How are the prospectus work in the company law

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Introduction of Prospectus

Section 2(70) Prospectus means any document described or issued as prospectus and includes red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circulation, advertisement or other document inviting offers from the public for the subscription or purchase of any secrurities of a body corporate. Means it is disclosure document which summarise the company financial security.

It includes – red herring section 32, shelf prospectus section 31, deemed prospectus section 25, upbridge prospectus section 2(1)

Essential of prospectus

  • prospectus is a wrirtten document inviting public
  • invitation must be made by or on behalf of company
  • invitation must be the subscribed to purchase securities of the company
  • prospectus is not an offer but it is an invitation to offer
  • public invitation- section 42(2) minimum number is of 50 for making it public invitation.
  • An advertisement in a newspaper to invite an application for purchase of shares acording to the term of the prospectus was held to be prospectus.
  • prospectus must be registered.
    • Case: pramatha nath sanyal v/s kali kumari dutt 1925
      • matter to be estated in the prospectus
        • name of the company
        • date and time of the opening of the shares and securities
        • consent of the member of the company
        • objective of invitation
        • procedure for the allotment.

Golden rule of formation a prospectus

CAse: New burnwick and canada railway and land company v/s muggeridge 1860

Case: rex v/s kylsant 1932.

  • Those whose issue prospectus must mentioned to the public the great advantage which will accurate to the person who take up to the shares on the representation contained therein.
  • They are bound to estate everything with scrupulous accuracy (very detail)
  • The prospectus must present the whole picture of the company
  • the prospectus must disclose all material facts, truely and honestly and accurately.
  • All facts which are likely to influcence the decision regarding applying for shares must be disclosed.

Shelf prospectus

  • section 31 of the company law
  • time bound for 1 year only
  • volatile (flexible) shares/ securities.
  • According to the act shelf prospectus means a prospectus in respect of which the securities or a class of securities are issued for a subscription for a certain of time i.e 1 year.
    • According to the bare act the shelf prospectus Explanation : for the purpose of this section, the expression 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 issue over a certain period without the issue of further prospectus.

Red herring

  • Section 32 of the company law
  • immediate herring for the red hering, it is a temprory in nature , before the company started.
  • According to section 32, a company proposing to make an offer of securities may issue a res herring prospectus prior to the issue of prospectus it is basically a prospectus which is used in the public to attract the different investors for short period of time.

Deemed to be prospectus

  • section 25 of the company law
  • deemed prospectus all the prospectus are deemed to be prospectus like any notice , circular, advertisement or any other document inviting offers.
  • Any document,circular, advertisement by which the offer for sale to the public is made shall be deemed to be prospectus issused by a company.

Apbridged prospectus

It is summaried the prospectus in a consized form section 2(1) means a memorandum containg such salient features of a prospectus as may be specified by the securities and exchange board by making regulation in this behalf.

Book building

It may be defined as a process used by companies raising capital through public offerings, both IPO’s(Initial public offering) and FPO’s (follow public offering). It is mechanism where during the period for which the book for the offer is open. The method of offering shares by providing a “price range” is called book building method.

Private Placement

In section 42 of the company law ( not more than 50 members) . The term private placement means any offer of securities to a sellect group of person by a company.(other than by way of public offer through issue of a private placement of offer letter or by a fulfillment of the conditions specified.

Misstatement in prospectus

(Misleading as well as omission). A prospectus will be called as false and misleading if it contains an unture statement.

  • An untrue statement which is misleading
  • where a certain matter which is material enough has been omitted.
  • section 34( criminal liability)
  • section 35 civil liability
  • section 447 fraud

Consequence of the misstatement in prospectus

  • Section 34 criminal liability
    • if the fraud envolves an amount of 10 lakh or more and 1 % of the turnover of the company , he shall be punishable imprisonment minimum 6 months, which may extend to 10 years and fine may also extent to 3 time of such amount.
    • if the fraud envolves an amount less than 10 lakhs or less than 1 % of the turnover of the company then the punishment may extent to 5 year or fine may extent to 50 lakhs or both.
    • if the fraud in question envolves public interest imprisonment shall not less than 3 years.
  • section 35 civil liability
    • in such instance the following person shall be liable
      • Director of the company at the time of the issue of the prospectus.
      • Is a promotor of the company
      • person who has agreed to be named as director in the prospectus.
      • person whos has authorised the isue of the prospectus.

Reference : original note written by Riya tiwari of LLB of united university prayagraj uttar pradesh

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