Prospectus is the window through which an investor can look into the
soundness of a company. Investor therefore be given a complete
picture of the activities and financial position.
ANY document inviting offers from the public for the subscription of
shares or debenture of a Co. is called Prospectus.
IN WRITING: It cannot be oral. But it must be in writing. An advt. in
TV or films is Not prospectus. SUBSCRIPTION: Agreeing to take
shares and puts himself to liability. It is an INVITATION TO
PUBLIC to subscribe – any section of the public.
NOT treated as invitation to public : offers to ones kith and kin or
offer to selected persons ONLY by invitation and not to others.
PROSPECTUS must be dated, signed and registered with ROC with
necessary details. To be issued within 90 days of delivery with ROC.
MATTERS TO BE STATED: 1) General Information 2) Capital Structure
3) Terms of present issue 4) Company management and Project
5) Outstanding litigation, criminal prosecution, statutory dues, risk
factors. 6) Financial information: Report by auditors: P&L a/c, assets &
liabilities, dividend paid - last 5 financial years. 7) Statutory & other
information: Fees, commission, listing etc..
2. KINDS OF PROSPECTUS
• SHELF PROSPECTUS: Issued by any financial institution or bank for
one or more issues of securities specified in that prospectus. Valid for
1 year from the date of opening of the first issue. To file information
memorandum relating to changes created.
• RED HERRING PROSPECTUS: Prospectus which does NOT have
complete particulars on the price & quantum of securities offered.
• FINAL PROSPECTUS: After the closure of the issue, prospectus filed
with ROC issue price determined by Book Building process, the size of
the issue and certain other information.
• Abridged Prospectus: Every application for shares should contain
salient features of the prospectus. Information is given to prospective
investor to take informed decision. This is also known as memorandum
containing salient features of prospectus.
• Prospectus by implication: All documents containing offer of shares
for sale are Deemed to be Prospectus by implication of law.
Therefore all the rules of Prospectus are applicable.
3. Prospectus cont..
STATEMENT IN LIEU OF PROSPECTUS: Public Company may
NOT invite shares from the general public but arranges the money
from private sources it need not issue prospectus.
3 days before allotment of shares or deb. deliver to ROC for
registration a statement signed by the directors is called -
Statement in lieu of Prospectus. If the statement contains any
untrue statement or omission of facts persons who authorized
Prospectus will be liable.
• A private limited co. on conversion to public company required to
file statement in lieu of prospectus.
• When Prospectus is NOT required to be issued: for underwriting
agreements, offer to existing members only (rights issue), when
shares are not offered to public , Private Ltd Co..
• OFFER FOR SALE: Legal requirements are avoided by Co.s in the
past by allotting shares to an Issuing House which in turn will SELL
the shares to public at a higher price. Now any document which
makes offer for sale shall fall within the definition of prospectus.
MISSTATEMENTS & GOLDEN RULE
• MISSTATEMENT : If there is a misstatement or withholding of any
material information in the prospectus and if that statement has induced
any person to subscribe shares then he has the right to 1) Rescind the
contract within a reasonable time, 2) such statements must be
misrepresentation of facts and is not a mere opinion, 3) this statement
has induced him and has relied upon this and has subscribed, but the
statement is untrue. The member can also claim for damages.
• LOSS OF RIGHT OF RESCISSION: If this share is sold, transferred or
pays call money, or receives dividend, or on unreasonable delay to claim.
Civil & Criminal Liability : Every person who has authorized issue is
punishable with fine and imprisonment for misstatement, if any.
LIABILITY UNDER GENERAL LAW: Case law: Derry Vs Peek
Prospectus contained a statement that the Co. has the right to run trams by
steam instead of horses. They had the approval of Parliament but the Board
of Trade rejected it. It was held that the Directors NOT liable for fraud but
only for misstatement since directors honestly belived that the
statements were true.
Defences available: Director will not be liable if he can prove that he -
has withdrawn his consent before issue of Pros.., without his consent it
has been stated and having come to know has given public notice,
or he believed it to be true on reasonable grounds .