makes any allotment
of securities, it shall file with the Registrar a
return of allotment.
ii. The return of allotment shall be filed in such
manner as may be prescribed.
5. Consequences of The company and every officer who is in default
default shall be liable to a penalty, for each default, of Rs.
1,000 for each day during which such default
continues or Rs. 1 lakh, whichever is less.

(B) PROVISIONS CONTAINED IN RULE 11 OF THE

COMPANIES (PROSPECTUS AND ALLOTMENT OF
SECURITIES) RULES, 2014.

1. Refund of a) If the amount stated in the prospectus as the

application money if minimum subscription is not subscribed or the
minimum sum payable on application in respect of
subscription is not minimum subscription is not received within 30
subscribed days of issue of prospectus, then, the
application money shall be repaid within a
period of 15 days from the closure of the issue.

b) If any such money is not so repaid within such

period, the directors of the company who are
officers in default shall jointly and severally be
liable to repay that money along with interest at
the rate of 15% per annum.
2. Manner of refund The application money to be refunded shall be
of application money credited only to the bank account from which the
subscription was remitted.

3.6 LEGAL RULES AS TO PROSPECTUS (Sec. 26)

Dating and signing of a) Every prospectus issued by or on behalf of a public

prospectus company shall be dated and signed.

3. 10
 tax ki duniya

b) (b) The date indicated in the prospectus shall be

deemed to be the date of its publication.
Filing of a copy of the A prospectus may be issued by a company only if the
prospectus with the following 2 conditions are satisfied:
Registrar
a) A copy of the prospectus has been filed with the
Registrar, on or before the date of publication of the
prospectus.
b) (b) Such copy of the prospectus is signed by every
person who is named in the prospectus as a
director or proposed director of the company or by
his duly authorised attorney.
Time limit for issue A prospectus shall not be valid if it is issued more than
of prospectus 90 days after the date on which a copy of the
prospectus is filed with the Registrar.
Inclusion of expert’s A statement purporting to be made by an expert may
statement in the be included in the prospectus, only if all
prospectus the following conditions are satisfied:

a) The expert is a person who is not, and has not

been, engaged or interested in the formation or
promotion or management of the company.
b) The expert has given his written consent to the
issue of the prospectus.
c) The expert has not withdrawn his consent
before the date of filing of a copy of the
prospectus with the Registrar.
d) (d) A statement is included in the prospectus
that the expert has given his written consent and
has not withdrawn such consent.
Definition of ‘expert’ ‘Expert’ includes an engineer, a valuer, a chartered
[Sec. 2(38)] accountant, a company secretary, a cost accountant
and any other person who has the power or authority
to issue a certificate in pursuance of any law for the
time being in force.
Punishment for issue The company and every person who is knowingly a
of prospectus in party to the issue of a prospectus issued in
contravention of Sec. contravention of Sec. 26, shall be liable to –
26
a) minimum fine of Rs. 50,000; and

3. 11
 tax ki duniya

b) Maximum fine of Rs. 3 lakh.

3.7 MATTERS TO BE STATED IN PROSPECTUS |Sec.

26(1)]

Matters to be stated a) The prospectus shall contain such information and

in prospectus [Sec. reports on financial information as may be
26(1)] specified by SEBI in consultation with CG.
b) Until SEBI specifies the information and reports on
financial information, the regulations made by SEBI
under SEBI Act, 1992, in respect of such financial
information or reports on financial information
shall apply.
c) A declaration shall be included in the prospectus.
The declaration shall state that –

i. the company has complied with the provisions

of the Companies Act, 2013; and
ii. Nothing in the prospectus is contrary to the
provisions contained in the Companies Act,
2013, the Securities Contracts (Regulation) Act,
1956 and SEBI Act, 1992 and the Rules and
Regulations made thereunder.

d) Every prospectus shall contain the following

disclosures:

i.A statement that a copy of the prospectus has

been filed with the Registrar.
ii. A list of all such documents as are required to
be attached with the prospectus.
Non-applicability of The provisions contained in Sec. 26(1) shall not apply
Sec. 26(1) in the following cases:

a) Where a prospectus or form of application

relating to shares or debentures is issued to the
existing members or debenture-holders of a
company, whether or not an applicant has a

3. 12
 tax ki duniya

right to renounce the shares in favour of any

other person as per Sec. 62.
b) (b) Where a prospectus or form of application
relating to shares or debentures is issued, if such
shares or debentures are in all respects uniform
with shares or debentures previously issued and
for the time being dealt in or quoted on a
recognized stock exchange.
Punishment for issue The company and every person who is knowingly a
of prospectus in party to the issue of a prospectus issued in
contravention of Sec. contravention of Sec. 26, shall be liable to –
26
a) minimum fine of Rs. 50,000; and
b) maximum fine of Rs. 3 lakh.

3.8 REMEDIES AGAINST PROMOTERS DIRECTORS

AND EXPERTS (CIVIL LIABILITY FOR
MISSTATEMENT IN PROSPECTUS) (Sec. 35)

Nov. 2006 When is an expert not liable for untrue statements in the
prospectus issued by a company?
Nov. 2012 State the liability of an ‘Expert’ in case of misrepresentation in
the prospectus. When an expert will not be liable for his untrue
statements made in the prospectors?

When is Sec. 35 If a prospectus includes any statement, which is

attracted? misleading; or

- Omission of any matter in the prospectus is.

misleading; and
- any person subscribes for securities acting on any
such statement or omission; and
- such person sustains any loss as a consequence
thereof,

Then, - Sec. 35 is attracted.

Persons liable for i. The company;
misstatement ii. Every person who is a director of the company at
the time of issue of prospectus;

3. 13
 tax ki duniya

iii. Every person who has authorised himself to be

named and is named in the prospectus as a
director of the company;
iv. Every person who has agreed to become a
director of the company, either immediately or
after an interval of time;
v. Every person who is a promoter of the company;
vi. Every person who has authorised the issue of the
prospectus; and
vii. Every person who is an expert.
Punishment Every person liable for mis-statement shall be
liable for –
a) payment of compensation to every person who
has sustained any loss or damage;
b) Punishment for fraudulently inducing any person
to invest money u/s 36.
Defences Withdrawal No person shall be liable u/s 35, if he
of consent proves that, having consented to
become a director of the company, he
withdrew his consent before the issue of
the prospectus, and that it was issued
without his authority or consent
Prospectus No person shall be liable u/s 35 if he
issued proves that the prospectus was issued
without his without his knowledge or consent, and
consent that on becoming aware of its issue, he
forthwith gave a reasonable public
notice that it was issued without his
knowledge or consent.
Defence to A person who makes any statement on
any person the basis of report of an expert shall not
making a be liable u/s 35, if it is proved that –
statement
on the basis a) the statement made by such
of report of person was a correct and fair
an expert representation of the statement
made by the expert;
b) the person who made the
statement on the basis of the

3. 14
 tax ki duniya

statement made by the expert had

reasonable ground to believe and
did up to the time of the issue of
the prospectus believe, that the
expert was competent to make it;
c) the expert had given his consent;
and
d) the expert had not withdrawn his
consent before filing of a copy of
the prospectus with the Registrar.
Liability in case of Where it is proved that a prospectus has been issued
fraud with intent to defraud the applicants or any other
person or for any fraudulent purpose, every person
referred to in Sec. 35 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.

3.9 GOLDEN RULE FOR FRAMING THE PROSPECTUS

Meaning of ‘untrue  A statement included in a prospectus shall be

statement’ and deemed to be untrue, if the statement is
‘prospectus misleading in the form and context in which it is
containing untrue included.
statement’  Similarly, if the omission from a prospectus of any
matter is calculated to mislead the investors, the
prospectus is deemed to be a prospectus in which
an untrue statement is included.
Golden Rule for  The prospectus must present the whole picture of
framing the the company.
prospectus  The prospectus must disclose all material facts
truly, honestly and accurately.
 All facts which are likely to influence the decision
regarding applying for shares must be disclosed.
 The prospectus should not contain any untrue or
misleading statement.
 No fact should be omitted, the existence of which
might, in any degree, affect the nature or quality of

3. 15
 tax ki duniya

privileges and advantages disclosed by the

prospectus (Rex v Kylsant).
 Suppression of a fact, howsoever remote, will
make a prospectus ‘misleading prospectus’, if
inclusion of such fact might have affected
investor’s decision to subscribe for the shares
(Rex v Kylsant).

Example: A prospectus stating that the company is

regularly paying dividend, but not disclosing that the
company is incurring losses and that the dividend
was paid out of reserves, is misleading.

Question 5

May 2004, whether a prospectus is misleading if it does not disclose the fact that
dividend during the past years May 2013 was paid out of accumulated profits?

P 3.9A. A company issued a prospectus. All the statements contained therein

were literally true. It also stated that the company had paid dividends for a
number of years, but did not disclose the fact that the dividends were not paid
out of trading profits, but out to capital profits. An allottee of shares wants to
avoid the contract on the ground that the prospectus was false in material
particulars. Decide. (May 2004)
OR
XYZ Ltd. issued a prospectus inviting the public for subscription of its equity
shares stating in it that company possesses good financial health and paying
dividends to its equity shareholders consistently and regularly @ 20 percent over
the last five years. The fact was, company was running in loss since last three
years and it was paying dividends to its shareholders out of accumulated profits.
Mr. Amit read the prospectus and bought 500 shares from the company.
Discovering the Misstatement made by the company in the prospectus, he wants
to rescind the contract and claim the damages from the company.
Referring the provisions of the companies Act, decide, whether Mr. Amit will
succeed. (May 2013)

Answer:

3. 16
 tax ki duniya

The prospectus is - since non-disclosure of the fact that the

misleading company was making losses and that the
dividends were paid out of past year profits
gave a false impression that the company was
making profits;
- Since suppression of such fact might have
affected investor's decision to subscribe for
shares.
- Since the prospectus does not disclose all the
material facts truly, honestly and accurately.

The allottee of shares since the allottee has a right to rescind the contract of
allotment of shares if he had is entitled to avoid relied and acted on the
prospectus, i.e. he subscribed for shares after being allotment influenced by a
misleading prospectus [Rex v Kylsant].

Question 6

Nov. 2006 Whether an investor who purchases shares from the market is
entitled to claim damages (Sec. 35)
May 2017 From the company if there is mis-statement in prospectus?

P 3.9B, With a view to issue shares to the general public a prospectus containing
some false information was issued by a company. Mr. X received a copy of the
prospectus from the company, but did not apply for allotment of any shares. The
allotment of shares to the general public was completed by the company within
the stipulated period. A few months later, Mr. X bought 2000 shares through the
stock exchange at a higher price which later on fell sharply. X sold these shares at
a heavy loss. Mr. X claims damages from the company for the loss suffered on the
ground that the prospectus issued by the company contained a false statement.
Referring to the provisions of the Companies Act, examine whether X’s claim for
damages is justified.

OR

With a view to issue shares to the general public a prospectus containing some
false information was issued by a company. Mr. Damu received copy of the
prospectus from the company, but did not apply for allotment of any shares. The
allotment of shares to the general public was completed by the company within
the stipulated period. A few months later, Mr. Damu bought 4,000 shares through
the stock exchange at a higher price which later on fell sharply. Damu sold these
3. 17
 tax ki duniya

shares at a heavy loss. Mr. Damu claims damages from the company for the loss
suffered on the ground that the prospectus issued by the company contained a
false statement. Referring to the provisions of the Companies Act, 2013 examine
whether Damu’s claims for damages is justified?

Answer:

Mr. X is not an - Since he purchased the shares from the market,

original allottee of and not from the company.
shares
Mr. X cannot claim - since Mr. X is not an original allottee of shares;
damages from the - since Mr. X did not subscribe for shares on the faith
company of a misleading prospectus (Peek v Gumey).

Question 7

May 2008, whether a person who purchases shares from the secondary market
can refuse to pay the (Sec. 35)
May 2016 unpaid calls on the ground that the prospectus contained false
statements?

P 3.9C. Peek Ltd. Co. issued and published its prospectus to invite the investors to
purchase its shares. The said prospectus contained false statement. Mr. X
purchased some partly paid shares of the company in good faith on the Stock
Exchange. Subsequently, the company was wound up and the name of Mr. X was
in the list of contributors. Decide:

i. Whether Mr. X is liable to pay the unpaid amount?

ii. Can Mr. X sue the directors of the company to recover damages?

Answer:

Mr. X is not an - Since he purchased shares from the secondary

original allottee of market, viz. stock exchange.
shares
i. Mr. X is liable - since Mr. X holds partly paid shares;
to pay the - Since he is liable as a contributory.
unpaid calls
ii. Mr. X cannot - Since Mr. X has no cause of action against the
sue the company or the directors as he did not subscribe

3. 18
 tax ki duniya

directors to for shares on the faith of a misleading prospectus

recover (Peek v Gurney).
damages

Question 8

Nov. 2008 whether a person who becomes a member by way of transfer of

shares, can bring an action (Sec. 35) i for rescission on the ground of mis-
statement in prospectus?

P 3.9D. M applies for share on the basis of a prospectus which contains mis-
statement. The shares are allotted to him, who afterwards transfers them to N.
Can N bring an action for a rescission on the ground of mis-statement? Decide
under the provisions of the Companies Act.

Answer:

1. Mr. N is not an original allottee of shares

- Since he obtained the shares by way of transfer from M.

2. Mr. N cannot claim damages from the company

- since Mr. N is not an original allottee of shares;
- since Mr. N did not subscribe for shares on the faith of a misleading
prospectus freak v Gtirnev)

Question 9

Nov. 2009 Whether a person who purchases shares on the basis of an inaccurate
report of the expert (Sec. 35) claim any remedy against the company?

P 3.9E Modern Furniture’s Limited was willing to purchase teakwood estate in

Chhattisgarh State. Its prospectus contained some important extracts from an
expert report giving the number of teakwood trees and other relevant
information in the estate in Chhattisgarh State. The report was found inaccurate.
Mr. ‘X’ purchased the shares of Modern Furniture’s Limited on the basis of the
above statement in the prospectus. Will Mr. ‘X’ have any remedy against the
company? When an expert will not be liable? State the provisions of the
Companies Act in this respect. '

Answer:

3. 19
 tax ki duniya

Mr. X is entitled to - Since he purchased the shares relying on a

repudiate the mis-statement contained in the prospectus.
allotment
An expert is not liable - He proves that the prospectus was issued
if without his knowledge or consent, and that on
becoming aware of its issue, he forthwith gave a
reasonable public notice that it was issued
without his knowledge or consent.

3.10 CRIMINAL LIABILITY FOR MIS-STATEMENT IN

PROSPECTUS (Sec. 14)

Nov. 2011 what is the law relating to criminal liability for mis-statement in the
prospectus?
Nov. 2018 ACE Builders Ltd. issued a prospectus which contained mis-statement
about the prospects of the Company from a project to be undertaken with an
intent to defraud the applicants for securities. Discuss the provisions of law
relating to criminal liability for mis-statement in the prospectus under the
Section 34 of the Companies Act 2013

Nature of - If a prospectus includes any statement, which is

criminal liability misleading; or
- omission of any matter in the prospectus is misleading
- Then, every person who has authorised the issue of
such prospectus shall be liable u/s 447.
Defences Immaterial The person proves that the statement or
omission was immaterial.
Belief in The person proves that –
truthfulness
of the - he had reasonable ground to believe
statement that the statement was true; and
- He continued to believe upto the
time of issue of the prospectus, that
the statement was true or the
omission was necessary.

3. 20
 tax ki duniya

3.11 PUNISHMENT FOR FRAUD (Sec. 447)

When is Sec. 447 Where any person is found guilty of fraud.

attracted?
Punishment u/s 447 Where any person is found guilty of fraud involving
for frauds of greater an amount of at least Rs. 10 lakh or 1% of the
magnitude turnover of the company, whichever is lower, he shall
be punishable as follows-
Fraud involves Any other case
public interest
Min. 3 years 6 months
Imprisonment
Max. 10 years
Imprisonment
Min. Fine Amount involved in the fraud
Max. Fine 3 times the amount involved in the
fraud
Punishment u/s 447 Where any person is found guilty of fraud involving
for frauds of lesser an amount less than Rs. 10 lakh or 1% of the
magnitude turnover of the company, whichever is lower, and the
fraud does not involve public interest, any person
guilty of such fraud shall be punishable with –

a) imprisonment upto 5 years; or

b) fine upto Rs. 20 lakh; or
c) Both.
Other liabilities to The person liable u/s 447 shall continue to be liable
remain unaffected for any other liability under this Act or any other law
for the time being in force (including repayment of
any debt).
Meaning of certain Fraud ‘Fraud’ includes any act, omission,
terms concealment of any fact or abuse
of position with intent to deceive,
to gain undue advantage from, or
to injure the interests of, any
other person, whether or not
there is any wrongful gain or
wrongful loss.

3. 21
 tax ki duniya

Wrongful gain ‘Wrongful gain’ means the gain by

unlawful means of property to
which the person gaining is not
legally entitled.
Wrongful loss ‘Wrongful loss’ means the loss by
unlawful means of property to
which the person losing is legally
entitled.

3.12 PUNISHMENT FOR FRAUDULENTLY INDUCING

(Sec. 36) PERSONS TO INVEST MONEY

When is Sec. 36 If a person, either knowingly or recklessly

attracted? makes any statement, promise or forecast
which is false, deceptive or misleading, or
deliberately conceals any material facts, so as
to induce another person to enter into –

a) any agreement for acquiring, disposing of,

subscribing for, or underwriting
securities; or
b) any agreement, the purpose or the
pretended purpose of which is to secure a
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 obtaining credit
facilities from any bank or financial
institution.
Punishment Such person shall be liable for action u/s 447.

3.13 ACTION BY AFFECTED PERSONS (Sec. 37)

A suit may be filed or any other action may be taken u/s 34 or 35 or 36 by any
person or group of persons or any association of persons affected by any
misleading statement or the omission of any matter in the prospectus.

3. 22
 tax ki duniya

3.14 ACTION BY AFFECTED PERSONS (Sec. 37)

Nov. 2015 when is an allotment of shares treated as an irregular allotment?

Briefly state the effects of an irregular allotment.

Nov. 2018 MPN Limited allotted shares to the public without issuing a
prospectus. Discuss the validity of such allotment and list out any five
circumstances when allotment can be deemed to be irregular.

Reasons for irregular allotment Consequences

1. Public offer of securities by a
company without issuing a
prospectus (Contravention of Sec.
23).
2. The prospectus issued by the
company is misleading or does not
contain the matters required to be
included therein (Contravention of
Sec. 26).
3. The prospectus is issued to the
public without first delivering to
the Registrar a copy of the
prospectus (Contravention of Sec.
26).
4. In case of a public offer of
securities, minimum subscription is default shall be liable to a penalty, for
not received, but allotment of
 No punishment is prescribed u/s
23.
 The company and every officer in
default or any other person who is
liable for contravention, shall be
liable to a penalty of Rs. 10,000, and
in case of continuing contravention,
with a further penalty of Rs. 1,000
for each day after the first during
which the contravention continues,
subject to a maximum of Rs. 2 lakh
in case of a company and Rs. 50,000
in case of an officer who is in
default or any other person [Sec.
450].
The company and every person who is
knowingly a party to the issue of such
prospectus, shall be liable to –
 Minimum fine of Rs. 50,000
 Maximum fine of Rs. 3 lakh
Company and every officer who is in
each default, of Rs. 1,000 for each day

3. 23
 tax ki duniya

securities is made by the company during which such default continues

(Contravention of Sec. 39). or Rs. 1 lakh, whichever is less.
5. Application money payable on
securities is less than 5% of the
nominal value of the security or
such other percentage or amount,
as may be specified by SEBI
(Contravention of Sec. 39).

6. Return of allotment is not filed

with the Registrar after making
allotment of securities
(Contravention of Sec. 39).

7. Public offer of securities is made Fine on the company: a Minimum fine

by the company without first
obtaining the permission for listing
of securities from any stock
exchange (Contravention of Sec.
40).
8. Moneys received on application
are not kept in a separate bank
account in a scheduled bank
(Contravention of Sec. 40).
of Rs. 5 lakh
 Maximum fine of Rs. 50 lakh
 Fine on every officer of the
company who is in default:
 Minimum fine of Rs. 50,000
 Maximum fine of Rs. 3 lakh

3.15 VARIATION IN TERMS OF CONTRACT OR

OBJECTS IN PROSPECTUS (Sec. 27)

(A) PROVISION CONTAINED IN THE ACT.

1. Legal A company shall not –

requirements for
variation in terms of a) vary the terms of any contract referred to in the
contract or objects prospectus; or
b) vary the objects for which the prospectus was
issued unless –

i. SR is passed in GM; and

3. 24
 tax ki duniya

ii. The prescribed details of the notice of GM

(indicating clearly the justification for such
variation) are published in 2 newspapers (one in
English language and one in vernacular
language) circulating in the city in which the
registered office of the company is situated.
2. Restriction on use A company which has raised any money through the
of money issue of prospectus, shall not use such money for
buying, trading or otherwise dealing in the equity
shares of any other listed company.
3. Exit offer to the a) The dissenting shareholders {viz. the
dissenting shareholders who did not agree to the variation
shareholders at the time of passing SR) shall be given an exit
offer by the promoters or controlling
shareholders.

b) The exit price and the manner and conditions of

the exit offer shall be such as may be specified
by SEBI by making Regulations.

(B) PROVISION CONTAINED IN RULE 7 OF THE

COMPANIES (PROSPECTUS AND ALLOTMENT OF
SECURITIES) RULES, 2014.

1. Requirements for a) Where the company has raised money from

passing special public through prospectus and has any unutilised
resolution amount out of the money so raised, it shall not
vary the terms of contracts referred to in the
prospectus or objects for which the prospectus
was issued except by passing SR through postal
ballot.
b) The notice of the nronnsed SR shall mntmn the
nartienlarc oc r*recr*i-iherl nn^ar 1
2. Form of a) The advertisement containing the details of the
advertisement notice of general meeting shall be in Form PAS-1.
b) (b) The advertisement shall be published
simultaneously with dispatch of Postal Ballot
Notices to the shareholders.

3. 25
 tax ki duniya

3. Placing of notice on The notice of GM shall also be placed on the website

the website of the company, if any.

3.16 PUBLIC OFFER OF SECURITIES TO BE IN

DEMATERIALISED FORM (Sec. 29)
(A) PROVISION CONTAINED IN THE ACT.
Mandatory issue of i. Every company making public offer; and
securities in ii. such other class or classes of companies as may
dematerialised form be prescribed,

Shall issue the securities only in dematerialised form

by complying with the provisions of the Depositories
Act, 1996 and the regulations made thereunder.
Holding and transfer of In case of such class or classes of unlisted companies
securities in as may be prescribed, the securities shall be held or
dematerialised form transferred only in dematerialised form in the
manner laid down in the Depositories Act, 1996 and
the regulations made thereunder.
Optional Any other company may –
dematerialisation
- convert its securities into dematerialised form; or
- issue its securities in physical form in accordance
with the provisions of this Act; or
- Issue its securities in dematerialised form in
accordance with the provisions of the
Depositories Act, 1996 and the regulations made
thereunder.

(B) PROVISIONS CONTAINED IN RULE 9A OF THE

COMPANIES (PROSPECTUS AND ALLOTMENT OF
SECURITIES) RULES, 2014: ISSUES OF SECURITIES IN
DEMATERIALISED FORM BY UNLISTED PUBLIC
COMPANIES

Applicability Rule 9A shall apply to all unlisted public

companies.

3. 26
 tax ki duniya

Issue of securities to a) Every unlisted public company shall issue the

be in dematerialised securities only in dematerialised form.
form b) (b) The securities shall be issued in accordance
with the provisions of the Depositories Act, 1996
and regulations made thereunder.
Existing securities to a) Every unlisted public company shall facilitate
be dematerialised dematerialisation of all its existing securities by
making necessary application to a depository.
b) Every unlisted public company shall inform all its
existing security holders about such facility.
c) The existing securities shall be dematerialised in
accordance with the provisions of the
Depositories Act, 1996 and regulations made
thereunder.
d) Every unlisted public company shall secure
International Security Identification Number
(ISIN) for each type of security.
Securities held by a) Every unlisted public company shall ensure that
promoters, directors entire holding of securities of its promoters,
and KMPs to be in directors, Key Managerial Personnels has been
dematerialised form dematerialised, before –

i. it makes any offer for issue of any securities;

or'
ii. it makes any offer for buy-back of securities; or
iii. it makes any offer of right shares; or
iv. It issues bonus shares.

(b) The company shall comply with the provisions of

the Depositories Act, 1996 and regulations made
thereunder.
Duty of holder to get Every holder of securities of an unlisted public
his securities company, -
dematerialised before
transfer or a) who intends to transfer such securities on or after
subscription 2nd October, 2018, shall get such securities
dematerialised before the transfer; or
b) Who subscribes to any securities of an unlisted
public company (whether by way of private
placement or bonus shares or rights offer) on or

3. 27
 tax ki duniya

after 2nd October, 2018 shall ensure that all his

existing securities are held in dematerialised form
before such subscription.
Duty to pay fees and (a) Every unlisted public company shall ensure that –
maintain security
deposit i. it makes timely payment of fees (admission
fees as well as annual fees) to the depository
and registrar to an issue and share transfer
agent;
ii. it maintains security deposit at all times, of not
less than 2 years, fees with the depository and
registrar to an issue and share transfer agent;
and
iii. It complies with the regulations or directions
or guidelines or circulars, if any, issued by SEBI
or Depository from time to time with respect to
dematerialisation of shares of unlisted public
companies and matters incidental or related
thereto.

(b) If an unlisted public company makes a default in

complying with the above provisions, it shall not
make any offer of any securities or buy-back its
securities or issue any bonus shares or right shares
till the payments to depositories or registrar to an
issue and share transfer agent are made.
Applicability of a) The provisions contained in the Depositories Act
certain provisions 1996, SEBI (Depositories and Participants)
Regulations, 2018 and SEBI (Registrars to an Issue
and Share Transfer Agents) Regulations, 1993
shall apply mutatis mutandis to dematerialisation
of securities of unlisted public companies.

b) Every unlisted public company governed by Rule

9A shall submit Form PAS-6 to the Registrar with
such fee as provided in Companies (Registration
Offices and Fees) Rules, 2014 within 60 days from
the conclusion of each half year duly certified by a
company secretary in practice or a chartered
accountant in practice.

3. 28
 tax ki duniya

Differences to be The company shall immediately bring to the notice of

brought to notice of the depositories any difference observed in its issued
depositories capital and the capital held in dematerialised form.
Filing of grievances of a) The grievances, if any, of security holders of
security holders unlisted public companies shall be filed before the
Investor Education and Protection Fund
Authority.

b) The Investor Education and Protection Fund

Authority shall initiate action against a depository
or participant or registrar to an issue and share
transfer agent after prior consultation with SEBI.
Non-applicability Rule 9A shall not apply to an unlisted public company
which is –
a) a Nidhi; or
b) a Government company; or
c) a wholly owned subsidiary.

3.17 SHELF PROSPECTUS AND INFORMATION

MEMORANDUM (Sec. 31)

May 2003 Explain the concept of ‘Shelf Prospectus’ in the light of

Companies (Amendment) Act, 2000. What is the law relating
to issuing and filing of such prospectus?
Nov. 2005 When is a company required to issue a ‘shelf prospectus' under
the provisions of the Companies (Amendment) Act, 2000?
Explain the provisions of the Act relating to the issue of ‘shelf
prospectus’ and filing it with the Registrar of Companies.
Nov. 2008 What is meant by “Shelf prospectus"? Who can file a ‘Shelf
prospectus' to the Registrar of Companies? Stating the provisions
of Companies Act. Point out the circumstances under which such
prospectus is required to be filed with the Registrar of
Companies.
Nov. 2013 Explain the meaning of “Shelf Prospectus". State the law relating
to Shelf prospectus as contained in Companies (Amendment) Act,
2000.
Nov. 2016 When is a company required to issue a ‘self-prospectus’ under
the provisions of the companies Act, 2013? Explain the law
relating to issuing and filing of such prospectus.
3. 29
 tax ki duniya

Nov. 2018 What is a Shelf-Prospectus? State the important provisions

relating to the issuance of Shelf-Prospectus under the provisions
of Companies Act, 2013. ;
July 2021 ABC Limited proposes to issue series of debentures frequently
within a period of one year to raise the funds without undergoing
the complicated exercise of issuing the prospectus every time of
issuing a new series of debentures. Examine the feasibility of the
proposal of ABC Limited having taken into account the concept of
deemed prospectus dealt with under the provisions of the
Companies Act, 2013.

1. Definition of ‘Shelf prospectus’ means a prospectus in respect of which

shelf prospectus the securities or class of securities included therein are
issued for subscription in one or more issues over a
certain period without the issue of a further prospectus.
2. Applicability The provisions of Sec. 31 shall apply to any class or classes
of companies, as SEBI may provide by regulations in this
behalf.
3. Procedure for Filing of shelf Any class or classes of companies, as
issue of prospectus SEBI may provide by regulations in this
securities under behalf, may file a shelf prospectus with
shelf prospectus the Registrar at the stage of the first offer
of securities specified in the shelf
prospectus.
Validity  The shelf prospectus shall indicate a
period of period not exceeding 1 year as the
shelf period of validity of such prospectus.
prospectus  The period of 1 year shall commence
from the date of opening of the first
offer of securities under the shelf
prospectus.
 With respect to second or any
subsequent offer of such securities
issued during the period of validity of
shelf prospectus, no further
prospectus shall be required.
Information  Prior to the issue of a second or
memorandum subsequent offer of securities under
the shelf prospectus, the company
shall be required to file an
3. 30
 tax ki duniya

information memorandum with the

Registrar.
 The information memorandum shall
be filed with the Registrar within such
time as may be prescribed.
 The information memorandum shall
contain all material facts relating to –

- new charges created;

- changes in the financial position of
the company as have occurred
between the first offer of securities
or the previous offer of securities
and the succeeding offer of
securities; and
- such other changes as may be
prescribed.
Intimation of Where a company has received
changes and applications for the allotment of
opportunity securities along with advance payments
to withdraw of subscription before the making of any
applications such change, the company shall intimate
the changes to such applicants and if they
express a desire to withdraw their
application, the company or other person
shall refund all the monies received as
subscription within 15 days thereof.
4. Construing the Where an information memorandum is filed, every time an
term ‘prospectus’ offer of securities is made, the information memorandum
together with the shelf prospectus shall be deemed to be a
prospectus.

3.18 RED HERRING PROSPECTUS (Sec. 32)

May 2006 What are the provisions relating to ‘information

memorandum’ as contained in the Companies Act, 2013?
May 2008 What is meant by ‘Red-herring prospectus'? State the
circumstances under which such prospectus is required to be filed

3. 31
 tax ki duniya

with the Registrar of Companies. What is the requirement relating

to filing of final prospectus in such cases?
May 2014 State the provisions relating to “Information Memorandum" under
Section 60B of the Companies Act, 1956 (v/z. Section 32 of the
Companies Act, 2013).

1. Definition of ‘red The expression ‘red herring prospectus’ means a

Herring prospectus’ prospectus which does not include complete
particulars of the quantum or price of the securities
included therein.
2. Procedure for issue a) A company proposing to make an offer of
of securities under securities may issue a red herring prospectus
red herring prior to the issue of a prospectus.
prospectus b) A company proposing to issue a red herring
prospectus shall file it with the Registrar at
least 3 days prior to the opening of the offer.
c) Upon the closing of the offer of securities, the
prospectus shall be filed with the Registrar and
SEBI.
d) Any variation between the red herring
prospectus and a prospectus shall be
highlighted as variations in the prospectus.
e) The prospectus shall state –

i.the total capital raised, whether by way of debt

or share capital;
ii. the closing price of the securities; and
iii. Any other details as were not included in the
red herring prospectus.
3. Construing the term A red herring prospectus shall carry the same
‘prospectus’ obligations as are applicable to a prospectus.

3.19 DEEMED PROSPECTIS (OFKKR FOR SALK) (Sec.

25)

May 2004 Explain the concept of ‘Deemed Prospectus' under the

Companies Act, 2013.

3. 32
 tax ki duniya

Nov. 2015 Explain the concept of Deemed Prospectus under the

Companies Act, 2013. Under what circumstances such
prospectus need not be issued?

1. Meaning of - Where a company allots or agrees to allot any

deemed prospectus securities of the company
- with a view to all or any of those securities being
offered for sale to the public
- any document by which the offer for sale to the
public is made
- shall be deemed to be a prospectus issued by the
company.
2. Presumption as Unless contrary is proved, it shall be presumed that
to deemed allotment or agreement to allot the securities was made
prospectus with a view to the securities being offered for sale to
the public if it is shown –

a) that the offer for sale to the public was made within
6 months of allotment or agreement to allot; or

b) that the whole consideration had not been received

by the company when the offer for sale to the public
was made.
3. Effects of deemed a) All enactments and Rules of law as to the contents of
prospectus prospectus shall apply as if the securities had been
offered to the public for subscription.
b) All enactments and Rules of law as to liability in
respect of mis-statement in prospectus shall apply as
if the securities had been offered to the public for
subscription.
c) The persons by whom the offer for sale to the public
is made, were named in the prospectus as the
directors of the company.
d) The persons accepting the offer for sale were the
subscribers for those securities.
e) The persons by whom the offer for sale to the public
is made, shall be liable for any misstatement
contained in the document by which the offer for
sale to the public is made.

3. 33
 tax ki duniya

4. Contents of a) Contents specified u/s 26.

deemed prospectus b) Net consideration received or to be received by the
company in respect of the securities which are
offered for sale to the public.
c) Time and place for inspection of contract where
under the securities have been allotted or are
proposed to be allotted.
5. Signing of The document by which the offer for sale to the public
deemed prospectus is made (which is deemed to be a prospectus issued by
the company) must be signed –

i. In case the person making the offer for sale to the

public is a company, by 2 directors of the
company;
ii. In case the person making the offer for sale to the
public is a firm, by not less than one-half of the
partners in the firm.

3.20 OFFER FOR SALE OF SHARES BY CERTAIN

MEMBERS OF COMPANY (Sec. 28)

1. Offer for sale to be as Sec. 28 applies where –

per the procedure
prescribed - in accordance with the provisions of any law for
the time being in force,
- Certain members of a company propose to offer
for sale to the public, the shares held by them.

Sec. 28 entitles such members to do so –

a) in consultation with the Board of directors;

2. Document for offer
for sale deemed to be
prospectus
b) In accordance with such procedure as may be
prescribed.
Any document by which the offer for sale to the
public is made shall be deemed to be a
prospectus issued by the company.
All laws and Rules with respect to –

a) the contents of the prospectus; and

3. 34
 tax ki duniya

b) liability in case of mis-statement in

prospectus

shall apply as if such document were a

prospectus issued by the company
3. Members to The members, whose shares are proposed to be
authorise the company offered to the public, shall –
to act on their behalf
a) collectively authorise the company to take all
actions in respect of offer for sale on their behalf;
and
b) Reimburse the company all expenses incurred by
the company.

3.21 OFFER OR INVITATION FOR SUBSCRIPTION OF

SECURITIES ON PRIVATE PLACEMENT (Sec 42)

Nov. 2018 discuss the provisions relating to private placement of shares

under the Companies Art 9013

1. Scope of Sec. 42 a) Sec. 42 entitles a company to make a private

placement of securities.
b) Every private placement of securities shall
comply with –

i. the provisions contained in Sec. 42; and

ii. such conditions as may be prescribed, viz.
conditions contained in Rule 14 of the
Companies (Prospectus and Allotment of
Securities) Rules 2014
2. Definition of private Private placement’ means any offer or invitation to
placement subscribe or issue of securities to a select group of
persons by a company (other than by way of public
offer) through private placement offer-cum-
application, which satisfies the conditions specified
in this section.
3. Requirement of a) A company shall not make a private placement of
special resolution its securities unless such proposal has been
- previously approved by the shareholders of the

3. 35
tax ki duniya

company, by SR, for each of the offers or

invitations.
b) However, in case of offer or invitation for non-
convertible debentures, it shall be sufficient if-

i. the company passes a previous SR only once

in a year for all the offers or invitations for
such debentures during the year, in case the
proposed amount to be raised through such
offer or invitation exceeds the limit specified
u/s 180(l)(c), viz. 100% of the aggregate of its
paid-up share capital, free reserves and
securities premium account;

ii. (n) The company passes a resolution in a

Board meeting, in case the proposed amount
to be raised through private placement does
not exceed the limit specified u/s 180(l) (c).

c) Also, in case of offer or invitation of any

securities to qualified institutional buyers, it
shall be sufficient if the company passes a
previous SR only once in a year for all the
allotments to such qualified institutional buyers
during the year.

d) A company shall issue private placement offer-

cum-application only after the relevant SR or the
Board resolution has been filed with the
Registrar.

e) The explanatory statement annexed to the notice

for shareholders’ approval shall contain

the following disclosures:

i. Particulars of the offer including date of

passing of the Board resolution.
ii. Kinds of securities offered and the price at
which the securities are being offered.

3. 36
 tax ki duniya

iii. Basis or justification for the price (including

premium, if any) at which the offer or
invitation is being made.
iv. Name and address of the valuer who
performed the valuation.
v. Amount, which the company intends to raise
by way of such securities.
vi. Material terms of issue of such securities,
proposed time schedule, purposes or objects
of private placement, contribution being made
by the promoters or directors, principal terms
of assets charged as securities.
4. Private placement a) A private placement shall be made only to a
offer- cum-application select group of persons who have been identified
by the Board (hereinafter referred to as
‘identified persons’).
b) The private placement offer-cum-application
shall be addressed specifically to the person to
whom the offer is made.
c) The private placement offer-cum-application
shall not carry any right of renunciation.
d) No person other than the person addressed in
the private placement offer-cum-application
shall be allowed to apply, and any application not
conforming to this condition shall be treated as
invalid.
e) The private placement offer-cum-application
shall be –

i. In Form PAS-4;
ii. serially numbered; and
iii. Sent, either in writing or in electronic mode.
5. Recording of names a) The private placement offer-cum-application
by the company shall be issued to identify persons, whose names
and addresses are recorded by the company.
b) The private placement offer-cum-application
shall be sent to every identified person, within 30
days of recording the name of such person.

3. 37
 tax ki duniya

c) (c) The company shall maintain a complete

record of private placement offers in Form PAS-
5.
6. Maximum number of a) The private placement shall not be made, during
persons the entire FY, to more than –

i. 50 persons; or.
ii. Such higher number of persons, as may be
prescribed (the prescribed number for this
purpose is 200).

(b) While computing the number of persons to

whom private placement has been made by a
company, following shall be excluded:

i. Qualified Institutional Buyers; and

ii. Employees of the company who have been
offered securities under a scheme of
employees stock option u/s 62(1) (b).

c) The restrictions with respect to the maximum

number of persons to whom private placement
can be made shall be reckoned individually for
each kind of security, i.e. equity shares,
preference shares and debentures.
d) If a company –

 makes an offer to allot securities; or

 invites subscription for securities; or
 allots securities; or
 enters into an agreement to allot securities

to more than the maximum number of persons to

whom private placement can be made (i.e. 200),
it shall be deemed to be a public offer; and
In such a case, the company shall have to comply
with the provisions of the Companies Act, 2013,
the Securities Contracts (Regulation) Act, 1956
and the SEBI Act, 1992. '

3. 38
 tax ki duniya

e) The provisions with respect to the maximum

number of persons to whom private placement
can be made (i.e. 200), shall not apply to –

i. non-banking financial companies which are

registered with RBI under the RBI Act, 1934, if
such companies comply with regulations
made by RBI in respect of offer or invitation to
be issued on private placement basis; and
ii. Housing finance companies which are
registered with the National Housing Bank
under the National Housing Bank Act, 1987, if
such companies comply with regulations
made by the National Housing Bank in respect
of offer or invitation to be issued on private
placement basis.

However, such companies shall comply with these

provisions, in case RBI or the National Housing
Bank have not specified similar regulations.
7. Application by a) Every identified person willing to subscribe to
identified persons the private placement issue shall apply in the
private placement offer-cum-application issued
to such person.
b) Such person shall pay to the company the
subscription money either by cheque or demand
draft or other banking channel, but not by cash.
8. Allotments to be a) A company making private placement shall allot
made within 60 days the securities within 60 days of receiving the
application money for the securities.
b) If the company is not able to allot the securities
within the said period of 60 days, it shall, within
next 15 days, repay the application money to the
applicants.
c) If the company fails to repay the application
money within the said period of 15 days, it shall
be liable to pay interest @ 12% per annum from
the expiry of 60th day.

3. 39
 tax ki duniya

9. Bank Account to be a) The payment to be made for subscription to

of the applicant securities shall be made from the bank account of
the person subscribing to such securities.
b) The company shall keep the record of the bank
account from where payment for subscription
has been received.
c) Where securities are subscribed by joint holders,
the money shall be paid from the bank account of
the person whose name appears first in the
application.
d) These provisions shall not apply where securities
are issued for consideration other than cash.
10. Moneys to be kept a) All moneys received on application shall be kept
in separate bank in a separate bank account in a Scheduled bank.
account b) All such monies shall be utilised only when the
securities have been allotted.
c) If for any reason the company is unable to allot
the securities, the company shall repay all such
monies to the applicants.
11. Moneys not to be A company shall not utilise the monies raised
utilized through private placement unless –

a) the securities have been allotted; and

b) The return of allotment is filed with the
Registrar.
12. Return of allotment a) After the allotment is made, the company shall
file with the Registrar a return of allotment.
b) The return of allotment shall be filed within 15
days from the date of allotment.
c) The return of allotment shall be filed in Form
PAS-3.
d) The return of allotment shall contain –

i. full name, address, Permanent Account

Number and E-mail ID of all the allottees;
ii. Number of securities allotted to each allottee;
iii. class of securities allotted to each allottee;
iv. date of allotment of securities to each allottee;
v. nominal value and amount paid-up on
securities; and

3. 40
 tax ki duniya

vi. Particulars of consideration received, if the

securities were issued for consideration other
than cash.

e) If a company defaults in filing the return of

allotment within the aforesaid period of 15 days,
the company, its promoters and directors shall
be liable to a penalty for each default of Rs. 1,000
for each day during which such default continues
but not exceeding Rs. 25 lakh.
13. No fresh offer or A company shall not make any fresh offer or
invitation pending the invitation under this section, unless under the
earlier offer earlier offer or invitation, if any, -

a) the allotments have been completed; or

b) Such offer or invitation has been withdrawn or
abandoned.
14. No public a) The company shall not release any public
advertisement advertisement with respect to the issue of
securities by way of private placement.
b) The company shall not utilise any media,
marketing or distribution channels or agents to
inform the public at large about issue of
securities by way of private placement.
15. Approval required No offer or invitation of any securities shall be made
under FEMA in certain by way of private placement, to –
cases
i. a body corporate incorporated in a country
which shares a land border with India; or
ii. a national of a country which shares a land
border with India,

Unless such body corporate or the national, as the

case may be, has obtained approval under the
Foreign Exchange Management (Non-debt
Instruments) Rules, 2019 and attached the same
with the private placement offer cum application
letter.
16. Consequences of If a company makes an offer or accepts monies in
contravention contravention of this section, -

3. 41
 tax ki duniya

a) the company, its promoters and directors shall

be liable for penalty upto –

i. amount raised through private placement; or

ii. Rs. 2 crore; whichever is lower;

b) the company shall refund all monies to the

subscribers, within 30 days of the order
imposing the penalty; and
c) the company shall be liable to pay interest at the
rate of 12% per annum to the subscribers.

3.22 ‘TRUE OR FALSE

State whether the following statements are true or false and give reasons

1. May Television advertisements and visual clips giving required

2017 details can be treated as prospectus.

Ans: The given statement is false.

Reason: As per Sec. 2(70), only a document can be treated as a

prospectus.

3.23 ‘CHOOSE THE CORRECT ANSWER’

Pick out the correct answer from the following and give reasons (1 Mark
each):

1. Nov. A prospectus issued by the financial institutions or bank for

2009 one or more issues of the securities or class of securities
specified in the prospectus is called:
a) Deemed prospectus
b) Red-herring prospectus
c) Abridged prospectus
d) Shelf prospectus.

Answer: Option (d)

3. 42
 tax ki duniya

Reason: As per Sec. 31, ‘shelf prospectus’ means a prospectus in

respect of which the securities or class of securities included
therein are issued for subscription in one or more issues over a
certain period without the issue of a further prospectus.
2. May The underwriting commission on shares must not exceed:
2010
a) 2.0 percent of the issued price of shares
b) 2.5 percent of the issued price of shares
c) 5.0 percent of the issued price of shares
d) 5.5 percent of the issued prices of shares.

Answer: Option (c)

Reason: As per Sec. 40, the underwriting commission shall not

exceed in the case of shares, 5% of the price at which the shares
are issued or the amount or rate authorised by the articles,
whichever is less.

Multiple Choice Questions (Answers given at the end of this Chapter)

Question 1

Means a memorandum containing such salient features of a prospectus as may be

specified by SEBI by making regulations in this behalf.

a) Deemed prospectus
b) Prospectus
c) Information memorandum
d) Abridged prospectus

Answer: Option (d)

Question 2

Any notice, circular, advertisement or other document inviting offers from for the
subscription or purchase of any securities of shall be a prospectus.
a) The member; a company
b) The members; a body corporate
c) The public; a company

3. 43
 tax ki duniya

d) The public; a body corporate

Answer: Option (d)

Question 3
Is included in the definition of prospectus.

a) Any document described or issued as a prospectus

b) Shelf prospectus
c) Red herring prospectus
d) All of these

Answer: Option (d)

Question 4
A public company may issue securities.

a) To public, by issuing a prospectus

b) By way of private placement
c) By way of a right issue or a bonus issue
d) All of these

Answer: Option (d)

Question 5

The term ‘public offer’ includes.

a) Initial public offer of securities to the public by a company
b) Further public offer of securities to the public by a company
c) An offer for sale of securities to the public by an existing shareholder,
through issue of a prospectus
d) All of these

Answer: Option (d)

Question 6

Unless contrary is proved, it shall be presumed that allotment or agreement to

allot the securities was made with a view to the securities being offered for sale

3. 44
 tax ki duniya

to the public if it is shown that the offer for sale to the public was made within of
allotment or agreement to allot.

a) 3 months
b) 6 months
c) 1 year
d) 3 years

Answer: Option (b)

Question 7

Statement (1): In case of a deemed prospectus, the prospectus shall contain the
net consideration received or to be received by the company in respect of the
securities to which the offer relates.

Statement (2): In case of a deemed prospectus, the prospectus shall contain the
time and place for inspection of contract where under the securities have been
allotted or to be allotted.

a) Only Statement (1) is correct

b) Only Statement (2) is correct
c) Both the Statements are correct
d) None of the Statements is correct

Answer: Option (c)

Question 8

No prospectus shall be valid if it is issued more than_____ after the date on which a
copy there of the Registrar

a) 30 days
b) 60 days
c) 90 days
d) 120 days

Answer: Option (c)

3. 45
 tax ki duniya

Question 9

No prospectus shall be issued by or on behalf of a company unless on or before

the date of its publication, there has been delivered to the Registrar for filing, a
copy of the prospectus signed by every person who is named therein as of the
company.
(a) A director
(b) A proposed director
(c) Both (a) and (b)
(d) None of these

Answer: Option (c)

Question 10

A statement can be included as an expert’s statements in the prospectus only if

the person making the statement is not, and has not been, engaged or interested
in of the company.

a) The formation or promotion

b) Management
c) Either (a) or (b) or both
d) Membership

Answer: Option (c)

Question 11

Is required if a company intends to vary the terms of any contract referred

to in the prospectus or vary the objects for which the prospectus was
issued.
a) An ordinary resolution
b) A special resolution
c) Approval of the Central Government
d) Both (b) and (c)

Answer: Option (a)

3. 46
 tax ki duniya

Question 12

If a company intends to vary the terms of any contract referred to in the

prospectus or vary the objects for which the prospectus was issued, the
dissenting shareholders shall be given an exit offer by , and the exit price and the
manner and conditions of the exit offer shall be such as may be specified by .

a) The directors; Central Government

b) The members; Central Government
c) The promoters or controlling shareholders; SEBI
d) The members; SEBI

Answer: Option (c)

Question 13

A company may forfeit the shares held by a member on the ground of non-
payment of calls only if it is authorised by

a) A resolution passed in general meeting

b) The articles
c) A resolution passed by the Board
d) Both (b) and (c)

Answer: Option (d)

Question 14

Means a prospectus in respect of which the securities or class of securities

included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.

a) Shelf prospectus
b) Red herring prospectus
c) Information memorandum
d) Abridged prospectus

Answer: Option (a)

3. 47
 tax ki duniya

Question 15

Prior to the issue of a second or subsequent offer of securities under the shelf
prospectus, the company shall be required to file with the Registrar.

a) Deemed prospectus
b) Red herring prospectus
c) Information memorandum
d) Abridged prospectus

Answer: Option (c)

Question 16
The shelf prospectus shall indicate a period not exceeding as the period of
validity of such prospectus

a) 3 months
b) 6 months
c) 1 year
d) 2 years

Answer: Option (c)

Question 17

Where a company issues a shelf prospectus, it shall, prior to the issue of a second
or subsequent offer of securities under the shelf prospectus, file with the
Registrar.

a) A deemed prospectus
b) A prospectus
c) An information memorandum
d) An abridged prospectus

Answer: Option (c)

3. 48
 tax ki duniya

Question 18

_______means a prospectus which does not include complete particulars of the

quantum or price of the securities included therein.

(a) Shelf prospectus

(b) Red herring prospectus
(c) Information memorandum
(d) Abridged prospectus

Answer: Option (b)

Question 19

A company proposing to issue a red herring prospectus shall file it with the
Registrar at least of the offer prior to the opening

a) 3 days
b) 7 days
c) 14 days
d) 15 days

Answer: Option (a)

Question 20

Any variation between the red herring prospectus and a prospectus shall be
highlighted as variations in the __________.

a) Deemed prospectus
b) Prospectus
c) Information memorandum
d) Abridged prospectus

Answer: Option (b)

Question 21

The application money on every security shall not be less than _________of the
nominal amount of the security.

a) 2%
3. 49
 tax ki duniya

b) 2.5%
c) 5%
d) 10%

Answer: Option (c)

Question 22

A company shall file return of allotment with the Registrar on ______.

a) Allotment of securities
b) Reissue of forfeited shares
c) Both (a) and (b)
d) Forfeiture of shares

Answer: Option (a)

Question 23

A company can issue Global Depository Receipts only if it is authorised by

(a) An ordinary resolution
(b) A special resolution
(c) A unanimous resolution
(d) None of these

Answer: Option (b)

Question 24

The Global Depository Receipts may be issued by way of _

a) Public offering
b) Private placement
c) Any manner prevalent abroad
d) Any of these

Answer: Option (d)

3. 50
 tax ki duniya

Question 25

A company making private placement shall issue

a) Private placement offer-cum-application
b) Prospectus
c) Abridged prospectus
d) Red herring prospectus

Answer: Option (a)

Question 26

The private placement shall not be made, during the entire financial year, to more
than______ person

a) 50
b) 100
c) 200
d) 250

Answer: Option (c)

Question 27

A company may make a private placement of its securities only if it is authorised

by________.

a) The Central Government

b) The Tribunal
c) The Court
d) None of these

Answer: Option (d)

Question 28

A company may make a private placement of its securities only if such proposal is
approved by ___
a) The members by passing an ordinary resolution
b) The members by passing a special resolution

3. 51
 tax ki duniya

c) The Board by passing a unanimous resolution

d) Both (b) and (c)

Answer: Option (b)

Question 29

Every person willing to subscribe to the private placement issue shall pay to the
company the subscription money by______

a) Cheque
b) Cash
c) Either (a) or (b)
d) None of these

Answer: Option (a)

Question 30
A company making private placement shall allot the securities within of receiving
the application money for the securities.

a) 30 days
b) 45 days
c) 60 days
d) 90 days

Answer: Option (c)

Question 31

The private placement offer-cum-application letter shall be in Form.________

a) PAS-1
b) PAS-2
c) PAS-3
d) PAS-4

Answer: Option (d)

3. 52
 tax ki duniya

Question 32

In case of a private placement, the return of allotment of securities shall be filed

in Form _______

a) PAS-1
b) PAS-2
c) PAS-3
d) PAS-4

Answer: Option (c)

Question 33

The company shall maintain a complete record of private placement offers in

Form _________.

a) PAS-3
b) PAS-4
c) PAS-5
d) PAS-6

Answer: Option (c)

Question 34

In case of a private placement, if the company is not able to allot the securities
within the stipulated time period, it shall, within next_______ repay the application
money to the applicants.

a) 15 days
b) 30 days
c) 45 days
d) 60 days

Answer: Option (a)

3. 53