PROSPECTUS

S.2(70) defines “prospectus” as-

(i) any document

(ii) which is described or issued as prospectus
(iii) that includes notice, circular, advertisement or other document
(iv) inviting deposits from public
(v) for subscriptions or purchase of shares/ debentures of a body corporate.

A prospectus is an invitation issued to public to take shares/ debentures of a Co. or to deposit money with
the Co.

CONTENTS OF A PROSPECTUS

Dealt u/S.26.

An investor wanting a sound investment, a prospectus is one of the means by which he is informed

of the soundness of the Co.

Companies Act contains a comprehensive set of regulations to protect an investor from any fraud.

Chief aim of the legislature is to secure full disclosure of all material and essential particulars, i.e.-

1. has to be dated.
2. has to be registered- (i) with the RoC; registration has to be made on or before the publication of
prospectus.
(ii) copy to be signed by the director or proposed director in the prospectus.
(iii) copy of registered prospectus to be accompanied with-
(a) if the prospectus contains a report of expert publication, consent of the expert.
(b) copy of every contract relating to appointment and remuneration of managerial position.
(c) copy of material contract
(d) consent in writing of person named in prospectus as- auditor, attorney, solicitor, banker or broker of the
Co., to act in that capacity.
(e) written statement relating to adjustments relating to figures in profit or loss or assets and liabilities.
Statement to give reasons for adjustments and to be signed by the expert.

Prospectus to be issued within 90 days of its registration.

Whoever knowingly issues prospectus without registration, is liable of fine extending to ₹50,000

Must be stated on the face of prospectus that it is registered and necessary documents have been

filed.
 EXPERT’S CONSENT

If a prospectus contains a statement made by an expert; consent in writing of such an expert to be

obtained and mentioned in the prospectus.

“expert”- (i) himself not engaged or interested in formation, promotion or management of the co.
(ii) making expert a party in issue of prospectus “makes him liable for untrue statements”.

DISCLOSURES TO BE MADE- S.26

Schedule II provides for the information that is to be disclosed in the prospectus.

Schedule is divided into 3 parts.

Part 1- consists of general information, capital structure of the Co., terms of issue, particulars of

issue, Co. management and project, information about certain pending litigation, management of

risk factors( forex fluctuations).

Part 2- general information, financial information relating to profit and loss, assets and liabilities of

the Co., rate of dividend, auditor’s report about profit & loss of Co.’s subsidiaries and combined

profit & loss, accountant’s report if Co. proposes to acquire any business, utilization of proceeds of

the issue also to be stated.

Part 3- explanation of Part 1 and 2.

STATEMENT IN LIEU OF PROSPECTUS

Made for promoting a Co., it is necessary to have capital that can be raised from general public by

means of public issue.

This advantage is enjoyed only by a public Co. which is listed at a recognized stock exchange.

At times even a public Co. need not necessarily go to public for money.

Promoters may be confident of raising money from private contacts.

In such a case, no prospectus need to be issued to the public.

If the Co.(listed/ unlisted) can mange the capital requirement without going to public, Co. is only

required to prepare a “draft prospectus”

This draft prospectus with all necessary information is known as statement in lieu of prospectus.
 TYPES OF PROSPECTUS

1. DEEMED

Dealt u/S. 25(1).

Herein the Co. agrees or allows to allot any security of the Co.
The offer is made to investors via this document called deemed prospectus.

2. RED HERRING

Dealt u/s. 32.

This type of prospectus does not contain all information about the prices of securities offered and the
number of securities issued.
On the face of prospectus, a “red disclaimer” is provided, hence the name red herring.
Co. Act provides that the Co. proposing to issue this kind of prospectus shall file it with the RoC at least 3
days prior to the opening of subscription list and offer.

3. SHELF

Mentioned u/s. 31.

Is issued when Co. or public financial institution offers one or more securities to the public.
Validity period of such a prospectus is 1 year from the start of first offer.
S.31(2) states- material facts relating to new charges created to be provided in case of shelf prospectus.
“Information Memorandum” has to be filed with the RoC before issuing of securities.
Co. may circulate the information memorandum to the public before filing the prospectus.

4. ABRIDGED

Contains all salient features of prospectus as specified by the SEBI.

Contains all information in brief, gives investor a summary to make further decisions.
Co. cannot issue “application form” for purchase of securities unless abridged prospectus accompanies
the form.

DISCLOSURES TO GIVE TRUE AND FAIR VIEW OF CO.-

This golden rule was laid down in Henderson v. Lacon.
The true nature of Co.’s venture is to be disclosed.
This rule talks about the nature of conduct between shareholders and directors.
SEBI guidelines also to be observed.

REMEDIES FOR MISREPRESENTATION

 1. Damages for deceit-

Deceit is a tort which is a fraud.

Any person who is induced to invest through fraudulent statement can sue the person responsible

for issuing it.

If his action is successful, he recovers full compensation for the loss sustained by him.

“Burden of proof” lies on him to establish the action on following points-

(i) fraudulent misstatement- Fraud is proved when-

—> false representation has been made- knowingly; without belief in truth; recklessly,
whether it be true or false.

If directors publish a statement without knowledge of it being true/false or with knowledge the statement to
be false, they are said to have committed fraud.

(ii) Representation relating to fraud-

false representation must relate to some existing facts which are material to contract of purchasing

shares. Purpose for which money will be used is an important fact.

Eg: object of issue of debentures was to complete alterations in Co. building etc, but the real object was to
pay off director’s liabilities.

(iii) Remedy for direct allottees-

Plaintiff can have remedy against directors only when there is a misrepresentation in prospectus.

Liability cannot be attached to directors for all subsequent dealings which may take place on the

stock exchange.

COMPENSATION u/S.35

S.35 puts forth civil liability for misstatements.

Persons liable u/S.35 are-

(i) every person who is a director at the time of issue of prospectus.

(ii) who authorized himself to be named as director in the prospectus.
(iii) every promoter who was part of preparation of prospectus.
 (iv) every person who authorises the issue of prospectus.

They are liable to compensate the investor for any loss sustained by him by reason of untrue

statement in prospectus.

Main advantage of moving forward with S.35 is that the plaintiff does not have to prove fraud.

If the representation is false, the directors cannot escape liability even if they had made bona fide
statements and not with an intent to deceive.

SPECIAL DEFENCES AVAILABLE TO DIRECTORS U/S.35

1. WITHDRAWAL OF CONSENT- Person will not be liable if he had withdrawn his consent to become

a director before the issue of the prospectus and prospectus was issued without his authority or

consent.

2. ISSUE WITHOUT KNOWLEDGE- Even if the director’s name appears in prospectus, he can escape

liability if he proves that the prospectus was issued without his knowledge or consent. On becoming

aware, he issued a public notice.

3. IGNORANCE OF UNTRUE STATEMENT- At times a director maybe ignorant about the untrue

statement in the prospectus, he can defend himself on proving that on becoming aware of untrue

statement, he issued a public notice to withdraw his consent.

This must be done before allotment of shares.

4. REASONABLE GROUND FOR BELIEF- Director can be protected if he is able to show that he had

“reasonable ground” to believe till the time of allotment of shares that statements were true.

It is not enough for him to say that he was honest.

Along with him being honest he has to prove that his honest belief was based upon reasonable grounds.

5. STATEMENT OF EXPERT- If untrue statements are contained in expert’s reports, then the director
 who is sued has to show that he had reasonable grounds to believe till the allotment time that the

expert was competent.

RESCISSION FOR MISREPRESENTATION

an allotment of shares can be avoided at the option of the allottee if it is caused by

misrepresentation, whether done innocently or fraudulently.

This action is against the Co. have the subscriber’s name removed from the register of shareholders.

ESSENTIALS REQUIRED ARE-

1. False representation- there must be a false representation in prospectus.

False representation consists of-

(i) a positive misstatement; or
(ii) concealment of material facts.
—> R v. Kylsant-
FACTS- Lord Kylsant was prosecuted for issuing a prospectus with untrue statements. It was stated that
between the period of 1911-27 Co. paid dividends varying from 5-8%, except in 1914 no dividend was
paid and in 1926 dividend of 4% was paid.
These statements provided that the Co.was in sound financial position , but the truth was prior to issuing
of prospectus, Co. was in substantial trading loss.
The dividends that were being paid, were from the stored/ reserved funds of the Co.
HELD- Whole prospectus was held to be false on the basis of what was not stated/ mentioned in the
prospectus.

2. Of facts and not of law-

-> Misrepresentation must be of facts and not of law.

-> Facts misrepresented must be material to the contract of taking shares.
-> Fact is said to be material if it is likely to influence the decision of an average purchaser of shares (i.e.
urge or induce him to purchase or refrain from purchasing shares.)

3. Reliance and Inducement-

-> It is necessary that the plaintiff should have acted in reliance on statements contained in the prospectus.
-> Misrepresentation should be at least one inducement for his contract of taking shares.
-> No remedy for person if purchased shares in open market.
-> Also no remedy when plaintiff had means of “discovering the truth with ordinary diligence”, i.e. care that
every prudent person takes.

—> When it is established that there was misrepresentation/ willful concealment which induced the person
to enter into a contract, it cannot be used to relieve from it on the basis that the person would have known
the truth by proper inquiry.

4. By or On behalf of Co.-

-> Co. is only responsible for statements in prospectus when it shown that the prospectus was issued by
Co. or by someone who had the authority of the Co.- by BoD for instances.
OR
-> prospectus issued by promoters, was ratified by the Co.
Eg- where a person was induced to join a Co. as a shareholder by representation made by the secretary-
plaintiff couldn’t obtain remission as the secretary was not in the authority to make representation.

LIMITS OF RESCISSION-
—> Circumstances where the option to rescind is lost-

1. By affirmation- If the allottee had full knowledge of misrepresentation, upholds the contract, cannot

a afterwards rescind. Affirmation can be express or implied.

‘Implied affirmation’- takes place by shareholders conduct( attends meetings, receives dividend etc.)

2. By unreasonable delay-

any person who gets to know about misrepresentation, is bound to come at the earliest possible moment
after he becomes aware of the misrepresentation.
—> In Re Christianville Rubber Estates ltd
applicant became fully aware of misrepresentation, in prospectus by end of July, but in December he
moved to have his name removed from the register.
HELD- unexplained delay of 5 months precluded him from obtaining relief.

3. By commencement of winding up-

Right of rescission is lost when winding up proceedings commence.

shareholders of the Co. cannot be permitted to get rid of their shares after winding up of the Co. is

initiated.

names of the shareholders in the register is prima facie evidence of membership which gives

creditors faith to lend their money.

The removal of names would mislead the creditors.

—> Incase a shareholder had initiated to be relieved of his shares, passing of winding up order during the
pendency would not prevent him getting the relief.

CRIMINAL LIABILITY U/S.34

every person authorised to issue prospectus shall be punishable-

(i) with a term of 2 years; OR

(ii) a fine which may extend to ₹50,000
OR
BOTH

Any director sued u/S.34 shall have to prove that the statement was immaterial; OR

He had reasonable ground to believe and did at the time of issue of prospectus that the statement

was true.

INVITATION FOR DEPOSITS

(i) Central govt. to regulate the acceptance of deposits by companies in consultation with RBI.

(ii) rules prescribe the limit up to which manner in which and terms and conditions on which

deposits may be invited or accepted.

REGULATION PRESCRIBED-

deposits to be invited in accordance with deposit rules.

by an advertisement accompanied by a statement showing the financial position of the Co.

*PRIVATE Co. CANNOT ADVERTISE FOR DEPOSITS.*

If a Co. accepts or renews the deposit in contravention of these rules- Co. has to repay it within 30

days or within further 30 days if allowed by Central govt. on “sufficient causes”

If deposit is not refunded in accordance to the terms and conditions, Co. law board may order

repayment. Co. law board can do so on its own or on application of depositors.

Deposits in excess of limits prescribed also involves fine on the Co. to an amount equal to the

deposit( not less than ₹50,000, can go up to ₹10 lakh.)

Officers punishable with fine or imprisonment upto 5 years.

 Co. cannot invite/ renew deposits if it is in default in repayment of any deposits in full or in part or

any interest due on them.

—> These provisions NOT APPLICABLE ON-

banking Co.

Co. which Central govt. in consultation with RBI exempt.

—> DUTY TO SMALL DEPOSITORS-

If a co. fails to pay back a small depositor, it has to inform the National Company law tribunal.

‘SMALL DEPOSITOR’- In a financial year deposited with the Co. not more than ₹20,000. Would

include his successors, nominees and legal representatives.

Information has to be submitted on a monthly basis within 60 days of each default and with all

particulars of the deposit.

On receipt of such information, NCLT is under the duty to exercise the power to order the Co. to pay

back the depositor.

Defaulting Co. cannot accept any further deposit from small depositors, unless it has paid back the

whole amount due to each and every such depositor.

-> This doesn’t apply when deposit has been renewed by the depositor VOLUNTARILY;
OR
-> Repayment couldn’t be made due to the death of the depositor;
OR
-> Stay order of the Court or some other authority has been passed.

Total amount of default in respect of small deposits has to be included in future advertisements and

application forms inviting public deposits.

If any interest accrued to small depositor has been waived off- this fact has to be also included in

the respective advertisements and application forms.

After acceptance of new deposits, Co. is successful in taking loans for its working capital, before

the loan amount can be used for any purpose, it should be used in repayment of dues on small

deposits.
 FRAUDULENTLY INDUCING INVESTMENT OF MONEY

Is a punishable offense to fraudulently induce persons to invest money in companies.

When investment is brought about by-

-> knowingly;
-> recklessly making statements which are false or deceptive or misleading or by dishonest
concealment of material facts;

In such a scenario, liability would be incurred even when one was only attempting to do so.

FIRST ISSUE IN DEMAT FORM

Every public listed Co. making IPO for securities of ₹10 crore or more has to issue in demote form.

For this purpose, Depositories Act 1996 and Regulations made under the Act should be complied

with.