Prospectus

Public Offer & Private placement

• A public company may issue securities :

- to public through prospectus (referred as public offer)

- through private placement

- through rights issue or bonus issue in accordance with this act and SEBI

• A private company may issue securities :

- by way of rights issue or bonus issue

- through private placement

Meaning : Prospectus

Any document described or issued as a prospectus and includes:

- a red herring prospectus or

- shelf prospectus 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.

Considerations :

• Prospectus to be in writing

• Invitation to Public

• How many persons constitute public ?

• Dating of Prospectus

• Signing of Prospectus - by the proposed directors/agents authorised

- by the existing directors/agents authorised

The ‘Golden Rule’ :Prospectus

• The ‘Golden Rule’ as to framing of prospectus

- disclosure of information - so as investor can look into soundness of the

company’s venture - purpose of raising capital/project proposed - financial performance (last 5 years) - perception towards risk factors

• Matters to be stated/Reports to be set out

Types:

(i) Red herring prospectus

(ii) Shelf prospectus

Statement in lieu of prospectus: Where a public company does not invite public to

subscribe for its shares, but arranges to get money from private sources, it need not issue a prospectus to the public.

(i) Red Herring Prospectus

“Red herring prospectus" means a prospectus which does not include complete

particulars of the quantum or price of the securities included therein.

A company :

- May issue prior to the issue of a prospectus. - shall file it with the Registrar at least three days prior

to the opening of the subscription list and the offer.

Also a red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

(ii) Shelf Prospectus

It means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that

prospectus.

- In Companies Act, 1956, only Public Financial Institutions, Public sector Banks or Scheduled Banks with main object as “financing” were allowed to issue Shelf Prospectus

- The 2013 Act extends the facility of shelf prospectus by enabling SEBI to prescribe the classes of companies that may file a shelf prospectus.

Contents :ProspectusAs per The Companies Act,2013 (Sec.26)

(i) Section 26: Matters to be stated in prospectus

(ii) Money raised through a prospectus cannot be used for dealing in equity shares of another company.

(iii) Section 27: Variation in terms of Contract or Objects in Prospectus

(If a company changes terms of the prospectus or objects for which money is raised, it shall provide dissenting shareholders an exit opportunity. )

A prospectus may be issued : - By or behalf of a public company either with

reference to its formation or subsequently, or

- by or on behalf of any person who is or has been engaged or interested in the formation of a public company.

MATTERS TO BE STATED IN PROSPECTUS

Information in Prospectus: i) General Information: Names and addresses of

the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, underwriters.

ii)Terms of Issue: Dates of the opening and closing of the issue, and declaration about the issue of allotment letters and refunds within the prescribed time;

iii) Bank Account Details: a statement by the BOD about the separate bank account where all money received out of the issue are to be transferred and disclosure of utilised and unutilised money out of the previous

iv) Underwriter details

v) Consent of the directors, auditors, bankers to the issue, expert’s opinion, if any, and of such other persons

vi) The authority for the issue and the details of the resolution passed there for;

vii) Procedure and time schedule for allotment and issue of securities;

viii) Capital structure Details

ix) Particulars of issue : main objects of public offer, terms of the present issue and such other particulars as may be prescribed;

x) Project Details : main objects and present business of the company and its location, schedule of implementation of the project;

xi) particulars relating to—

- management perception of risk

- gestation period of the project;

- 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;

xii) minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash;

xiii) Company management :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

xiv) Disclosures in such manner as may be prescribed about sources of promoter’s contribution.

Reports with Prospectus: Every prospectus shall set out following reports for the

purpose of financial information:

i. Reports by the auditors

ii. Reports relating to profits and losses for each of the five financial years immediately preceding the financial year

iii. Reports of subsidiaries

iv. Reports on business transactions to which proceeds shall be applied

Note : Where company has not completed five financial years then such report for all financial years is required.

Reports by auditors should not be on accounts that are more than 180 days old.

iv)Reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly.

Declaration of Compliance:

Every 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 is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and the rules and regulations made there under.

Other matters in Prospectus

i) Delivery of Prospectus with Registrar:

ii) A copy of prospectus shall be delivered to the Registrar for registration signed by every person who is named as a director or proposed director of the company or by his duly authorised attorney on or before the date of its publication and only then it shall be issued by or on behalf of a company or in relation to an intended company.

Statement of an Expert:

I. Expert to be unconnected with formation or management of company

II. Expert’s consent should have a statement issued by him.

III.The registrar shall not register a prospectus all requirements has been complied with and the prospectus is accompanied by the consent in writing of all the person named in the prospectus.

IV.Prospectus shall not be valid if it is issued more than ninety days after the date on which a copy thereof delivered to the Registrar.

Caution:

Non compliance with the contents, the company shall be punishable with – fine which shall not be less than fifty thousand rupees

but which may extend to three lakh rupees to the company

– imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both to every person who is knowingly a party to issue

Misstatements in Prospectus/ Consequences

In case of misstatement of a material fact, there may arise :

(I)Civil Liability

(II)Criminal Liability

(I) Civil LiabilityA. Remedies against the company

1. Rescission of the contract

Conditions for rescission :

(i) statement must be a material misrepresentation of fact (differs from opinion) e.g wrong profits,directors

(ii) statement must have induced the shareholder to take the shares) e.g

(iii) statement must be untrue (dividend declared) e.g

(iv) the deceived shareholder is an allottee and he must have relied on the statement in the prospectus e.g. (shares from the market)

(v) the omission of material fact must be misleading before rescission is granted (approval for racing land)

(vi) proceedings must start as son as the allottee comes to know.

2. Damages for deceit

Cannot keep the shares and claim for the damages

B. Remedies against the Directors, promoters, Experts

The persons liable are :

- directors

- authorised as directors in prospectus

- promoters

- persons authorised to issue prospectus

1. Liability for damages for misstatement in prospectus

Defences of Directors, promoters, etc. a. Withdrawal of consent b. Absence of consent (public notice reqd.) c. Ignorance of untrue statement (public notice) d. Reasonable ground for belief (resignation of

any director ) e. Statement of expert

Right of Contribution

2. Liability for damages for non-compliance with sec.16 (matters to be reported)

3. Liability under general law

- deceived can drag all to the court for fraud

(II) Criminal Liability

A. Punishment for fraud (Sec 447)

The persons who is guilty of fraud is punishable with:

- imprisonment for a term which shall not be less than 6 months which may extend to 10 years

- liable to which shall not be less than the amount involved in fraud and may extend to 3 times the amount involved in the fraud.

- If fraud involves public interest, the term of imprisonment shall not be less than 5 years.

(B) Punishment for false statement (Sec 448) If any return, report, certificate, financial statement,

prospectus, statement or other document, any person makes a statement :

- which is false in material particulars, knowing to be false or

- which omits any material fact, knowing it to be material,

he shall be liable under sec.447

(C) Punishment for fraudulently inducing persons to invest money (Sec 36)

Any person either knowingly or recklessly makes any statement, promise or forecast which is false, deceiving or misleading or deliberately conceals any material facts to induce another person to enter into or to offer to enter into:

- any agreement with a view to acquire, dispose or subscribe for or underwriting securities; or

- any agreement , the purpose of which is to secure a profit to any of the parties from the yield of securities or reference to fluctuation in value of securities; or

- any agreement for obtaining credit facilities from any bank or financial institution

he shall be liable under sec.447