Faculty : CA Rachna Parakh Dubey

CHAPTER - 3
Prospectus & Allotment of Securities

Section 2 (70) : Prospectus

Section 23 : Issue of securities by company
Section 24 : Power of SEBI to regular issue
Section 25 : Deemed Prospectus
Section 26 : Matters to be stated in prospectus
Section 27 : Variation in terms of contract
Section 28 : Offer of sale by members
Section 29 : Public offers in dematerialized form
Section 31 : Shelf Prospectus
Section 32 : Red Herring Prospectus
Section 33 : Abridged Prospectus
Section 34 : Criminal Liability
Section 35 : Civil Liability
Section 36 : Penalty for fraudulently inducing a person to invest money
Section 37 : Action by affected persons
Section 38 : Punishment for personation
Section 39 : Minimum subscription & Allotment
Section 40 : Stock exchange permission & underwriting commission
Section 41 : Global Depository Receipts (GDR)
Section 42 : Private Placement

General Description of Prospectus

(a) Section 2(70): Prospectus

It means any document which is described or issued as a prospectus & includes a Red herring
prospectus or shelf prospectus or abridged prospectus or any notice, circular advertisement or any
other documents inviting offer from the public for the purchase of any securities of company.

(b) Features of Prospectus:

 It is a document in writing.
 It is an invitation to offer.
 It must be signed by all current directors & proposed directors.
 It must be registered with ROC, before issue to public.
 It must contain all contents prescribed U/S 26.
 Once registered with ROC, it must be issued to public within 90 days.
 Also it must be approved by intermediaries like SEBI, merchant bankers, Stock exchange, etc.

(c) When prospectus in not needed?

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 In case of private placement U/S 42
 In case of bonus issue & right issue under rule of SEBI
 When person enters into bonafide underwriting agreement.

Section 26: Contents of prospectus

(a) Information in Prospectus

General Financial Statutory.
 Name of company  Auditor’s Report on  Directors have to give a
 Address of company profitability of company in declaration that all rules &
 Names and Addresses of CFO, previous 5 years. regulations of SEBI,
Directors, Promoters, CS,  Auditor’s Report on related Securities Contract
Bankers, Auditors, Experts, business risk. Regulation Act (SCRA) /
Trustee / Debentures, Deposit,  Capital structure of the Companies Act, 2013/
Legal Advisor company FEMA/ RBI have been
 Dates of Opening & Closing of complied.
issue of shares
 Name of bank where money
will be deposited.
 Consent of Bankers, Auditors,
Directors
 Nature of business
 Risk Associated.
 Time schedule of completion of
project and name of
underwriters etc.

(b) The prospectus containing detailed information must be FILED with ROC. However, ROC shall
not register if, it is:
 Not Dated.
 Not signed by Auditor / Experts / CS
 It contains information which is 6 months old.
If any of above 3 information is missing then ROC will refuse to register.

(c) Contravention to Section 26

Contravention of
section 26

Any person
knowingly a party
Company
to issue of
prospectus

fine (₹50,000 - ₹3 fine (₹50,000 - ₹3 Imprisonment

or Both
lacs) lacs) (upto 3 years)

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Type of prospectus

Section 31 Section 32 Section 33 Section 25 Section 28

Shelf prospectus Red Herring Abridged Deemed Offer for sale
Prospectus Prospectus Prospectus

Section 31: Shelf Prospectus

 Shelf prospectus is a prospectus which can be used for more than one issue of shares/securities
during validity period of 1 year.
 This facility is given to prescribed class of companies who need funds frequently and SEBI rules to
be followed.
 A company which has applied for Shelf Prospectus, should file a separate document called
‘Information Memorandum.’
 In the first issue, the Main prospectus containing detailed information U/S 26 is given to the
investors along with Information Memorandum Containing Key points prescribed. Information
Memorandum contains material information & changes.
 In all subsequent issues, during validity period, only the information memorandum is given
containing the changes from 1st issue to current date.
 Both the main & Shelf prospectus need to be filed with ROC. Any investor requiring detailed
information can acquire the main prospectus from the registered office.

Section 32: Red Herring Prospectus

 Red-herring prospectus is one which contains incomplete information regarding an issue. It is used
in Book Building issue.
 Normally, a red herring prospectus does not contain the price at which shares are being offered.
 It contains face value of security, Price band, minimum price (floor price), maximum price (ceiling
price) & the no. of securities offered.
 Such book building process is used by companies, which use public opinion to decide final issue
price. Upon decision of final price as per SEBI Regulations, the company must inform the ROC &
SEBI regarding details of the total capital/money raised and the other prescribed details.
 Red herring prospectus shall be filed with ROC at least 3 days before to the opening of the
subscription list and the offer.
 Both the Red-Herring prospectus & the final prospectus must be registered with ROC.

Section 33: Abridged Prospectus

 Abridged prospectus is one which contains salient features or highlights of the main prospectus that
a shareholder needs to know, as prescribed by SEBI in consultation with CG. Every application form
must be attached with such abridged prospectus.
 The application form and the abridged prospectus must contain the same Sr. No. They must be
separated by a perforated line; the applicant must detach the application form and submit along
with application money.
 The purpose of abridged prospectus is to reduce printing, circulation and administration cost.
 Any investor needing detail information will visit the RO and acquire the copy of detailed
prospectus.

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Such prospectus is not needed:

In case of private Bonus & Rights Underwriting

placement issue agreement
(Section 62&63)

Extra point if you write to note down any please do –

Section 25: Deemed Prospectus

 Any document by which an offer of securities is made to public, then such document shall be
deemed as prospectus for all purposes & all enactments (SEBI, SCRA, RBI) shall apply to it.
 The purpose of this section is to broad the scope of the prospectus to include not only the formal
document issued as prospectus but all other documents and communications made by company to
public with the intention of selling securities.
 This section is designed to prevent companies from making misleading statements through various
documents, while making the main prospectus clean.

Section 28: Offer for Sale of Securities by certain members of company

 Members of company may collectively handover their shares to be sold to general public. The
company shall collect the proceeds & handover to the members. Any document used in this process
to make the offer to public shall be deemed as prospectus. [Just like 2nd hand sale process]
 Such method is generally used to dilute promoters holding or to provide exit route to venture
capitalist.
 All money is received in one installment. Money goes in hands of Shareholders, selling the shares &
expenditures are reimbursed to the company. There is no provision of minimum subscription.

Liability for Mis-statement in prospectus

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Section 34 Section 34 Section 34

Criminal Liability Civil Liability Liability for

fraudulently
inducing persons to
447 covered Loss reimburse invest money

447 covered

Section 34: Criminal Liability

 Section 34 covers criminal liability for mis-statement in prospectus. It is covered in CPC i.e.
Criminal Procedure Code, 1973.
 Men’s rea (guilty mind) is an essential condition for this section.
 Mis-statement includes:
 Any untrue statement given with the intention to deceive, or
 Any material omission with the intention to deceive.
 Penalty: - Section 447 shall be applicable:
 Imprisonment (6months – 10 years).
 Fine up to 3 times amount involved.
 If public interest involved minimum imprisonment is 3 years.
 Persons Covered: Any person who authorized the issue shall be covered. Eg. directors, promoters,
etc.
Exception: A person covered under this section shall be exempted if:
 If he proves that he has reasonable ground to believe that the statement was true, or
 The statement was immaterial.

Section 35: Civil liability

 Section 35 covers civil liabilities where loss is an essential condition.

 Offence is against 2nd/counter party.
 Civil procedure code, 1908 is covered.
 Persons covered:
(i) Company;
(ii) any person who was director of company at the time of issue;
(iii) Any person who authorized himself to be named as director;
(iv) Promoter;
(v) Any expert (CA, CS, engineer, Advocate, Architect etc.)
(vi) Any person who authorized the issue.
 Punishment:
 Damage has to be restored & Compensation needs to be given.
 Joint & several liabilities of all.

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Any person shall not be liable If he proves that

He withdrew his consent to become The prospectus was issued without his
director before issue of prospectus & knowledge or consent and he gave a
Prospectus is issued without his authority. reasonable public notice that prospectus
was issued without his consent.

Section 36: Liability for Fraudulently Inducing Persons to Invest Money

 Any person who, either knowingly or recklessly makes any statement, promise or
forecast which is false, deceptive or misleading, or deliberately conceals any material
facts, to induce another person to enter into agreement for acquiring, disposing of,
subscribing for, or underwriting securities shall be liable for action under section
447.

SECTION 39: Allotment

(a) Allotment of Securities in a public offering cannot be made unless:
(i) Minimum subscription is received by cheque or any other instrument, as stated in the
prospectus.
(ii) Minimum application amount cannot be less than 5% of the face value.
(iii) In case minimum subscription application money is not received within 30 days from the
date of the issue of prospectus, application money received must be returned.
(iv) Whenever a company having a share capital makes any allotment of securities, it shall file
a return of allotment with the registrar.
(v) In case of any default under this section, the company and its officer who is in default shall
be liable to a penalty of ₹ 1000 for each day and for each default during which such default
continues or ₹ 1,00,000, whichever is lower.
(b) Once the securities are issued and subscribed for then few of the conditions need to be
followed:
(i) Minimum subscription to be received within 30 days of issue of prospectus. If it is not
received then it is regarded as fail.
(ii) Application money > 5% of the nominal amount.
(iii) Return of allotment needs to be filed with the ROC.
(c) If the stated minimum amount has not been subscribed within the period specified therein, then
the application money shall be repaid within period of 15 days from the closure of the issue.
(d) If any such money is not so repaid within 15 days, the directors of company who are officers in
default shall jointly and severally be liable to repay that money with interest @15 p.a.
(e) The application money to be refunded shall be credited only to the bank account from which the
subscription was remitted.
Example: After receiving 80% of the minimum subscription as stated in the prospectus, a
company allotted 100 equity shares in favour of ‘X’. The company deposited the said amount in
the bank but withdrew 50% of the amount, before finalisation of the allotment, for the purchase
of certain assets. X refuses to accept the allotment of shares on the ground that the allotment is
violative of the provisions of the Companies Act, 2013.
 Hint: Allotment of securities cannot be made unless minimum subscription is received.
Hence, X is within his rights to refuse to accept the allotment of shares which has been
illegally made by the company.

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Section 40: Stock Exchange Permission + Underwriting commission.

(a) Stock Exchange Permission

 Every company making public offer shall make an application to one or more recognized
stock exchange or exchanges and obtain permission for the securities, before making such
offer.
 Where a prospectus states that an application has been made and shall also state the name or
names of stock exchange in which the securities shall be dealt with.
 Not only the company has to apply for listing of the securities at a recognized stock exchange
but also obtain permission thereof before making the public offer.
 All monies received on application from the public for subscription to the securities shall be
kept in separate bank account in a scheduled bank.
 In case of default: Company = fine varying from ₹ 5,00,000 to ₹ 50,00,000
Officer = punishable with imprisonment upto one year, or fine varying from ₹50,000 to
₹3,00,000 or both

(b) Payment of Commission

 Underwriting is a contract between the company and the underwriter whereby underwriter
guarantees to purchase the securities of the company or to get investor in the event of under
subscription. This is applicable only when shares are offered to public.
 Underwriting commission is paid as % of issue price, subject to following conditions:
 Must be authorized by AOA
 It may paid out of proceeds of share issue or profit of the company or both
 It may be paid in cash or in kind.
 The rate can be:
 In case of shares = 5% of issue price, or the amount specified by AOA, whichever is less.
 In case of debenture = 2.5% of the issue price or amount specified in AOA, whichever is
less.
 The prospectus must contain:

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 Name of Underwriter
 Rate & amount of Underwriting commission
 No. of securities underwritten.
 The contract of Underwriting must be submitted to ROC along with registration of
prospectus.
 There shall not be paid commission to any underwriter on securities which are not offered to
the public for subscription.
 A copy of contract for the payment of commission is delivered to registrar at the time of
delivery of prospectus for registration.

Example: A public limited company which went in for Public issue of shares had applied for
listing of shares in three recognised Stock Exchanges and out of it only two had given
permission for listing. Can the company proceed for allotment of shares?
Hint: Company cannot proceed for allotment of shares.
Example: The Board of Directors of a company decide to pay 5% of issue price of shares 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 decide 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?
Hint: The decision of BOD to pay 5% commission to the underwriters is invalid while
the decision to payout of the proceeds of the share issued is valid.

Section 42: Private Placement Offer or Invitation for Subscription of Securites on Private
Placement

Private Placement

A private placement is a way of raising capital that involves

the sale of securities to a relatively small number of select
investors.

A private placement is different from a public issue in which

securities are made available for sale on the open market to any
type of investor.

 Private Placement means any offer of securities to a select a group of persons (other than public
offer) by a company through issue of a Private Placement offer letter.
 A private placement shall be made only to a select group of persons who have been identified
by the Board (herein referred to as "identified persons"), whose number shall not exceed 200
[excluding the qualified institutional buyers and employees of the company being offered
securities under a scheme of employees stock option] in a financial year.
 Any offer by company to more than 200 persons is deemed as public issue.
 Every identified person willing to subscribe to the private placement issue shall apply in the
private placement and application issued to such person along with subscription money paid
either by cheque or demand draft or other banking channel and not by cash.

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 Company shall not release any public advertisements or utilise any media, marketing or
distribution channels or agents to inform the public at large about such an issue.
 A company shall file a return of allotment within 15 days from the date of the allotment, with
the registrar including a complete list of all allottees, with their full names, addresses, no. of
securities allotted and such other information as may be prescribed.
 If a company defaults in filing the return of allotment within prescribed period, the company,
its promoters and directors shall be liable to a penalty for each default of one thousand
rupees for each day during which such default continues but not exceeding twenty-five lakh
rupees.
 The provision of companies Act/ SCRA /SEBI needs to be complied with.
 In case of default, the company + promoter + director shall be liable for the penalty.
Penalty = Amount involved or ₹2 crores whichever is less. Refund of entire collection within 30
days.
 No fresh offer can be done unless:
 Offer is withdrawn by company
 Offeree rejects the offer
 Allotment is done.
 Company must allot shares within 60 days from application else it needs to refund money in the
next 15 days.
 If the company fails to repay the application money within the aforesaid period, it shall be liable
to repay that money with interest 12% per annum from the expiry of the 60th day.
 All application money should be kept in a separate bank A/c in a scheduled bank & cannot be
used for any other purpose other than allotment refund.
 A list of names should be prepared in Advance & should be file with ROC within 30 days of
circulation of Private Placement offer letter.
 Company must file return to ROC within 30 days of allotment.
 Before making the issue, company must get approval in GM through special resolution.
 Minimum investment is ₹20,000 per person Nominal Value (Face value).

Section 23: Issue of Securities by Companies

Public Company Private Company

(i) By issue of prospectus (i) Private Placement u/s 42
 IPO (ii) Right Issue and Bonus Issue
 FPO
 Offer for sale [OFS]
(ii) Private Placement u/s 42 (it is a
special offer)
(iii) Right Issue and Bonus Issue

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Section 27: Variation in terms of contract or objects in prospectus

 Once funds are raised through a given prospectus, the principles of “doctrine of ultra vires”(mutatis
mutandis) comes into play i.e. the company has to use the funds strictly in accordance with the
prospectus.
 Deviations are required to be pre-approved by the investors and recall option to be given to
dissenting investors.
 If the company wants to change any of terms in prospectus. Ex: - Dividend Rate of preference
shares.
 BM/BR
 GM/SR (75%)
 Newspaper advertisement needs to be given along with website publication containing
justification (logic).
 Company shall not use any amount raised by it through prospectus for buying, trading or
otherwise dealing in equity shares of any other listed company.
 Dissenting shareholder must be given exist route and amount shall be paid by promoters &
controlling shareholders, as per SEBI guidelines.

Section 29: Dematerialization

(a) Every company bringing a public offer must issue its securities only in dematerialized form by
complying with the provisions of the Depositories Act, 1996.
(b) Any company, other than public company, may convert its securities into dematerialized from in
accordance with the provisions of the Depositories Act, 1996.
(c) D-mat ensures fool proof control over issue, sale, purchase, pledge and credibility to the entire
process and securities markets.

Section 37: Action by Affected Persons [Class Action Suit]

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 Section 37 is a gift of Companies Act, 2013 to shareholders of the company. Under this section suit
case is filed, u/s 34, 35, 36, by any person or group of person affected by Mis-statement in
prospectus.
 Class Action Suit may be filled on behalf of entire group through a common case & they need not file
separate cases individually.
 The case can be represented by one petitioner. This section has given advantage to small investor,
seeking justice for mis-statement in prospectus.
Example: 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 under section 37 of the Companies Act,
2013?
 Hint: Case is filed by any person or group of persons affected by Mis-statement in
prospectus. Hence, N cannot bring an action for rescission of the contract to buy securities
from M on the ground of mis-statement.

Section 2(69): Promoter

 Promoter is a person, who initiates the formation of company & conducts all initial formalities for
formation of company.
 Under Section 2(69) following person is includes the following persons:
(a) Any person who has control over the affair of the company directly or indirectly whether as a
shareholder, director or otherwise; or
(b) Any person in accordance with whose advice, directions or instructions the BOD of the company
is familiarized to act; or
(c) A person who has been named as promoter in the prospectus of company as promoter or who
has name in annual return u/s Section 92.
 It does not include a person in professional capacity.

Section 2(38): Expert

 Expert includes an engineer, a valuer, a Chartered 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.
 Since a prospectus is the key document based on which the prospective investors make their
investment in the issue of securities of the company, it is very critical that statements made are
authentic and correct.

Punishment for Fraud:

Fraud in relation to affairs of a company or anybody corporate includes:

 Any act
 Omission
 Concealment of any fact
 Abuse of position
committed by any person with intent to deceive, to gain undue advantage from, or to injure the
interests of, the company or its shareholders or its creditors or any other person. The person who
involves in any of above shall be liable U/S 447.

Section 447:

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Fine Imprisonment
Fraud of less than 10 lakh rupees or Upto ` 50 or Upto 5 years
1% of turnover whichever is less Lakhs
Fraud of equal to or more than 10 Min: amount and Min: 6 months
lakh rupees or 1% of turnover of fraud
Max: 10 Years
whichever is less
Max:
(amount of
fraud) x 3
Involving Public Interest Min: amount and Min: 3 years
of fraud
Max: 10 Years
Max:
(amount of
fraud) x 3

Important Question Bank

Q.1) A company issued a prospectus. All the statements contained therein were literally true. It also
started 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 of capital profits. An allottee of
shares wants to avoid the contract on the ground that the prospectus was false in material
particulars. Discuss can he do so? RTP MAY 18
Hint: The allottee can avoid the contract of allotment of shares.

Q.2) Kapoor Builders Limited decides to pay 2.5% of the value of debentures as underwriting
commission to the underwriters but the Articles of the company authorize only 2% underwriting
commission on debentures. The company further decides to pay the underwriting commission in
the form of flats. Examine the validity of the above arrangements under the provisions of the
companies Act, 2013 RTP MAY 18
Hint: The decision of BOD to pay 2.5% commission to the underwriters is invalid while
the decision to pay the underwriting commission in from of flats is valid.

Q.3) Prakhar Ltd. intends to raise share capital by issuing Equity in different stages over a certain
period of time. However, the company does not wish to issue prospectus each and every time of
issue of shares. Considering the provisions of the Companies Act, 2013, discuss what formalities
Prakhar Ltd. should follow to avoid repeated issuance of prospectus? RTP NOV 18
Hint: Shelf Prospectus

Q.4) Green Ltd. was dealing in export of rubber to specified foreign countries. The company was willing
to purchase rubber trees in A.P. STATE. The prospectus issued by the company contained some
important extracts of the expert report and number of trees in A.P. state. The report was found
untrue. Mr. Andrew purchased the shares of Green Ltd. on the basis of the expert’s report
published in the prospectus. However, he did not suffer any loss due to purchase of such shares.

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Will Mr. Andrew have any remedy against the company? State also the circumstances where an
expert is not liable under the Companies Act, 2013. RTP MAY 20
Hint: Explain Provision of section 35. Since Mr. Andrew did not suffer any loss due to
purchase of purchase of such shares, therefore, Mr. Andrew will have no remedy against
the company.

Q.5) Dwapar Equipment Finance Ltd., a non-banking finance company (NBFC), is desirous of offering
secured, redeemable; non-convertible 9% debentures to the public in 3 or more tranches so that
its purpose is served and there arises no need to take out a fresh prospectus for second and
subsequent offer of securities.
a) Deemed Prospectus
b) Shelf Prospectus
c) Red-Herring Prospectus
d) Abridged Prospectus MTP NOV 19
Hint: b)

Q.6) An allottee of shares in a company brought action against a Director in respect of false statements
in prospectus. The director contended that the statements were prepared by the promoters and
he has relied on them. Is the director liable under the circumstances? Decide referring to the
provisions of the Companies Act, 2013 MTP NOV 19
Hint: Section 34 imposes a criminal punishment on every person who authorizes the issue
of prospects, and section 35 more particularly includes a director of company. Hence
director cannot hide behind the excuse that he had relied on the promoters for making
correct statement in the prospectus.

Q.7) Discuss the provisions relating to private placement of shares under the Companies Act, 2013.
QP NOV 18

Q.8) What is Shelf Prospectus? State the important provisions relating to the issuance of Shelf-
Prospectus under the provisions of Companies Act, 2013. QP NOV 18

Q.9) Explain various instances which make the allotment of securities as Irregular Allotment under the
Companies Act, 2013. QP MAY 19

Q.10) The Board of Directors of Chandra Ltd. proposes to issue the prospectus inviting offers from the
public for subscribing the shares of the company. State the reports which shall be included in the
prospectus for the purpose of providing financial information under the provisions of the
Companies Act, 2013. QP NOV 19

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Faculty : CA Rachna Parakh Dubey

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