Finale WriteUp on Prospectus 26.08

K. J. Somaiya Institute of Management Studies & Research

Prospectus [As per The Companies Act, 1956]

By Group No. 10

Masters in Financial Management - Semester 1

Roll No. Members Name

10 Kunal Dhuri

16 Amit Gupta

23 Harun Inamdar

24 Nilesh Jadhav

43 Sandesh Rane

53 Durgaprasad Shirolkar

Facilitator: Prof. Rajkumar Bagadia

August 26, 2011

BUSINESS LAW ‐ I PROSPECTUS

Contents

Sr. No. Particulars

1. Definition, Meaning of Prospectus

2. Roll of Prospectus

3. Statutory Requirements as to the issue of Prospectus

4. Contents of Prospectus

5. Statement in Lieu of Prospectus

6. Abridged Prospectus

7. Red Herring Prospectus

8. Shelf prospectus

9. Deemed prospectus

10. Mis-Statements in Prospectus

MFM‐ SEM‐I (2011‐2014) Group No. 10 2 of 29


DEFINITION AND MEANING OF PROSPECTUS

A prospectus, as per section 2(36), means any document described or issued as prospectus and includes 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 or debentures of a body corporate. It is a formal legal document, which is required by and filed with the Securities and Exchange Commission that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision. Also known as an "offer document". In this context, it should be noted that prospectus is not an offer in itself but an invitation to make an offer, signifying thereby that on acceptance of such an invitation by any member of the public, no binding contract between him and the company comes into being. Application for purchase of shares or debentures or for making a deposit constitutes an offer by the subscriber to the company and it is only on its acceptance by the company that a binding contract comes into existence. Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies four things:

1. There must be an invitation to the public 2. The Invitation must be made by or on behalf of the company, 3. The invitation must to subscribe or purchase and 4. The invitation must relate to securities.

What constitutes an ‘offer to public’: It is important to take a note in the definition of prospectus about the offer being made to the public and about accepting deposits from public. Section 67 of the Act takes an insight into the construction of references to offering shares or debentures to the public. The Act is clear that an offer of shares to the company’s shareholders cannot be termed “an offer to the public”. It is necessary to understand the meaning of this expression in order to find out as to what constitutes a prospectus. Where an invitation is made by the management of a company to selected persons for subscription or purchase by less than 50 persons receiving the offer or invitation, the shares or debentures and such invitation or offer is not calculated directly or indirectly to be availed of by other persons, such invitation or offer shall not be treated as an offer or invitation to the public. If a prospectus addressed to the general public, or to a section of the public, is published, that no doubt constitutes an offer to the public, even though none of the public come in; but possibly if this offer is made without any intention to let the public take up any of the shares, it might be found as a fact that there was no real offer to the public. Explanation; (a) Any oral or TV/film advertisement is not regarded as a prospectus, it should be in writing. (b) The word subscription here means "taking" or "agreeing to take" securities for cash or' to pay cash. .



(c) Invitation to public means an invitation to public to subscribe for shares or debentures and shall include an invitation to any section of the public, whether selected as members or debenture holders of the company concerned or as d) It is opposed to 'private communication' e.g., invitation to friends, relatives of directors. A private company under Section 3 (J) (iii) is prohibited from inviting the public to subscribe for Its shares or debentures; and also prohibited to invite or accept deposits from persons other than Its members, directors or their relatives. Accordingly, a private company has no power to issue prospectus. Only a public company has power and privilege to Issue prospectus to public for subscription of shares in or debentures of the company or for inviting public deposits. If a public company is able to raise funds from its own resources and does not issue a prospectus with reference to its formation then it has to file a statement in lieu of prospectus with the concerned Registrar of Companies.



ROLE OF PROSPECTUS The prospectus is the basic document on the basis of which the intending investors decide whether or not they should subscribe to the shares or debentures. Therefore, the law requires unstinted disclosure of various matters through prospectus and forbids variations of any terms and conditions of a contract contained therein except with the approval and authority of the company in general meeting [Section 61]. Those who issue prospectus holding out to the public great advantage which will accrue to persons, who take up shares on the representations contained therein, are bound to state everything with scrupulous accuracy and not only to abstain from stating as fact that which is not so but to omit no fact within their knowledge, the existence of which might in any degree affect the nature or extent or quality of the privilege and advantages which the prospectus holds out as an inducement to take shares. It is therefore essential that the information statutorily needing disclosure is stated fully and precisely so that the investing public which is ignorant of the present and future prospects of the company may get all the information which is likely to affect the public mind. It is only to protect the members of the public against their being misguided by half truths or falsehoods that the law casts a liability on various persons connected with the issue of the prospectus to compensate every person (who subscribes on the faith of the prospectus) for any loss or damage he may have sustained because of the inclusion of any untrue statements in the prospectus [Section 62]. When issue of a Prospectus is not necessary; As per Section 56 of the Companies Act, 1956, the issue of a Prospectus is not necessary in the following cases: (i) When shares or debentures are offered to existing holders of shares or debentures by way of right issue. [Subsection (5)]. (ii) When the issue relates to shares or debentures uniform in all respects with shares or debentures previously issued and dealt in or quoted in a recognized stock exchange [Sub-section (5)]. (iii) Where a person is bona fide invited to enter into an underwriting agreement with respect to shares or debentures. [Subsection (3)]. (iv) A public company need not issue a prospectus when shares or debentures are not offered to public [Sub-section (3)] and money is being raised privately. In such a situation, a public company is to file' Statement in lieu of Prospectus'. (v) A private company need not issue a prospectus. Judicial Interpretations / Case Examples: Pramatha Nath Sanyal v. Kali Kumar Dutt AIR 1925 Cal. 714; An advertisement was inserted in-a newspaper stating: "some shares are still available for sale according to the terms of the prospectus of the company which can be obtained on application". This was held to be a prospectus as it invited the public to purchase shares. The directors were, therefore, penalized, for not complying with the requirements of filing a copy thereof with the Registrar of Companies.


South of England Natural Gas and Petroleum Company Ltd. 1911, I Ch., 573.


In this case 3000 of prospectus were sent out and distributed amongst the members of a certain gas company only. It is not considered to be an issue to public as it was directed to a specified person or a group of persons and it does not result in becoming available to others.

Nush v Lynde, 1929, A.C., 158 Public is a general word and no particular number are prescribed. Single private communication does not amount to issue to public. In this case, several copies of prospectus marked ‘strictly confidential' containing particulars of the issue, accompanied by appropriate forms (not containing all material facts) and prepared by the managing director (MD) were given to company director who gave to solicitor, who further gave them to a client and who to his brother-in-law, who induced 'L' to become director which he did. L also took some shares in the company. Held: the document had not been issued as a prospectus, as the document was passed on privately through a small circle of friends of the MD.

Govt.Stock Securities Investment Co. Ltd. v. Christopher [1956] I WLR 237, In this case, an offer was made to shareholders of company ‘A’ to transfer their existing shares to company ‘B’ against which they would be issued shares of company ‘B’. The question was whether the letter of offer was 'prospectus' inviting public subscription. Held that the test is not who receives the circular, but who can accept the offer put forward. In this case it could only be persons legally or equitably interested as shareholders in the shares of company 'A'. In these circumstances the impugned letter of offer was not a prospectus inviting public subscription.



STATUTORY REQUIREMENTS AS TO THE ISSUE OF PROSPECTUS

Comprehensive rules and regulations have been incorporated into the Companies Act 1956 in respect of this basic document which is the only source for the investors to ascertain the soundness or otherwise of the company. Since the prospectus is intended to save the investing public from victimisation, the Legislature has aimed at securing the fullest disclosure of all material and essential particulars and laying the same before all the prospective buyers of shares. (i) Dating of prospectus - According to Section 55, every prospectus must be dated. The

date so stated in the prospectus shall be taken as the date of its publication unless contrary is proved.

(ii) Signed: It must be signed by every Director or Proposed Director.

(iii) Registration of prospectus: The date of its filing with the Registrar (ROC) is taken to be

the date of its issue (it can be issued up to (90 days) and the date of issue can be different from the date of its publication. The Registrar shall not register a prospectus unless the requirements of Section 55, 56, 57 and 58 and sub-sections 1 and 2 of section 60 have been complied with and the prospectus is accompanied by the consent in writing of the person, if any, named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that capacity.

(iv) Terms of Prospectus not to be Varied or Changed: After registration, terms

mentioned in the prospectus cannot be changed except with the approval of shareholders in general meeting, so also with statement in lieu of' prospectus

(v) Alterations in Prospectus: If the prospectus delivered for registration to the Registrar is

not in conformity with the law or does not furnish required information, necessary corrections, alterations are made by companies as desired by the Registrar.

(vi) Printed Copies of the Prospectus Delivered to Regulatory Authorities: Printed

copies of the prospectus as registered by the Registrar, should be delivered to the SEBI, Stock Exchange and all the concerning authorities as true copy of the prospectus registered by the Registrar.

(vii) Time of Issue: Generally prospectus is issued after registration but there is no ban as

such to its issue before the registration.

(viii) It must be issued within 90 Days from the Date on which a Copy was Delivered to the Registrar (ROC) and Facts be mentioned on the face of it. It is not necessary that a prospectus should be issued by a company. It may be issued on behalf of a company by its agents like an 'issuing house'.

(ix) Application form to Accompany Prospectus: Application form for shares debentures

must accompany abridged (brief) form of prospectus. In the Companies Amendment Act, 1998 word 'prospectus' has been substituted by "memorandum containing such salient features of prospectus as may be presented". Such memorandum is the abridged form of prospectus.

(x) Furnishing of a Copy of a Prospectus on Demand: A copy of prospectus shall be

furnished to a person who makes request in this regard before the closing of the subscription list. Any person who acts in contravention of provisions cited above shall be punishable with fine, which may extend to fifty thousand rupees. [Section 56(3]


(xi) It must be Accompanied by:


a. Consent of expert if the report of the expert is to be published. b. Written consent of all those whose names are mentioned e.g., the auditors,

bankers, solicitors, etc. c. A copy of agreement for the appointment of managerial personnel and their

consent. d. Copy of material contracts.



CONTENTS OF PROSPECTUS [SECTION 56]

1. Every prospectus issued by or on behalf of a company or by or on behalf of any person who is or has been engaged or interested in the formation of a company, shall state the matters specified in Part I of Schedule II and set out the reports specified in Part If of that Schedule and the said Parts I and shall have effect subject to the provisions contained in Pat1 III of that Schedule.

2. A condition requiring or binding an applicant for shares in or debentures of a company to waive compliance with any of the requirements of this section or purporting to affect him with notice of any contract, document or material not specifically referred to in the prospectus shall be void.

3. No one shall issue any form of application for shares in or debentures of a company,

unless the form is accompanied by a memorandum containing such salient features of a prospectus as may be prescribed which complies with the requirements of this section provided that a copy of the prospectus shall, on a request being made by any person before the closing of the subscription list, be furnished to him: provided further that this sub-section shall not apply if it is shown that the form of application was issued either; a. In connection with a bona fide invitation to a person to enter into an underwriting

agreement with respect to the shares or debentures; or b. In relation to shares or debentures which were not offered to the public.

Non-Compliance: If any person acts in contravention of the provisions of this subsection, he shall be punishable with fine which may extend to fifty thousand rupees.

4. A director or other person responsible for the prospectus shall not incur any liability by

reason of any non-compliance with, or contravention or any of the requirements of this section. If; a. As regards any matter not disclosed. he proves that he had no knowledge thereof;

or

b. He proves that the non-compliance or contravention arose from an honest mistake or fact on his part; or

c. The non-compliance or contravention was in respect of matters which, in the

opinion of the Court dealing with the case, were immaterial, or was otherwise such as ought. in the opinion of that Court, having regard to all the circumstances of the case reasonably to be excused; provided that no director or other person shall incur any liability in respect of the failure to include in a prospectus a statement with respect to the matters specified in clause 18 of Schedule II, unless it is proved that he had knowledge of the matters not disclosed.

5. This section shall not apply:


a. To the issue to existing members or debenture holders of a company of a prospectus or form or application relating to shares in or debentures of the company, whether an applicant; for shares or debentures will or will not have the right to renounce in favour of other persons; or

To the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange; but subject as aforesaid, this section shall apply to a prospectus or a form of


application whether issued on or with reference to the formation of a company or subsequently,

6. Nothing in this section shall limit or diminish any liability which any person may incur

under the general law or under this Act apart from this section.

Matters Specified in Schedule II: Central government vide note no, 666 (E) dated 3/10/91 amended Schedule II and matters to be disclosed under revised Schedule II are given in 3 parts;

In Part I brief particulars are to be given about matters mentioned below:

1. General information: Under this head, information is given about – i. The Name and address of registered office of the company. ii. Name/(s) of stock exchange/(s) where application for listing is made. iii. Declaration about refund of the issue if minimum subscription of 90% is not received

within 90 days' from closure of the issue. iv. Declaration about the issue of allotment letters/refunds within a period of 10 weeks

and interest in case of any delay in refund at the rate prescribed under section 73. v. Date of opening of the issue. vi. Date of closing of the issue including the date of earliest closing of the issue. vii. Name and address of auditors and lead managers. viii. Whether rating from CRISIL or any rating agency has been obtained for the

proposed debentures/preference shares issue. If no rating has been obtained, this should be answered as 'No'. However, if 'yes', the rating should by indicated.

ix. Names and addresses of the underwriters and the amount underwritten by them together with declaration by the Board of directors that the underwriters have sufficient resources to meet their respective obligations.

x. Consent of the Central Government about the present issue as also particulars of letter of intent/industrial licence making clear in the statement that the Central Government does not undertake any responsibility for financial soundness or correctness of the statement(s).

xi. Punishment if application for shares is made in a fictitious name (vide section 68A) xii. Names and addresses of trustees of the debenture trust deed, in case of issue of

debentures.

2. Capital structure of the company : i. Authorised, issued, subscribed and paid-up capital; also, paid up capital after the

present issue or after conversion of debentures, if any. ii. Size of the present issue, giving separately reservation for preferential allotment to

promoters and others.

3. Terms of the present issue: i. Terms of payment. ii. How to apply, i.e., for making use of the application form, on the basis of study of

prospectus and mode of payment. iii. Any special tax benefits for the company and its shareholders. iv. Rights of the instrument holders e.g., whether they will get dividend for the whole

year or for the period of holding only.


4. Particulars of the issue:


i. Object(s) of the issue. ii. Project cost. iii. Means of financing (including contribution of promoters).

5. Company Management and Project:

i. History and main objects and present business of the company, as also name and address of subsidiary, if any.

ii. Promoters and their background. iii. Location of the project. iv. Collaborations, if any, with details of any performance guarantee or assistance in

marketing. v. Nature of the product/(s), export possibilities, export guarantee. vi. Stock market data for shares/debentures of the company including high and low

price in each of the last three years and monthly high/low during the last six months, if applicable.

vii. Names, addresses and occupation of managing director, whole time director, other directors including nominee directors and manager, mentioning any directorship held in other company in each case.

viii. Plant and machinery, technology, process etc. ix. Infrastructure facilities for raw materials and utility like water and electricity. x. Schedule of implementation of the project and the progress made so far, giving

relevant details like land acquisition, civil construction, installation of plant and machinery, trial production, date of commercial production, etc.

xi. Approach to marketing and proposed marketing set up. xii. Future prospects, expected capacity utilization during the first three years from the

date of commencement of commercial production, arid the expected year from which the company would be earning cash profits and net profits.

Part II of Schedule II requires the company to give certain detailed information. This part is further sub-divided into three parts viz; General Information, Financial Information and Statutory and Other Information. A. General Information

It includes information on matters like: i. Consent of directors, auditors, solicitors, managers to the issue, registrars to the

issue, bankers of the company, bankers to the issue and experts. If expert's opinion was obtained, the same should be given.

ii. Change, if any, in directors and auditors during the last 3 years and reasons therefore.

iii. Procedure and time schedule for allotment and issue of certificates. iv. Names and addresses of company secretary, legal advisor, lead managers, co-

managers, auditors, bankers to the issue and brokers to the issue. v. Authority for the issue and details of resolution passed therefore.

B. Financial Information

It includes;


i. Reports of the auditors of the company with respect to its profits and losses and assets and liabilities and the rates of dividends paid in respect of each class of


shares for each of the five financial years immediately preceding the issue of prospectus; in case the statement of accounts has not been prepared for any period or part thereof out of the five years as aforesaid ending on a day three months before the issue of the prospectus, the auditor's report shall make a mention of the same along with a certificate on the statement of accounts in respect of aforesaid period or part thereof ending on a day not earlier to six months from the date of the prospectus indicating the profits or losses for the period or part thereof and assets and liabilities as on the last day of that period, that, such statement of accounts has been examined and found correct by him. The auditor's report shall also state the dividend not paid on any class of shares in respect of the five years or shorter period mentioned above.

ii. Report by the accountants (who should be named) on the profits and losses for the preceding 5 financial years and on the assets and liabilities on a date which must not be more than 120 days before the date of the issue of the prospectus.

C. Statutory and other information

It includes information about; i. Minimum subscription.

ii. Expenses of the issue (i.e., fee payable to Advisors, Registrars to the issue, Managers to the issue and Trustees for the debenture holders.

iii. Underwriting commission and brokerage.

iv. Previous issue for cash.

v. Previous public or rights issue, if any, during the last five years, giving particulars about date of allotment, refunds, premium/discount, etc. and the reason for any difference in premium compared to premium paid or payable in any issue of shares during the last two years. Also, how any premium received has been disposed of should be stated.

vi. Issue of shares otherwise than for cash.

vii. Commission or brokerage on previous issue.

viii. Revaluation of assets, if any (during the last five years).

ix. Material contracts and time and place where such documents may be inspected.

x. Debentures and redeemable preference shares or other instruments issued but remaining outstanding on the date of the prospectus and terms of their issue.

xi. Purchase of any property with details as to :

a. names, addresses, occupations and description of vendors;

b. amount paid or payable in cash, shares and debentures to the vendor or vendors, specifying the amount, payable or paid, if any, for goodwill;


c. the nature of title or interest in such property acquired or to be acquired by the company;


d. Short particulars of each transaction relating to the property completed within two preceding years including interest therein of any person acting as promoter or director or as a proposed director of the company at the relevant time [vide Clause 10(d) of Part II of Schedule II].

xii. If the proceeds of the issue are to be applied wholly or partly in payment for the property in (Xl) above, or the property, acquisition of which is not complete at the date of the issue of the prospectus, the particulars thereof, unless the contract for purchase or acquisition was entered in the ordinary course of the business and not made in contemplation of the issue nor the issue in consequence of the contract and where the amount involved in the purchase was immaterial. If a business which has not been carried on for three years is proposed to be purchased, then the length of time during which the business was carried on.

xiii. (l) Details of directors, proposed directors, whole time directors, their remuneration, appointment and remuneration of managing directors, interests of directors, their borrowing powers and qualification shares.

Any amount or benefit paid or given within the two preceding years or intended to be paid or given to any promoter or officer and consideration for payment of giving the benefit.

(ii) The dates, parties to, and general nature of;

(a) every contract appointing or fixing the remuneration of a managing director or manager whenever entered into, that is to say, whether within or more than, two years before the date of the prospectus;

(b) every other material contract, not being a contract entered into in the ordinary course of the business carried on or intended to be carried on by the company or a contract entered into more than two years before the date of the prospectus.

A reasonable time and place at which any such contract or a copy thereof may be inspected.

iii) Full particulars of the nature and extent of the interest, if any, of every director or promoter

(a) in the promotion of the company; or

(b) in any property acquired by the company within two years of the date of the prospectus or proposed to be acquired by it.

Where the interest of such a director or promoter consists in being a member of a firm or company, the nature and extent of the interest of the firm or company with a statement of all sums paid or agreed to be paid to him or to the firm or company in cash or shares or otherwise by any person either to induce him to become, or to qualify him as, a director, or otherwise for services rendered by him or by the firm or company, in connection with the promotion or formation of the company.


xiv. Rights of members regarding voting, dividend, lien on shares and the process for modification of such rights and forfeiture of shares.


xv. Restrictions, if any, on transfer and transmission of shares/debentures and on their consolidation/splitting.

xvi. Certain prescribed particulars in regard to the company and other listed companies under the same management in terms of section 370(1B) which made any capital issue during the last 3 years.

xvii. Outstanding litigations relating to financial matters or criminal proceedings against the company or directors under Schedule XIll. Similarly, particulars of default, if any, in meeting statutory dues, institutional dues and dues towards instrument holders like preference shares, debentures and deposits together with same particulars in respect of companies promoted by same private promoters and listed on stock exchanges.

xviii. Any material development subsequent to the date of the latest balance sheet and its impact on performance and prospects of the company.

xix. Management perception of risk factors (e.g., sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost/time over run, etc.).

Part III of the Schedule gives explanations of certain terms and expressions used under Part I and Part II of the Schedule. It also requires a declaration that all the relevant provisions of the Companies Act, 1956, and the guidelines issued by the Government or the guidelines issued by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange, Board of India Act,1992, as the case may be} have been complied with and no statement made in prospectus is contrary to the provisions of the Companies Act, 1956 or the Securities and Exchange Board of India Act, 1992 or rules made there under or guidelines issued, as the case may be.



STATEMENT IN LIEU OF PROSPECTUS

As per Section 70 (I), a company (excluding a private company) having a share capital, which does not issue a prospectus on or with reference to its formation, or which has issued such a prospectus but has not proceeded to allot any of the shares offered to the public for subscription, shall not allot any of its shares or debentures unless at least three days before the first allotment of either shares or debentures, there has been delivered to the Registrar of Companies (ROC) for registration a statement in lieu of prospectus signed by every person who is named therein as a director or proposed director of the company or by his agent authorised in writing, in the form and containing the particulars set out in Part I of Schedule III and in the cases mentioned in Part II of that Schedule, setting out the reports specified therein, and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule. [Section 70 (I)].

If a company acts in contravention of this sub-section, the company, and every director of the company who wilfully authorises or permits the contravention shall be punishable with fine which may extend to ten thousand rupees. [Section 70 (4)]

ABRIDGED PROSPECTUS

Prospectus is a bulky document and it is not economically feasible to supply full-fledged prospectus to the prospective investors. Therefore, as a cost saving measure, provision has been made to issue prospectus in abridged form. As per Section 2(1) of the Companies (Amendment) Act, 2000 “abridged prospectus means a memorandum containing such salient features of a prospectus as may be prescribed.” In the Companies Amendment Act, 1988, word 'prospectus' has been substituted by "memorandum containing such salient features of prospectus as may be presented". Such memorandum is the abridged form of prospectus. After this amendment, companies are not required to issue full/detailed prospectus along with application form, which may be issued only on the request of the applicant. It is however, open to a company to attach full prospectus along with the application forms. By the Amendment Act of 1988 the company was permitted to furnish an abridged form of prospectus along with the application for shares or debentures instead of the full prospectus. The Government has revised the format of abridged prospectus to provide for greater disclosure of information to prospective investors so as to enable them to take an informed decision regarding investment in shares and debentures. The abridged prospectus (in Form 2A) and the share application form should bear the same printed number. The investor may detach the share application form along the perforated line after he has had an opportunity to study the contents of the abridged prospectus, before submitting the same to the company or its designated bankers. New rule 4cc has been inserted in the Companies (Central Govt) Rules and Forms 1956 and as per this rule; the salient features should be given in Form 2A which requires information to be given under nine heads: 1. General information 2. Capital Structure 3. Terms of Present Issue 4. Particulars of the Issue 5. Company Management and Project


6. Financial Performance during 5·years


7. Payments/Refunds 8. Companies under same Management 9, Risk Factors The Department of Company Affairs (now Ministry of Corporate Affairs) circular no 1/92 dated 9th January, 1992 provides that;

(i) Share application form should be a part of the abridged prospectus. (ii) Abridged prospectus and application form (attached with) are allowed to be same

printed numbers. SEBI requirements in respect of abridged prospectus will also have to be fulfilled. Circumstances where details are not required in the abridged prospectus:

(1) Where the offer is made in connection with a bona fide invitation to a person to enter into an undertaking agreement with respect to the shares or debentures.

(2) Where the shares or debentures are not offered to the public.

(3) Where the offer is made only to the existing members or debenture holders of the company.

(4) Where the shares or debentures offered are in all respects uniform with shares or debentures already issued and quoted on a recognized stock exchange.

(5) Where a prospectus is issued as a newspaper advertisement, it is not necessary to specify the contents of the memorandum, or the names etc., of the signatories to the memorandum or the number of shares subscribed for by them.

Abridged prospectus to be issued along with application form: A company cannot issue application forms for shares or debentures unless the form is accompanied by abridged prospectus, according to Section 56(3) of the Companies Act, 1956. The abridged prospectus and application form should bear the same printed number. The investor may detach the share application form along the perforated line, after he has had an opportunity to study the contents of this abridged prospectus. The objective of this provision is to reduce the cost of issue as the detailed prospectus is a very bulky document whereas the contents of abridged prospectus are limited. Penalty for failure to comply with Section 56(3) can be a fine of up to Rs.50, 000. Circumstances under which the abridged prospectus containing all the prescribed details need not accompany the application forms: (i) In case of bona fide underwriting agreement [Section 56(3)(a)] (ii) Where shares and debentures are not issued to the public [Section 56(3)(b)]. (iii) where the offer is made only to existing members or debenture holders of the company [Section 56(5)(a)]. (iv) In case of issue of shares or debentures which are in all respect similar to those previously issued and dealt in a recognized stock exchange [section 56(5)(b)]

RED HERRING PROSPECTUS


"Red-herring prospectus" Means a prospectus, which does not have complete particulars on the price of the securities offered and quantum of securities offered. [Explanation to Section 60B (4)].


A red herring prospectus is a document submitted by a company (issuer) who intends on having a public offering of securities (either stocks or bonds). Most frequently associated with an Initial Public Offering (IPO), this registration statement must be filed with the Securities and Exchange Commission (SEC). The preliminary prospectus is the first offering document provided by a securities issuer and includes most of the details of the business and transaction in question. Some lettering on the front cover is printed in red, which results in the use of the nickname "red herring" for this document. The final prospectus is printed after the deal has been made effective and can be offered for sale, and supersedes the preliminary prospectus. It contains finalized background information including such details as the exact number of shares/certificates issued and the precise offering price. A public company making an issue of securities may circulate information memorandum to the public prior to filing of prospectus [Section 60B (1)]. As per Section 2(19B), information memorandum means a process undertaken prior to the filing of prospectus by which a demand for the securities proposed to be issued by the company is elicited, and the price and terms of issue for such securities is assessed by means of notice, etc. A company inviting subscription by an information memorandum shall be bound to file a prospectus prior to the opening of the subscription lists and the offer as red-herring prospectus, at least 3 days before the opening of offer [Section 60B (2)]. Exact issue size or issue price is not mentioned in the red-herring prospectus. On the basis of offers received, company will finalise the issue price and issue size and then close the offer. After closure of offer of securities, a final prospectus will be prepared stating the total capital raised whether by way of debts, or share capital and the closing price of securities and any other details as were not complete in red-herring prospectus. The prospectus will be filled with ROC and also with SEBI in case of listed company.[Section 60B (9)]. The red herring statement contains:

1. purpose of the issue; 2. proposed offering price range; 3. disclosure of any option agreement; 4. underwriter’s commissions and discounts; 5. promotion expenses; 6. net proceeds to the issuing company (issuer); 7. balance sheet; 8. earnings statements for last 3 years, if available; 9. names and address of all officers, directors, underwriters and stockholders owning 10%

or more of the current outstanding stock; 10. copy of the underwriting agreement; 11. legal opinion on the issue;


12. copies of the articles of incorporation of the issuer


SHELF PROSPECTUS

“Shelf prospectus” 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. It was introduced in the companies (Amendment) Act. 2000. As the issue of shares is a time consuming process with too many negotiations involved with various bodies of banks, underwriters and brokers and there are large number of matters which are highly informative to be published, repeating the procedures every time of issue is time consuming and costly too. Therefore, the provisions of shelf prospectus and information Memorandum were inserted in the Companies (Amendment) Act 2000 by inserting Sections 60A and 60B. Need for Shelf Prospectus: Under the Companies Act, a company must issue a complete prospectus every time it approached the capital market. It certainly leads to needless repetition more so when a company takes recourse to capital markets more than once in a given year. Newly inserted Section 60A provides relief to such a company (financial institution) that may issue a “shelf prospectus” which will remain valid for a period of one year from the date of opening of the first issue. Such a prospectus has a limited life during which it remains on the “shelf”, and is updated for any changes that may have occurred between two successive offerings.

Requirements of a Shelf Prospectus: 1. Any public financial institution, public sector bank or scheduled bank whose main object is

financing shall file a shelf prospectus. [Section 60A (1)]

2. A company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at very stage of offer of securities by it within a period of validity of such shelf prospectus. [Section 60A (2)]

3. A company filing a shelf prospectus shall be required to file an information memorandum on all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed by the Central Government (one year), prior to making of a second or subsequent offer of securities under the shelf prospectus. [Section 60A (3)]

4. An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus: provided that where an updates of information memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall continue the prospectus. [Section 60A (4)]

Purpose

When a financial institution wants financing from the Central Government in India, it must provide a shelf prospectus to the Registrar of Companies. A shelf prospectus contains one or more issues of the securities listed in the prospectus. It is a notification to the public of the transaction the institution plans to do, and it is the company's way into the primary market.



Process

The financial institution creates a shelf prospective and files in with the Registrar. Once it is filed, it remains valid for 1 year to the public. All securities wanted by the financial institution are listed in the prospectus. If five securities are wanted, only one shelf prospectus is needed.

Provisions relating to “information Memorandum” contained in Section 60B of the Companies Act, 1956 [Inserted by the Companies (Amendment) Act, 2000]

1. A public company making an issue of securities may circulate information memorandum to the public prior to filing of a prospectus.

2. A company inviting subscription by an information memorandum shall be bound to file a prospectus prior to the opening of the subscription lists and the offer as a red herring prospectus, at least three days before the opening of the date.

3. The Information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of a prospectus.

4. Any variation between the information memorandum and the red-herring prospectus shall be highlighted as variations by the issuing company.

5. Every variation as made and highlighted in accordance with sub-section(4) above shall be individually intimated to the persons invited to subscribe to the issue of securities.

6. In the event of the issuing company or the underwriters to the issue have invited or received advance subscription by way of cash or post-dated cheques or stock invest, the company or such underwriters or bankers to the issue shall not encash such subscription moneys or post-dated cheques or stock invest before the date of opening of the issue, without having individually intimated the prospective subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid.

7. The applicant or proposed subscriber shall exercise his rights to withdraw from the application on any intimation of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and the underwriters.

8. Any application for subscription which is acted upon by the company or underwriters or bankers to the issue without having given enough information of any variations, or the particulars of withdrawing of offer or opportunity for cancelling the post-dated cheques or stock invest or stop payments for such payments shall be void and the applicants shall be entitled to receive a refund, or return of its post-dated cheques or stock invest or subscription money or cancellation of its application, as if the said application had never been made and the applicants are entitled to receive back their original application and interest at the rate of fifteen percent from the date of encashment till payment of realization.

9. Upon the closing of the offer of securities, a final prospectus stating therein the total capital raised whether by way, of debt or share capital and the closing price of the securities and any other detail as were not complete in the red-herring prospectus shall be filed in a case of public company with the Securities and Exchange Board and Registrar, and in any other case with the Registrar only.



DEEMED PROSPECTUS

In order to avoid the expenses of issue of prospectus (which are quite exorbitant) one practice is that the company may allot agree to allot shares to an “Issue house” (merchant banker or financial institutions) without issuing the shares to the public through issue of prospectus.

The issue house in turn makes an offer for sale to the public. This offer for sale or advertisement of such issue house is called “Deemed prospectus”.

Document containing offer of shares or debentures for sale to be deemed prospectus.

The statement of the 'issue house' making a proposal to the public to invest in the company's shares and debentures is the deemed prospectus of the company. (1) Where a company allots or agrees to allot any shares in or debentures of the company with a view to all or any of those shares or debentures being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of statements in and omissions from prospectuses, or otherwise relating to prospectuses, shall apply with the modifications specified in sub-sections (3), (4) and (5), and have effect accordingly, as if the shares or debentures had been offered to the public for subscription and as if persons accepting the offer in respect of any shares or debentures were subscribers for those shares or debentures, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof. (2) For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, shares or debentures was made with a view to the shares or debentures being offered for sale to the public if it is shown— (a) that an offer of the shares or debentures or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or (b) that at the date when the offer was made, the whole consideration to be received by the company in respect of the shares or debentures had not been received by it. (3) Section 56 as applied by this section shall have effect as if it required a prospectus to state in addition to the matters required by that section to be stated in a prospectus— (a) the net amount of the consideration received or to be received by the company in respect of the shares or debentures to which the offer relates; and (b) the place and time at which the contract under which the said shares or debentures have been or are to be allotted may be inspected. (4) Section 60 as applied by this section shall have effect as if the persons making the offer were persons named in a prospectus as directors of a company. (5) Where a person making an offer to which this section relates is a company or a firm, it shall be sufficient if the document referred to in sub-section (1) is signed on behalf of the company or firm by two directors of the company or by not less than one-half of the partners in the firm, as the case may be; and any such director or partner may sign by his agent authorized in writing.

MIS-STATEMENTS IN THE PROSPECTUS

Golden rule of Prospectus:


New Brunswick and Canada Railway and Land Co. vs. Muggeridge (1860)

http://www.blurtit.com/q550679.html


The Golden Rule as regards the drafting of the prospectus was laid down by Kindersley, V. C., in the leading case New Brunswick and Canada Railway and Land Co. v. Muggeridge,[4] 1 Dr. & Sm. 363, 381. in these words:--- "Those who issue a prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares, on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as facts that which is not so, but to omit no one fact within their knowledge the existence of which might in any degree affect the nature, or extent, or quality of the privileges and advantages which the prospectus "holds out as inducements to take shares ". Lord Macnaghten has stated that, “everybody knows that half a truth is no better than a downright falsehood”. Prospectus represents the soul of the company. It is exclusively on the basis of the prospectus investors get the information about the company and based on that investor takes investment decisions. Investors have to be safeguarded against all wrongs and false statements in prospectus. Therefore every person authorizing the issue of prospectus has a primary responsibility to see that the prospectus contains the true state of affairs of the company and does not give any fraudulent picture to the public. The prospectus must make full & honest declarations of material fact without concealing or omitting or suppressing any relevant fact. What are Mis-statements?

Statements which are untrue or; Statements which conceals material facts or; Statements which produces wrong impression or; Statements which are misleading or; Statements with double meaning or; Omission of facts or; Exaggeration about the company

All of these have the potential to mislead a prospective investor in the company. Untrue Statement:

‘As per Section 65(1)a of the Act; a statement included in a prospectus shall be deemed to be untrue; if the statement is misleading in the form and context in which it is included.’

A mere representation that something will be done or will happen in future is not a mis-statement. Mis-statement must be to an existing fact. The prospectus must make all statements with absolute accuracy and avoid the facts which are strictly not correct. A statement may be false not only because of what it states but also because of what it omits or conceals. The mis-statements in the prospectus may lead to Civil Liability as per Section 62 and Criminal Liability as per Section 63 of the act. Civil Liability for Mis-Statements in Prospectus (Section 62):


Section 62 was first enacted in England in the Director’s Liability Act, 1890, which was subsequently replaced by section 43 of Companies Act, 1948. The section 62 of the Companies Act, 1956 makes certain person liable to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have suffered by reason of any untrue statement made in the prospectus.


The effect of Section 62 is to easily to establish liability against the Directors in a common law action of deceit by raising certain legal presumptions against them. Thus, this provision is an effective remedy to the deceived shareholders. This section is meant to tighten up the duties of directors and others who are in connection with the prospectus. So, this section provides statutory civil liability for ‘untrue statement’ Conditions for invoking Section 62:

The company had issued a prospectus inviting persons to subscribe for its shares or debentures.

An untrue statement was included in the prospectus. The person who is claiming for the compensation had subscribed for the shares or

debentures offered by the prospectus. Such person has subscribed for the shares or debentures relying upon the untrue

statement contained in the prospectus. Such persons on has sustained a loss or damage after having subscribed for the shares

or debentures.

Persons who are liable for mis-statements in the prospectus:

1. every person who is a director of the company at the time of the issue of the prospectus; 2. every person who has authorised himself to be named and is named in the prospectus

either as a director, or as having agreed to become a director, either immediately or after an interval of time;

3. every person who is a promoter of the company; 4. every person who has authorised the issue of the prospectus; 5. an expert

Liabilities:

1. Compensation:

Above persons are liable to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have suffered by reason of any untrue statement made in the prospectus. Measure of the damages to be paid is defined by case McConnel vs. Wright (1903 1 Ch 546). It has been held that the measure of the damages is the loss suffered by reason of the untrue statements, omission etc. and it is the difference between

Values the share would have had and True value of the shares at the time of allotment.

Kisan Mehta vs. Universal Luggage Mfg. Co. Ltd. Here, in this case, Mehta filed a suit for injunction to restrain the company from issuing a prospectus. Mehta alleged that it contained misleading statements. The suit was later dismissed. Court held that "Only a person who has suffered loss or damage on the faith of the prospectus is entitled to a remedy under the section". Thus, public interest litigation shall not be allowed with this. The Court further said that "If a subscriber, who purchases shares on the faith of a prospectus which allegedly contains misstatements, wants to take an action in addition to what is contemplated under section 62 or section 63, it is open to him to take an action; but that does not mean that any other person who is not interested in the company at all can come forward and say that the statements contained in the prospectus are false, and that a future investor might be duped, that he might suffer, and therefore, the company should be restrained from acting in any particular manner."


2. Damages for deceit or fraud:



Any person induced to invest in a company by fraudulent statement in a prospectus can sue the company and person responsible for damages. The shares shall be first surrendered to the company before the company can be sued for damages. Every actual misrepresentation, which is material, is a fraud, although it be apparently true. Thus, if words be used in a double sense, - as if articles be represented to be silver, when they are German silver, and be purchased in the belief that they are Mexican silver, - the contract would be void. So, also, where artifice is employed for the purpose of deception, or where a trick is played, by which a person is deceived into making a contract wholly different from what he intended, the fraud and surprise would vitiate it. The allottee can claim for damages of fraud from the company. Such damages can be claimed only after the allottee has rescinded the contract and ceased to remain the shareholder. Thus, if he still continues to be a shareholder of that same co. even after knowing the fact that the co. is acting fraudulently, then that person has no right to ask for any further damages. Fraud occurs when any statement is made without belief in the truth or carelessly. A statement made with knowledge that it is false will constitute fraud or deceit. In a leading case on the point, Derry vs. Peek (1989 14 AC 337), it has been held that if the person making statement honestly believes it to be true, he is not guilty of fraud even of the statement is not true. Derry vs. Peek (1989 14 AC 337), The directors of a tramway company issued a prospectus stating that they had the right to run tram cars with steam power instead of with horses as before. The Act incorporating the company provided that such power might be used with the sanction of the Board of Trade. The directors of the company honestly believed that since the plans were approved, getting permission from board of Trade was a mere formality and permission would be granted. But, the Board of Trade refused to give permission and the company had to be wound up. One of the shareholders sued the directors for damages for fraud or deceit. Now, the House of Lords held that the directors were not liable in fraud because they honestly believed what they said in the prospectus to be true. Lord Herschel in this case observed that “Fraud is proved when it is shown that false representation has been made (a) knowingly, (b) without belief in its truth, or, (c) recklessly, carelessly whether it be false or true. Re Reese River Silver Mining Company v. Smith, ib. 64 (1869) In this case, the prospectus contained the statement that the property which the company had contracted consisted of 50 acres land. It also said, “Containing several very valuable claims, some of which are in full operation, and make large daily returns”. The statement made was completely false as no such claims were in full operation. Now, the party contented that the statement was based on the report which was received by the director, and believed the same honestly. The court said that there was a misrepresentation of facts. Court further observed that the company had committed the mistake by stating the circumstances as facts instead of stating as information received. If the company speaks that they have got the information from the report, then it’s their duty not to mention as facts. A prospectus may be fraudulent where its statements are true but on omitting something, it may create a false impression. To render a prospectus fraudulent, it is not necessary that there should be a false representation in it. The suppression of material fact is also fraudulent. If an omission of a material fact is such that even if the omitted statement were included in the prospectus it would not render untrue the statement made in the prospectus, such omission will not entitle the purchaser to avoid the contract; nor will it make the persons


responsible for the issue of the prospectus liable in damages. Thus a prospectus must be looked from a point of view of "Constitution of a Company". So, in this regard, a company should never omit material facts which are directly relevant for investing in the company. Omission of such material facts should be handled strictly. Rex v. Kylsant Here, Kylsant issued a prospectus where it was stated that the company had paid dividend varying from 5 to 8% every year between 1911 to 1927, except in or 2 years where a lower rate of dividend or no dividend was paid. The prospectus thus rejected that the company was financially strong and stable. But, the facts were that the last 7 years, the company had incurred heavy losses and dividends were paid only out of the accumulated profits which had been stored up during the war period. The Court judged the case as the fact that the company has incurred heavy losses from past 7 years, and that the dividends is paid form a fund is a material fact. And so, it’s the duty of a company to disclose such fact. The Court held that the prospectus was misleading not because of what is stated but because of what it concealed or omitted. Peek v. Gurney Here, in this case, a deceitful prospectus was issued by the defendants on behalf of a company. The plaintiff received a copy of it but did not take any shares originally in the company. The allotment was completed and after several months, the plaintiff bought 2000 shares on the stock exchange. His action against the directors was rejected. A purchaser of shares in the open market has no remedy against the company or the promoters though he might have bought on the faith of the representations contained in the prospectus. The Court further observed that "Those only who are drawn on by the misrepresentation in the prospectus to become allottees can have remedy against the directors." The Court also held that "As regards omission and concealment of material facts the Directors and other persons responsible for issue o the prospectus are liable, and the purchasers of shares are entitled to avoid their contracts for the purchase of shares in the company, if the facts concealed or omitted are not only material facts but are also of such character that if stated in the prospectus they would render false that which is included in the prospectus or would render false statement, or any part thereof, contained in the prospectus". The conditions drawn in this case are:

The misstatement in the prospectus must be fraudulent i.e. must be made knowingly and with the intention to deceive. In other words, there must exist the elements of fraud.

The fraudulent misstatement must relate to some existing facts which are material to the contract of purchasing shares or debentures and the investor must be induced to purchase the shares of debentures in the co.

The investor must have taken the shares directly from the co. A person who purchases the shares in the open market has no remedy against the co. or directors etc. even if he bought the shares on the faith of representation contained in the prospectus.


Manavedan Tirumalpad (T), Rajah of Nilumbur vs. Amirchand Dass Here, in this case, a prospectus contained a statement that the Government of Cochin have agreed to encourage the company by giving a steady and continuous supply of timbers extracted from the state forests required for the purpose of the company at economical prices in order to encourage the establishment of industries for which there are natural advantages in the State. Now, in reality, there was only a conditional promise held out by the Government to give such steady supply of timber at reasonable rates that the first years transaction should be found to be mutually satisfactory. It was held that the statement made in the prospectus was false and misleading and the same did not amount to any fair representation of what was stated by the Government. The Court also held that " If the directors have taken the responsibility of asserting that there was an unconditional promise given by the Cochin Government to supply timber steadily for the purposes of the company, they must bear the consequences."


This case clearly shows that the company suppressed the material fact for its own benefit. The condition mentioned by the Government was not at all disclosed and with this any prudent man would believe that the agreement with the Government is unconditional. So, the Court has completely justified the case by stating that the statement made in the prospectus is misleading and not true.

3. Recission of the contract for misrepresentation : Recission means avoiding the contract. It is a general principle of law that if one of the parties to a contract does not disclose what he is bound to disclose to the other party, then he has full rights to rescind the contract. Where a prospectus contains certain misstatement then the shareholder has full right to rescind the contract. Thus, by avoiding such a contract, a person is able to get rid of his shares and can claim the money he paid for it. A person who lawfully rescinds a contract is entitled to compensation for any damages which he has sustained in the non-fulfillment of the contract. A suit for compensation or damages under this section is thus not based on a cause of action arising out of a contract, because at the stage of issue of prospectus there is no contract between a shareholder and anybody else. So, when the shares are allotted, then the contract is between the shareholder and the co. and with the director of the company. Recession will not be a remedy if the investor has been induced to buy shares on a material misrepresentation of law. There are certain conditions for Recession of the contract. They are:

It must be established that the prospectus issued by the co. or by someone on behalf of the co.

There must be an ‘untrue statement’ in the prospectus. The misrepresentation contained in the prospectus must be material to the contract

of taking shares. A fact will be material if it is likely to influence the judgment of a prospective investor in deciding whether he should purchase shares in the co. or refrain from doing so. Misrepresentation must be one of fact and not merely an expression of opinion or expectation.

The aggrieved party must exercise the right to rescind the contract within reasonable time of becoming aware of a misstatement in the prospectus.

The right of recession is not available where

the allottee has subscribed for the shares before looking at the prospectus, the prospectus itself makes it clear that such statements are mere hearsay

statements and are not true otherwise, the allottee has not relied on such statements but made a personal investigation for

it, he is such a person who can’t get misled merely by the statements of prospectus. If by ordinary diligence truth for misrepresentation can be discovered

For example, If a lesser represents a house to be in good order, and the lessee sees that several windows are broken out; lesser could not be bound to make good such representation, simply because it could not have deceived the party to whom it was made. But it can actually operate as a deception, -

• if the person to whom such a statement is made should be blind, or • should actually not perceive the statement to be false • The aggrieved party must have relied upon the prospectus while applying for

shares. He must have taken the shares directly from the co.


The contract is valid till it’s rescinded. A shareholder has only a limited time to rescind the contract. So, he must rescind it promptly on becoming aware of the fraud which is done to him.


Loss of right to recession: To avoid the contract must be done within a reasonable period of time. Though there is no specific time which has been allotted, but when a person gets to know about such fraud, then he must rescind the contract duly. The Madras High Court in one of its judgment stated that the suit alleging compensation must be filed within two years from the date of cause of action. Also, any people who claim to retire from a company on the ground that he was induced to become a member by misrepresentation in the prospectus is bound to come at the earliest possible moment after he becomes aware of the misrepresentation. In certain cases the right to recession is lost. They are:

If the proceedings for recession are not begun within a reasonable time. If he affirms the contract, directly or indirectly after becoming aware of the misleading

nature of the prospectus. If he initiates legal action only after the commencement of the winding up

proceedings of the co. the reason for this is that the creditors would have relied upon his membership also while making the deals with the co.

If it is proved that he had not been induced by the prospectus to make the contract. The right of recession is lost on the commencement of winding up of the co.

4. Liability for non compliance with section 56 : A director or other person responsible for not setting out matters and reports required to be set out in the prospectus as provided under section 56 of the Act, shall be punishable with fine which may extend to ` 50,000. A person responsible for the issue of prospectus shall not be liable if:

(a) if there is no knowledge of the particular statement that such statement has not been disclosed,

(b) there was a honest mistake of fact on his part, (c) when Court considers that omission should be excused or is immaterial.

5. Liability under general law :

The persons responsible for the issue of false prospectus may also be held liable for the payment of damages under the general law. Thus, a person who has been induced to invest money in a company by fraudulent statement in a prospectus can recover damages for fraud under the 'Indian Contract Act' or the 'Law of Trots'.

6. Penalty for contravening sections 57 or 58 : If any prospectus is issued in contravention of Section 57 (expert to be unconnected with formation or management of company), or Section 58 (expert's consent to issue of prospectus containing statement by him), the company and every person who is knowingly a party to the issue thereof, shall be punishable with fine which may extend to ` 50,000[Sec.59(1)].


7. Penalty for issuing prospectus without delivering for registration : If a prospectus is issued without a copy thereof being delivered to the Registrar, the company and every person who is knowingly a party to the issue thereof, shall be punishable with fine which may extend to ` 50,000[Sec.60(5)].


Defenses against Civil Liability [Sec 62(2)]:

1. Withdrawal of consent before issue: The director will not be liable if he had withdrawn his consent to become a director before the issue of the prospectus and it was issued without his authority or consent. 'Reasonable public notice' must be given of withdrawal of consent.

2. Issued without knowledge: The director can escape from his liability if he proves that the prospectus was issued without his knowledge or consent and when he became aware about it, and then he gave a public notice for it.

3. Withdrawal of the consent after the issue of the prospectus but before allotment: When the director becomes aware about such misstatement in the prospectus, after the issue of the prospectus but before the allotment, then he can withdraw his consent and can give a public notice for it.

4. Reasonable ground for belief: The director shall be protected if he can show for every untrue statement not purporting to be made on the authority of an expert or of a public official document or a statement, that he had such reasonable ground to believe, which he did up to the time of allotment of the share or debentures. Here, showing honesty is not enough, as one has to go beyond the principle of honesty.

5. Statement by an expert: As regards to every untrue statement which can be related to be a statement by an expert or contained in what purports to be a copy or an extract from a report or valuation of an expert, the person charged can escape liability on proving that -

5.1 it was correct and fair representation of the statement; or 5.2 a correct copy of , or a correct and fair extract from the report or valuation; and 5.3 he had reasonable ground to believe, and did up to the time of issue of the

prospectus believe, that the person making the statement was competent to make it; and

5.4 that the person (expert) had given the consent to the issue of the prospectus and has not withdrawn that consent before delivery of prospectus for registration or before allotment

Criminal Liability for Mis-Statements in Prospectus [Section 63(1) & Section 68]:


Section 63 of the Act incorporates the provision relating to the criminal liability for misstatement in prospectus. It provides that where a prospectus includes any untrue statement, every person who authorized the issue of prospectus shall be punishable with imprisonment for a term which may extend to 2 years or with fine which may extend to ` 50,000 or with both. The offence is compoundable under Section 621A. It has to be noted that under such cases, once the prosecution establishes the falsity of statement in a prospectus signed by a director, etc., the onus is shifted to the defendant of proving either that the statement was immaterial or he had reasonable ground to believe and did upto the time of issue of the prospectus believed it to be true. An expert who has given the consent will not be deemed as a person who authorized the issue of prospectus.


Fraudulently inducing Persons to invest money: Any person who either knowingly or recklessly makes any statement, promises or forecasts which is false, deceptive or misleading or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into:

(a) Any agreement either a view to acquiring , disposing of, subscribing for, or underwriting shares or debentures; or

(b) Any agreement, the purpose of which is to secure a profit to any of the parties from the yield of shares or debenture, or by reference to fluctuations in the values of shares or debentures;

shall be punishable with imprisonment for a term which may extend upto 5 years or with fine which may extend to ` 1 lac or with both. In Bhupinder Kaur Singh v. Registrar of Companies [2008] 85 SCL 135 (DELHI) In this case Registrar of Companies ('ROC') filed criminal complaint against petitioners under Section 63 and 628 of Companies Act,1956, alleging that they had mentioned in prospectus which was issued by them for raising public issue. It was mentioned in the prospectus that money collected would be utilized in leasing business for making investment, but funds were were invested in unproductive shares and securities and thus, petitioners had made false statement in prospectus for which they become liable for punishment under sections 63 and 628 of Companies Act, 1956. The Registrar issued summoning orders against the petitioners. Petitioners challenged said orders by stating that whether a case had been made out, prima facie, of misstatement in prospectus and in such situation, persons who were incharge at time of public issue and who made statement in prospectus would be held responsible. The decision of court: Since all three petitioners were promoters and had signed prospectus in which statement was made stating objects for which public issue was raised, petitions filed by them, against summoning order issued to them, was dismissed. Thus, ROC was permitted to continue with criminal prosecution of directors under section 63 and section 628 of the Companies Act, 1956. The ROC had also filed another criminal compliant against petitioners under sections 62 and 68 of the Companies Act, 1956. Petitioners submitted against these compliant stating that section 62 raises civil liability only. Held: since the heading of section 62 makes mis-statement in prospectus a civil liability, by no means it can be treated as criminal liability and therefore, criminal compliant under section 62, that too by ROC, would not be maintainable. If Minor represented as Promoters in the Prospectus could be held liable for misrepresentation and fraud? This question was dealt in detail by Supreme Court in Ritesh Agarwal and Anr. vs Securities and Exchange Board of India (SEBI) and Ors. wherein the Court answered it in negative.


A contract must be entered into by a person who can make a promise or make an offer. If he cannot make an offer or in his favour an offer cannot be made, the contract would be void as an agreement which is not enforceable in law would be void. Section 11 of the Indian Contract Act, 1872 provides that the person who is competent to contract must be of the age of majority.



Thus, if it is shown by the birth certificates that the promoters were minor they cannot be held liable / guilty.

Finale WriteUp on Prospectus 26.08

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Transcript of Finale WriteUp on Prospectus 26.08