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PROSPECTUS 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 .
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