COMPANY LAW

CHAPTER 7

Prospectus and Book Building

DEFINITION

Section 2(70) of the Act defines a prospectus as

"any document described or issued as a prospectus and includes a red herring
prospectus referred to Sec. 32 or shelf prospectus referred to in Sec. 31 or any notice,
circular, advertisement or other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any shares in, or debentures
of a body corporate.''
Any document to be called a prospectus must have the following ingredients :
1. there must be a written invitation offering to the public ;
2. the invitation must be made by or on behalf of the company or in relation to an
intended company;
3. the invitation must be to subscribe or purchase;
4. the invitation must relate to shares or debentures.
DEEMED PROSPECTUS

Section 25 of the Companies Act lays down that any

document by which the offer or sale of securities to
the public is made shall for all purposes be treated
as prospectus.
OFFER OF SALE OF SHARES BY CERTAIN
MEMBERS OF COMPANY : IS ALSO DEEMED
PROSPECTUS

Where certain members of a company The members, whether individuals or bodies

propose, in consultation with the Board of corporate or both, whose shares are
Directors to offer part of their holding of proposed to be offered to the public, shall
shares to the public. collectively authorise the company.
SHELF PROSPECTUS AND INFORMATION
MEMORANDUM (SECTION 31)
The provisions of Section 31, in regard to Shelf Prospectus are as follows.
1. A shelf prospectus may be issued by any class or classes of companies as the
Securities and Exchange Board of India (SEBI) may provide by regulations in this
behalf.
2. The shelf prospectus shall have a validity period not exceeding one year which
shall commence from the date of opening of the first offer of securities under that
prospectus.
3. The validity period not exceeding one year should be indicated in the shelf
prospectus.
4. In respect of second/subsequent offer of securities during the validity period, no
further prospectus shall be required.
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5. A company filing a shelf prospectus shall be required to file an information

memorandum with the Registrar before making of any second or subsequent offer
of securities under the shelf prospectus.
6. The information memorandum shall contain all material facts relating to :
 New charges created.
 Changes in financial position as have occurred between the first offer of
securities and the succeeding offer of securities.
 Such other changes as may be prescribed.
RED HERRING PROSPECTUS (SECTION 32)

Provisions relating to Red Herring Prospectus are

 The term ‘red herring prospectus’ means a prospectus which does not include
complete particulars of the quantum or price of the securities included therein.
 A company proposing to make an offer of securities may issue a red herring
prospectus prior to the issue of a prospectus. [Section 32(1)].
 A company proposing to issue a red herring prospectus under sub-section (1)
shall file it with the Registrar at least three days prior to the opening of the
subscription list and the offer. [Section 32(2)].
 A red herring prospectus shall carry the same obligations as are applicable to
a prospectus
 Any variation between the red herring prospectus and a prospectus shall be
highlighted as variations in the prospectus. [Section 32(3)].
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 Upon the closing of the offer of securities under this section, the prospectus
also stating therein (a) the total capital raised, whether by way of debt or
share capital, and the closing price of the securities (c) any other details as
are not included in the red herring prospectus.
Shall be filed with the Registrar and, in the case of a listed company, with the
Registrar and the Securities and Exchange Board. [Section 32(4)].
ABRIDGED PROSPECTUS
Section 33 of the Companies Act provides that every form of application
issued for the purchase of any securities of a company shall be accompanied
by an abridged prospectus. According to section 2(1) of the Companies
Act, “abridged prospectus” means a memorandum containing such salient
features of a prospectus as may be specified by the Securities and Exchange
Board by making regulations in this behalf.
WHEN PROSPECTUS IS NOT REQUIRED TO BE ISSUED (SEC. 26)
 The issue of a prospectus by a company is not necessary in the following
cases.
 When an offer is made in connection with a bonafide invitation to a person
to enter into an underwriting agreement with respect to shares or
debentures.
 When the shares or debentures are not offered to the public.
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 Where the offer is made only to existing members or debenture holders of

the company with or without a right to renounce. e.g. When shares are
placed privately to less than 50 persons.
 Where the shares or debentures offered are in all respects uniform with
shares or debentures previously issued and dealt in or quoted on a
recognised stock exchange.
 Where invitation to the public for subscription to the shares or debentures of
a company is made in the form of newspaper advertisement. [Sec. 30].
 A private company is not required to issue prospectus. [Sec. 2(35)]
LEGAL REQUIREMENTS IN RELATION TO A
PROSPECTUS
(1) Dating of prospectus (Section 26)
A prospectus issued by a company must be dated.
(2) Registration of prospectus (Section 27(7))
1. Nature.
2. Time Limit.
3. Signatures.
4. Date of issue of prospectus.
5. Contents. Prospectus should—
(a) State that a Copy thereof has been delivered to ROC for registration,
(b) Specify documents endorsed or attached to the copy so delivered, and
(c) Contain an endorsement that the consent of Experts has been obtained.
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6. Registration. The prospectus must be issued within ninety days of its registration.
7. Penalty for non-registration of prospectus. The company and every person
knowingly party to the issue of the prospectus, shall be punishable with fine.
8. Opening of subscription list. Where a prospectus has been issued, no allotment of
any shares shall be made until—
(a) The beginning of the 5th day after prospectus is first issued ; or
(b) Such later time as may be specified in the prospectus ; or
(c) The beginning of the 5th day after public notice is given.
Such day is referred to as 'date of opening of subscription list'.
When Registrar can Refuse registration (Sec. 26)
The Registrar can refuse to register a prospectus if :
(a) it is not dated;
(b) it does not comply with the requirements of as to the matters and reports to be set
out in it;
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(c) it contains statements or reports of experts engaged or interested in the formation

or promotion or management of the company;
(d) it includes a statement purported to be made by an expert without a statement
that he has given and has not withdrawn his consent to the manner of its
inclusion in the prospectus;
(e) it does not contain the consent in writing of directors and copy of the documents
has not been filed or does not comply with the provisions with regard to the fact
that a copy of it has been filed with the Registrar;
(f) it is not accompanied by the consent in writing of the auditor, legal adviser,
solicitor, banker or broker of the company if named in the prospectus to act in that
capacity.
CONTENTS OF PROSPECTUS
Section 26 of Companies Act, 2013 read with Rule-3 of Companies
(Prospectus and Allotment of Securities) Rules, 2014
Under Section 26 and Rule 3, every prospectus shall be dated and signed and
shall contain the following matters :
(A) MATTERS IN PROSPECTUS
 names and addresses of the registered office of the company, company
secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if
any, underwriters and such other persons as may be prescribed ;
 dates of the opening and closing of the issue, and declaration about the
issue of allotment letters and refunds within the prescribed time ;
 a statement by the Board of Directors about the separate bank account where
all monies received out of the issue are to be transferred and disclosure of
details of all monies including utilised and unutilised monies out of the previous
issue in the prescribed manner;
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 details about underwriting of the issue;
 consent of the directors, auditors, bankers to the issue, expert’s opinion, if
any, and of such other persons, as may be prescribed ;
 the authority for the issue and the details of the resolution passed therefore;
 procedure and time schedule for allotment and issue of securities;
 capital structure of the company in the prescribed manner;
 main objects of public offer, terms of the present issue and such other
particulars as may be prescribed;
 main objects and present business of the company and its location,
schedule of implementation of the project;
 particulars relating to—
• management perception of risk factors specific to the project;
• gestation period of the project;
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• extent of progress made in the project;
• deadlines for completion of the project; and
• any litigation or legal action pending or taken by a Government Department or
a statutory body during the last five years immediately preceding the year of
the issue of prospectus against the promoter of the company;
 minimum subscription, amount payable by way of premium, issue of shares
otherwise than on cash;
 details of directors including their appointments and remuneration, and such
particulars of the nature and extent of their interests in the company as may be
prescribed ; and
 disclosures in such manner as may be prescribed about sources of promoter’s
contribution;
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(B) REPORTS IN PROSPECTUS

 reports by the auditors of the company
 reports relating to profits and losses for each of the five financial years
 reports made by the auditors upon the profits and losses of the business of
the company for each of the five financial years
 reports about the business or transaction to which the proceeds of the
securities are to be applied directly or indirectly;
(C) DECLARATION
The prospectus shall make a declaration about the compliance of the provisions of
this Act and a statement to the effect that nothing in the prospectus in contrary to the
provisions of this Act, the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
and the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules
and regulations made thereunder.
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The prospectus shall also state such other matters and set out such
other reports, as may be prescribed.
(D) OTHER MATTERS
Prospectus shall also state such other matters and set out such other
reports, as may be prescribed.
LIABILITY FOR MIS-STATEMENTS IN
PROSPECTUS
What is an untrue statement/mis-statement ?
According to section 34(I) of the Act, a statement included in a prospectus shall
be demand to be untrue :
(a) if the statement is misleading in the form or context in which it is included ;
or
(b) where any inclusion or omission from a prospectus of any matter is likely
to mislead.
Who can be sued ?
Where a person has bought shares on the faith of a prospectus which is mis-
leading because of a mis-statement in or an omission from the prospectus, he
may have a legal remedy against all or any of the following :
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Liability for mis-statement in a prospectus

Civil liability Criminal liability

1. the company;
2. every director;
3. every person whose name appeared in the prospectus as a proposed
director;
4. every promoter;
5. every person who authorised the issue of the prospectus.
6. An expert referred u/s 26(5).
CIVIL LIABILITY [SEC. 35(1)]
Section 35(1) of the Companies Act, 2013 provides that where
 a person has subscribed for securities of a company acting on any statement
included, or the inclusion or omission of any matter, in the prospectus which is
misleading and has sustained any loss or damage as a consequence thereof, the
company and every person who–
(a) is a director of the company at the time of the issue of the prospectus ;
(b) has authorised himself to be named and is named in the prospectus as
a director of the company, or has agreed to become such director, either
immediately or after an interval of time :
(c) is a promoter of the company ;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in section 26(5).
shall, be liable to pay compensation to every person who has sustained such loss or
damage.
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1. Rescission of the contract.

The right to rescind the contract is available if he proves the following :
1. Prospectus was issued by or on behalf of the company.
2. Statement must be untrue.
3. Statement must be a material misrepresentation.
4. The misrepresentation must have induced the shareholder to take the
securities and he must have relied on the statement in applying for
securities.
5. Misrepresentation must be of facts and not of law.
6. That he has taken action promptly to rescind the contract.
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Loss of right to rescind the contract

(a) Unreasonable delay.
(b) Affirmation. However, affirmation may be express or implied. Implied
affirmation will be deemed to have taken place in the following cases :
1. where he endeavours to sell shares.
2. where he attends and votes at general meetings in person or by proxy.
3. where he receives dividend or pays calls.
4. where he executes a transfer.
(c) Commencement of winding up. The right of rescission is lost if the
shareholder does not exercise the right until after the commencement of
winding up.
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2. Right of action for damages for deceit.

Defences available to avoid civil liability. Section 35(2) of the Companies Act
provides that no person shall be liable for civil action under section 35(1) if he
proves—
(a) 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; or
(b) That the prospectus was issued 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.
CRIMINAL LIABILITY

Every person who athorises the issue of such prospectus

shall be liable under section 447.
BOOK BUILDING

Book Building is defined to mean a process by which demand for the

securities proposed to be issued by a body corporate is elicited and built-up
and the price for such securities is assessed for the determination of the
quantum of such securities to be issued by means of a notice, circular,
advertisement, document or information memorandum or other document.
Thus, in case of a public issue through the process of book-building, though
the total size of the issue is known, the number of shares is not known. It is
because the price at which shares will be allotted is not known, it’s
determined through the process of book-building only. The prospectus only
mentions the price band [i.e. the lowest (floor price)] and the highest
(maximum price). As per SEBI Regulations, 2009 the maximum price cannot
be more than 20% of the floor price.
OFFER TO PUBLIC THROUGH BOOK
BUILDING PROCESS (SEBI REGULATIONS)
 An issuer company may, subject to the requirements specified hereunder,
make an issue of securities to the public through a prospectus by making 100%
of the net offer to the public through book building process.
 Not permitted to offer capital on reservation bases.
(a) permanent employees
(b) shareholders of the listed promoting
 Appointment of Merchant Banker(s).
 Agreement with Stock Exchange(s).
 Filing Drat Prospectus.
 Provisions of Brokers.
 Advertisement. The advertisement in addition to other required information,
shall also contain the following:
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(a) the date of opening and closing of the issue

(b) the method and process of application and allotment
(c) the names, addresses and the telephone numbers of the stock brokers
and centres for bidding.
 Determination of Issue Price.
 Additional Discloures:
 Formalities after disclosures.
 The final prospectus containing all disclosures as per SEBI Guidelines
including the price and the number of securities proposed to be issued
shall be filed with the Registrar of Companies.
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 Arrangement shall be made by the Issuer for collection of the applications

by appointing mandatory collection centers.
 The online, real time graphical display of demand and bid prices at the
bidding terminals, shall be made.
 The Book Running Lead Manager shall ensure the availability of adequate
infrastructure with syndicate members for data entry of the bids on a real
time basis.
 The investors who had not participated in the bidding process or have not
received intimation of entitlement of securities may also make an
application.
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