Prospectus Shelf Prospectus and Red Herring Prospectus

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What is a ‘Company Prospectus’ ? State the legal provisions as to issue and registration of a Prospectus.

What is Prospectus ? Is the issue of Prospectus Compulsory on the part of a company ?

Ans. Meaning And Definition of Prospectus After the certificate of incorporation has been obtained, the promoters of a Public Company will have to take steps to raise the necessary capital for the company. A public company may invite the public to subscribe to its shares or debentures. This is done by issuing a document called ‘Prospectus’. The object of a prospectus is to arouse the interest of the potential investors in the company and induce them to invest in its shares and debentures.

According to Section 2 (70) of the Companies Act, 2013,

“Prospectus means any document described or issued as a prospectus and includes a red herring prospectus referred to in Section 32) orq shelf prospectus referred to in Section 31 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.

In simple words, a prospectus is any document which is described or issued as a prospectus by a body corporate for inviting offers from public for subscription or purchase of its securities.

Who can Issue Prospectus?

Prospectus may be issued by any of the following:

By a public company.
By any person on behalf of the public company.
By any person who is or who has been engaged or interested in the formation of a company.
By any person on behalf of a person who is or who has been engaged or interested in the formation of a public company. A deemed prospectus niay be issued by the person or the company to whom a company allots or agrees to allot securities with a view to the same securities being offered for sale to the public.

When Issue of Prospectus not needed

Is the Issue of Prospectus Compulsory?

Issue of prospectus is not compulsory. In other words, Issue of prospectus or abridged prospectus is not necessary in the following cases:

(i) Where he securities of a public company are not offered to the public. (Section 231 This will be in the case, when the public company (Section 421 issues its securities through private placement offer letter.

(ii) Where the securities ar•) offered to the existing members of the company with or without the tight of enunciation in favour of any other person.

(iii) Where the securities offered are uniform in all respects with securities previously issued and dealt in or quoted on a recognised stock 1 Section exchange.

(iv) Where a bona fide invitation is made to a person to enter into an underwriting agreement with respect to the securities. (Section 331

(v) A public company, not having share capital is not required to issue a prospectus. It should be noted that a private company cannot issue a prospectus.

Legal Provisions As To Issue of Prospectus

A prospectus is required to meet the following legal requirements :

1. Issue after Incorporation : A prospectus is generally issued after incorporation of the company.

2. Dating of Prospectus : A prospectus must be dated and this date is taken as the date of publication of the prospectus unless proved to the contrary.

3. Obligations of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009:These regulations inter-alia deal with appointment of Lead Merchant Banker, Bankers to the issue, Registrar to the issue, filing of various documents along with a draft prospectus, pricing of the securities, promoters contribution, minimum public offer, and disclosure in the offer document. The company is required to file a draft offer document through the lead merchant banker, at least 30 days prior to registering the prospectus with the Registrar of Companies.

4. It must be registered: A copy of every prospectus must be signed by every director or proposed director and filed with the Registrar for registration before it is issued to the public. Subsequent issues of copies Of the prospectus must state on their face that a copy has been so filed. This copy must be accompanied with the following documents:
(a) if the report of an expert is to be published, his written consent to such publication

(b) written consent of all those persons whose names are mentioned in the prospectus as auditors, legal advisors, solicitors, bankers, etc.
(c) a copy of every contract relating to appointment and remuneration of managerial personnel and their consent to act as such.
(d) a copy of every material contract unless entered into in the ordinary course of business or two years before the date of the issue of the prospectus.
(e) where the persons making any report required by Section 26 have made any adjustments as regards the “figures of profits or losses or assets and liabilities dealt with by the report”, without giving the reasons, a written statement signed by those persons setting out the adjustments and giving the reasons therefore. The prospectus must be issued within 90 days after the date on which a copy thereof has been delivered for registration. If a prospectus is issued
subsequently after the expiry of this period, it shall be deemed to be a prospectus a copy of which has not been delivered to the Registrar for registration. This default will make liable, the company, and every person who is knowingly a party to such an issue of prospectus, to a fine which may extend up to three lakh rupees.

5. Expert to be unconnected with the formation or management of the company—A prospectus must not include a statement purporting to be made by an expert such as an engineer, valuer, accountant etc., unless the expert is a person who has never been engaged or interested in the formation or promotion or in the management of the company (Section

6. Expert’s consent to be obtained—lf the prospectus includes a statement purporting to be made by an expert, it must not be issued, unless the expert was an independent person competent to make such reports and had given his written consent to the issue thereof and has not withdrawn such consent before the delivery of a copy of the prospectus for registration and a statement to that effect appears in the prospectus.

7. Every application form to be accompanied with a copy of prospectus or abridged prospectus. I Section 33(1)l— very form of application for subscribing the shares or debentures of a company shall not be issued unless it is accompanied by a prospectus or an abridged prospectus, unless the offer or invitation has not been made to the public.

8. Punishment for personation for acquisition, etc., of securities (Section 38)—-Any person who—(a) Makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing for, its securities; or (b) Makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or (c) Otherwise induces directly or indirectly a company to allot, or register any transfer of securities to him, or to any other person in a fictitious name, shall be liable for action under section 447. The above provisions shall be prominently reproduced in every prospectus issued by a company and in every form of application for securities.

9. Disclosure Requirement and Contents as per section 26—–Every prospectus issued by a company must state the matters and contain reports specified in Section 26 of the Act.

Prospectus Shelf Prospectus and Red Herring Prospectus

Question: Discuss the meaning and provisions with respect to a ‘Shelf Prospectus’ and ‘Red Herring Prospectus. Shelf Prospectus

Ans.

The provisions of shelf prospectus have been incorporated in the Act for the convenience of certain class or classes of companies such as the public financial institutions, public sector banks or scheduled banks. With the introduction of the provisions of shelf prospectus, they will not be required to prepare prospectus for every issue of securities and file it with the Registrar. This will save a lot of money and time required for complying with many formalities.

Definition:

‘Shelf Prospectus’ means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further Explanation to Section 311 prospectus.

Provisions Regarding Shelf Prospectus—The provisions with respect to shelf prospectus are as follows:
1. Any class or classes of companies to file—Any class or classes of companies, may file a shelf prospectus with the Registrar at the stage of the first offer of securities. The SEBI has been authorised to make Regulations for preparing and filing shelf prospectus.

2. Validity period—The shelf prospectus shall indicate a period not exceeding one year as the period of validity of such prospectus. The period of validity shall commence from the date of opening of the first offer of securities under that prospectus.

3. No need to file again during the validity period—A company filing a shelf prospectus shall not be required to file a further prospectus in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus.

4. Filing of an information memorandum—A company filing a shelf prospectus shall be required to file an information memorandum containing the following information:

(i) All material facts relating to new changes created.

(ii) Changes in the financial position as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities.

(iii) Such other changes as may be prescribed.

5. Time of filing information memorandum—The information memorandum shall be filed within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus. The Rules notified by the MCA have prescribed that the information memorandum shall be prepared in Form PAS-2 and filed with the Registrar along with the prescribed fee. It shall be filed within one month prior to the issue of a second or subsequent offer of securities under the shelf prospectus. (Rule PAS. 101

6. Applications for securities received before making such changes—Sometimes, a company may receive applications for the allotment of securities along with advance payments of subscription before the making of any such change through information memorandum. In such a case, the company shall intimate the changes to such applicants. If they express a desire to withdraw their application, the company shall refund all the money received as subscription within fifteen days thereof. (Proviso to Section 31(2)1

7. Information memorandum and shelf prospectus to be deemed prospectus—An information memorandum is filed at the time of every offer of securities. Such memorandum together with the shelf prospectus shall be deemed to be a prospectus. I Section 31(3)1

Red Herring Prospectus

In the recent years, the issue of securities to the public is being made through the process of book building. In this process, the issuer company may file a red herring prospectus with the Registrar.

Definition:

Red herring prospectus means a prospectus which does not have complete particulars on the quantum or price of the securities offered and the quantum of securities included therein. (Explanation to Section 321 Provisions Regarding Red Herring Prospectus : The main provisions with respect to the red herring prospectus are as follows:

1. Issue prior to the issue of prospectus—A company proposing to make an offer of securities may issue a red herring prospectus prior to the (Section issue of a prospectus. posing to issue a red

2. Filing with the Registrar—A comps herring prospectus shall file it with the Registrar at ! ast 3 days prior to (Section 32(2)1 the opening of the subscription list and the offer.

3. Same obligations as are applicable to prospectus—A red herring prospectus shall carry the, same obligations as are applicable to a prospectus.

4. Highlighting the variations in prospectus—Every company shall imprisonment for a chm which shall not be less than six months but which may extend to ten years, and

(ii) shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

(iii) In case the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Defenses available—A person shall not be held liable under Section 447, if he proves any of the following facts:

(i) That such statement or omission was immaterial.

(ii) That he had reasonable grounds to believe and up to the time of issue of the prospectus believe, that the statement was true.

(iii) That he had reasonable grounds to believe that the inclusion or

omission of any matter was necessary. (Proviso to Section 341

(b) Civil Liability (Section 35)—Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the every person who—
(i) is a director of the company at the .time of the issue of the prospectus;

(ii) has authorised himself to be named and is named in the prospectus as a director of fre company, or has agreed to become such director, either immediately or after an interval of time;

(iii) is a promoter of the company

(iv) has authorised the issue of the prospectus.

(v) is an expert referred to in sub-section (5) of section 26, shall be liable to pay compensation to every person who has sustained such loss or damage.

Defenses available—No person shall be liable to pay compensation if he proves the following facts:

(i) Withdrew consent before issue—A director will not be liable, if he proves that he withdrew the consent to become director before the issue of the prospectus and the prospectus was issued without his authority or consent.

(ii) “Issued without knowledge or consent—No person shall be liable, if he proves that the prospectus was issued without his knowledge or consent and on becoming aware its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

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