PROSPECTUS - · PDF fileKRISHAN COMMERCE CLASSES 6.1 Best Coaching available for CS & CA (Inter & Final Law Subjects) KRISHAN COMMERCE CLASSES #B-20/1458, Krishna Nagar, Ludhiana

KRISHAN COMMERCE CLASSES 6.1 Best Coaching available for CS & CA (Inter & Final Law Subjects)

KRISHAN COMMERCE CLASSES #B-20/1458, Krishna Nagar, Ludhiana

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PROSPECTUS

Definition of “Prospectus” {Section- 2(36)}

“Prospectus” means any document described or issued as a prospectus and includes a red herring

prospectus referred to in section 32 or 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;

PROSPECTUS HAS FOLLOWING 3 INGREDIENTS:

1) There must be an invitation to the Public.

2) Invitation may be made by or on behalf of an existing company or intended company.

3) Invitation in connection with any security of the company.

In certain cases prospectus need not be issued:

The prospectus containing all the details required under section 26 is not required to be

issued in the following cases:

Where a person is bona fide invitee to enter into an underwriting agreement with regard

to shares or debentures. [Section 33(1)(a)];

Where the shares or debentures are not offered to the public [Section 33(1)(b)];

Where the issue relates to shares or debentures uniform in all respects with the shares

or debentures already issued and dealt in or quoted at a recognized stock exchange

[Section 26(1)(b)];

Where the shares/debentures are offered to existing shareholders/ debenture holders

[Section 26(1)(a)];

“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 prospectus. {An explanation to sec. 31(3)}

i. A company filing a shelf prospectus with the Registrar shall not be required to file a

fresh prospectus at every stage of offer of securities by it within a period of validity of

each shelf prospectus.

ii. 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 succeeding offer of securities within such time as may be prescribed ,

prior to making of second or subsequent offer of securities under the shelf prospectus.

Shelf Prospectus {Sec. 31}



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Provided in case of any applicant make advance payment to the company for subscription

then company shall first intimate about such changes to applicant and if he wants to

withdraw his advance, company shall refund his advance within 15 days of receiving such

request.

iii. 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 update of information memorandum is filed every time an offer of

securities is made, such memorandum together with the shelf prospectus shall constitute the

prospectus.

(1) A company proposing to make an offer of securities may issue a red herring prospectus prior

to the issue of a prospectus and shall file it with the Registrar at least 3 days prior to the

opening of the subscription list and the offer.

(2) A red herring prospectus shall carry the same obligations as are applicable to a prospectus

and any variation between the red herring prospectus and a prospectus shall be highlighted

as variations in the prospectus.

(3) Upon the closing of the offer of securities under this section, the 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 details as are not included in the red herring

prospectus shall be filed with the Registrar and the Securities and Exchange Board.

The expression "red herring prospectus" means a prospectus which does not include

complete particulars of the quantum or price of the securities included therein.

Prospectus is an invitation issued to a public to subscribe for or purchase the securities of the

company. Section 2(36) of the Companies Act, 1956 defines “prospectus” means any document

described or issued as a prospectus and includes a red herring prospectus referred to in section

32 or 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;

Red herring Prospectus {Sec. 32}

Distinguish between Prospectus and Letter of Offer:

Letter of offer Prospectus i. Letter of Offer is issued by the

company when it raises its capital by

issue of rights shares to its existing

shareholders.

Prospectus is not required to be issued, when

securities are offered to existing share

holders or debenture holders.

ii. Letter of offer is issued in case of

right issue

Prospectus is issued in case of public issue or

offer for sale.



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Distinguish between “shelf prospectus” and “red-herring prospectus”

Shelf prospectus Red-Herring Prospectus i. “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 prospectus.The

shelf prospectus will be valid for a

period of 1 year, from the date of

first issue of securities. A company

filing a shelf prospectus a fresh at

every stage of offer securities by it

will in a period of validity of such shelf

prospectus.

i. Red- herring prospectus is a

prospectus, which does not have

complete particulars:

ⓐ The price of securities offered;

and

ⓑ The quantum of securities

offered.

❒ Prospectus must be dated: This provides prime facie evidence of the date of its publication.

Every prospectus shall be dated & signed whether issued by company (public company) or by

any person interested in the formation of company or on behalf of company or interested

person.

❒ Signature: The prospectus shall be signed by every person who is named therein as a

director or proposed director of the Company or by his duly authorised attorney.

❒ A copy of prospectus must be filed with the Registrar on or before its publication: The copy

sent for registration must be signed by every person who is named in the prospectus as a

director or a proposed director of the company or by his agent authorized in writing. The

Registrar shall not register a prospectus unless the requirements with respect to its

registration are complied with and the prospectus is accompanied by the consent in writing

of all the persons named in the prospectus.

❒ The prospectus must be issued within 90 days of its registration either by newspaper

advertisement or otherwise.

❒ The consent of the expert should be obtained: If the prospectus includes a statement

purporting to be made by an expert, consent in writing of that expert should be obtained

and this fact is stated in the prospectus. It should also state that the consent given has not

been withdrawn.

The expert should not be one who is himself engaged or interested in the formation, promotion,

or management of the company. He should be unconnected with the formation or management of

the company.

The company and every person who knowingly issues a prospectus without delivering a copy

thereof to the Registrar for the registration shall be punishable with fine up to Rs. 50,000

Dating, signing and registration of Prospectus



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which may extend to 3 lakh rupees and person or party in default shall be imprisoned for term

which may extend to 3 years or with fine or both

WHEN REGISTRAR MUST REFUSE REGISTRATION

Section 60(3) provides that the Registrar shall not register a prospectus if —

it is not dated — Section 55;

it does not comply with the requirements of Section 56 as to the matters and reports to be

set out in it;

it contains statements or reports of experts engaged or interested in the formation or

promotion or management of the company — Section 57;

it includes a statement purported to be made by an expert without a statement that he has

given and has not withdrawn his consent to the manner of its inclusion therein;

it does not contain consent in writing of directors, a copy of the documents mentioned in

Section 60(1) has been filed or does not comply with regard to the fact that a copy of it has

been filed with Registrar;

It is not accompanied by the consent in writing of the auditor, legal adviser, attorney,

solicitor, Issue House, banker, managers to the issue or broker, if named in prospectus to

act in that capacity — Section 60(3).

Contents of the Prospectus {Sec. 26}

Part I

Public Offer Headings Explanation

1. General

Information

Address of the Registered Office of the Company.

The authority for the issue and the details of the resolution passed

therefore.

A statement regarding the application made to one or more Stock

Exchanges for listing of securities or name of the stock exchange(s)

in which stocks shall be dealt with.

Minimum subscription, amount payable by way of premium, issue of

shares otherwise than on cash.

Procedure and time schedule for allotment and issue of securities.

Imprisonment for not less than 6 months which may extend to 10

years and fine of not less than amount involved in fraud which may

extend to 3 times of amount involved in fraud, if application made

under fictitious name.

Name and address of the auditors, lead managers, debentures

trustees, and underwriters, solicitors, auditors or such other persons

as may prescribed.



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A statement by BOD that all monies shall be transferred to a

separate bank account and disclosure of details in the prescribed

manner about all the monies including utilized and unutilized monies

out of previous issue.

Consent of the directors, auditors, bankers to the issue, expert’s

opinion, if any, and of such other persons, as may be prescribed.

2. Allotment of

securities or

refunds (Sec.

39)

Date of the opening and closing of the issue, and declaration about

the issue of allotment letters and refunds within the prescribed time

i.e. within 15 days from the closure of issue or such lesser time as

specified by SEBI;

Interest @ 15% for the delayed period due to be paid to the

applicants in case of non-compliance of above provision;

Allotment shall not be made unless company received 5% of nominal

value of securities issued or such other amount or percentage as may

be prescribed by SEBI.

Allotment shall not be made without obtaining prior approval from

stock exchange(s) where stocks shall be dealt with.

A return of allotment shall be filed by company having share capital in

form PAS-3 along with fees as may be prescribed.

In case of default (for each default) with respect to return of

allotment or refund, company and every officer in default shall be

liable to a penalty of Rs. 1000 for each day during which such default

continues or Rs. 1 lakh whichever is less.

3. Utilization of

application

money

[Sec. 40(3)]

Application shall be utilised only for the following purposes:-

for adjustment against allotment of securities where the securities

have been permitted to be dealt with in the stock exchange(s)

specified in the prospectus; or

for the repayment of monies within the time specified by the SEBI,

received from applicants in pursuance of the prospectus, where the

company is for any other reason unable to allot securities.

In case of default company is liable to a penalty of Rs. 5 lakh which

may extend to 50 lakh rupees and officer in default is liable to

imprisonment for a term which may extend to 1 year or with fine of

Rs. 50000 which may extend to Rs. 3 lakh.

4. Underwriters The prospectus shall disclose-

Name of the underwriting;

Rate & the amount of the commission payable;

Number of the securities underwritten absolutely or

conditionally.

The commission should be authorised by articles of the company and

may be paid out of proceeds of the issue or profits of the company or

both but commission shall not be paid on the non-offered securities.

The rate shall not exceed 5% in case of shares or 2.5% in case of

debentures.

A copy of the contract of the payment of the commission shall be

filed with ROC along with the copy of prospectus at the time of

registration of prospectus.



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5. Capital

Structure

Authorized, issued, subscribed and paid up capital

Present issue size

Paid up capital after issue or conversion of convertible securities

Security premium account

6. Sources of

Promoters

contribution

Disclosures in such manner as may be prescribed about sources of

promoter’s contribution.

7. Terms of the

present issue

Terms of payment

Rights of the Instrument holder

How to apply – availability of forms, prospectus and mode of payment.

Utilization of Issue Proceed

8. Particulars of

Issue

Objects of the Issue

The Cost of the Issue Project

Means of financing the Project

Appraisal

Deployment of funds in the project including interim.

9. Details about

Company

Management

and Project

Company’s main objects and present business of the company.

Details of directors including their appointments and remuneration,

and such particulars of the nature and extent of their interests in the

company as may be prescribed.

Names and addresses of Company Secretary, Chief Financial Officer,

auditors, legal advisers, bankers, trustees, if any, underwriters and

such other persons as may be prescribed.

The location of project, schedule of implementation of the project,

gestation period, extent of progress made management perception of

risk about project etc.

10. Outstanding

litigation

Any litigation or legal action pending or taken by a Government

Department or a statutory body during the last 5 years immediately

preceding the year of the issue of prospectus against the promoter of

the company.

11. Financial

information

Auditor’s report, P & L, assets and liabilities, rates of dividend paid by the

company during preceding 5 FYs.

12. Declaration

about

compliance of

various laws

Company shall make a declaration about the compliance of the

provisions of this Act and a statement to the effect that nothing in

the prospectus is contrary to the provisions of this Act, the

Securities Contracts (Regulation) Act, 1956 and the Securities and

Exchange Board of India Act, 1992 and the rules and regulations

made there under; and

State such other matters and set out such other reports, as may be

prescribed.

Offer for sale (OFS)

OFS by company through “Issue House”

{Sec. 25}

OFS by members of the company through

BOD {Sec. 28}

The document “Offer for sale” is an Members of the company are allowed to



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invitation to the general public to purchase

the shares of a company through an

intermediary, such as an issuing house or a

merchant bank.

A company not intended to offer shares

directly to the public through prospectus

may allot or agree to allot any shares or

debentures to an “Issue house”. The issue

house in turn makes an “OFS” to the public.

To make OFS any of the following

condition must be fulfilled [Sec. 25(1)]:

After the allotment or agreement to

allot OFS was made to public within 6

months.

At the date when the offer was made,

the whole consideration to be received

by the company in respect of the

securities had not been received by it.

The document ”OFS” or offer document

(OD) is considered to be prospectus here

because as per sec. 25(1) any document by

which offer or sale of shares or

debentures is made to the public is

deemed to be prospectus.

All laws and rules made thereunder as to

the contents of the prospectus and as to

liability in respect of mis-statements in

and omission from prospectus or otherwise

relating to prospectus shall apply as if this

is a prospectus issued by the company.

OFS shall contain all contents of

prospectus along with following additional

information [Sec. 25(3)]:

The net amount of the consideration

received or to be received by the

company in respect of the securities

to which the offer relates; and

The time and place at which the

contract where under the said

securities have been or are to be

allotted may be inspected.

As far as the signature of the prospectus

is concerned, it will be sufficient if it is

signed by 2 directors (Issuing house is a

company) and in case of firm by not less

than half of the directors. [Sec. 25(4)]

offer their entire or part of holding of

shares to public in consultation with BOD.

[Sec. 28(1)]

Any document by which the offer of sale

to the public is made shall, for all

purposes, be deemed to be a prospectus

issued by the company. [Sec. 28(2)]

all laws and rules made thereunder as to

the contents of the prospectus and as to

liability in respect of mis-statements in

and omission from prospectus or otherwise

relating to prospectus shall apply as if this

is a prospectus issued by the

company.[Sec. 28(2)]

The members, whose shares are proposed

to be offered to the public, whether

individuals or bodies corporate or both

shall collectively authorise the company, to

take all actions in respect of offer of sale

for and on their behalf and they shall

reimburse the company all expenses

incurred by it on this matter.

All the provisions of prospectus shall be

applicable except the provisions relating

to:

minimum subscription;

minimum application value;

any statement to be made by the

Board of directors in respect of the

utilization of money; and

any other provision or information

which cannot be compiled or gathered

by the offeror, with detailed

justifications for not being able to

comply with such provisions.

The name of the entity bearing the cost of

making OFS shall be disclosed with reasons

in the prospectus or offer document.



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Variation in terms of contract or objects of prospectus (Sec. 27)

Company can vary the terms of contracts referred in prospectus or objects of the

prospectus subject to the approval or authority given by company by special resolution in the

general meeting.

Provided that the details, as may be prescribed, of the notice in respect of such

resolution to shareholders, shall also be published in the newspapers (one in English and one

in vernacular language) in the city where the registered office of the company is situated

indicating clearly the justification for such variation:

Company varying the terms shall not use any amount raised by it through prospectus for

buying, trading or otherwise dealing in equity shares of any other listed company.

An exit offer shall be given to the dissenting shareholders being those shareholders who

have not agreed to the proposal to vary the terms of contracts or objects referred to in

the prospectus, by promoters or controlling shareholders at such exit price, and in such

manner and conditions as may be specified by the SEBI by making regulations in this behalf.

Abridged Prospectus

Meaning of abridged prospectus: “abridged prospectus” means a memorandum containing such

salient features of a prospectus as may be specified by the Securities and Exchange Board by

making regulations in this behalf. [Sec. 2(1)]

Form of Abridged Prospectus and attached to application form: No form of application

for the purchase of any of the securities of a company shall be issued unless such form is

accompanied by an abridged prospectus.

Furnish the copy of prospectus: A copy of the prospectus shall be furnished before the

closing of the subscription list and the offer on a request being made by any person.

When abridged prospectus is not required: where the form of application is issued –

a. To person who is bona fide invited is to enter into an underwriting agreement with

respect to the shares or debentures.

b. In relation to shares or debentures which were not offered to the public

Penalty: if company contravenes this provision shall be liable with fine of Rs. 50000 for each

default.



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Liability for Untrue Statement

It is now clear that a prospectus must be complete and perfect in all details or in other words

nothing should be omitted and nothing must be untrue in a prospectus.Where an untrue

statement occurs in a prospectus, there may arise

(i) civil liability

(ii) Criminal liability.

Every person who is a director of the company at the time of the issue of the

prospectus, every promoter of the company and every person, including an expert, who

has authorized the issue of a prospectus, shall be liable.

Onus for Proof of Mis-statement

The burden of proof in a suit by an allottee that he has been misled by the mis-statement in the

prospectus lies on the allottee. He must prove the following:

(i) The misrepresentation was of a fact

(ii) It was in respect of a material fact. What is a material statement of fact will depend

upon the circumstances of each case.

(iii) He acted on the misrepresentation; and

(iv) He suffered damages in consequence.

Remedies against the company for Misrepresentation in Prospectus

When co. is liable:

A company is responsible for a statement in prospectus only if it is shown that the

prospectus was issued by the company or

By someone with the authority of the company, e.g., the Board of directors.

The company is also liable even though the prospectus is issued by the promoters;

liability for mis-statement in the Prospectus

Civil Liablity Criminal Liability



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The Board ratifies and adopts the issue,the prospectus is the basis of the contract for

shares.

Recession of the contract:

The first remedy against the company is to rescind the contract.

A person who takes shares on the faith of a prospectus containing false statements, may

apply to the Court for the contract to be set aside, and

his name to be struck off from the register of members.

He may also claim his money back.

But the allottee must act within a reasonable time, before any proceedings to wind up

the company have been commenced, and

Before he does anything after notice of misrepresentation which is inconsistent with

the right to rescind.

He will lose his right to rescind if he attempts to sell the shares or attends a general

meeting of the company, or receives dividends.

Sue for the damages:

The second remedy against the company is to sue for damages for deceit.

This suit is founded on the tort of deceit, and is not a case of fraud on the part of

directors or promoters.

The allottee may recover damages from the company for any loss he may have suffered

if the invitation to take shares is emanating from the company and

The persons making it on behalf of the company have fraudulently mis-represented

material facts.

The allottee cannot both retain the shares and get damages against the company.

In actual practice, however, suits for damages against the company are rarely filed.

Damages are generally claimed from the directors, promoters and other persons who

authorized the issue of the prospectus.

Civil Liability for Mis-Statement in Prospectus or Remedies against Promoters,

Directors and Experts {Sec. 35}

Persons responsible for mis-statement in Prospectus {Sec. 35(1)}:

(i) Every person who is director at the time of issue of Prospectus;

(ii) Every person who has authorized himself to be named and is named in the prospectus

either as a director or as Proposed director;

(iii) Every promoter of the company or as proposed director;

(iv) Every other person who has authorized the issue of Prospectus;

(v) Expert as defined in the Act

Aforementioned persons are liable to compensate every person who subscribe for shares on the

faith of Prospectus containing untrue statement, if he suffers any loss or damage by reason of

such untrue statement.

Defenses available to aforementioned persons {Sec. 35(2)}:



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Any of Abovementioned persons shall not be liable, if he proves that-

Withdrew his consent before the issue of Prospectus, if consented to become a director

Prospectus was issued without his knowledge and he gave the reasonable public notice on

becoming aware of the untrue statement in the prospectus.

Prospectus issued to defraud the applicants (Sec. 35(3)}:

Notwithstanding anything contained in above provisions where it is proved that prospectus was

issued to defraud the applicants or for any fraudulent purpose all the persons mentioned u/s

35(1) shall be personally responsible, without any limitation of liability, for all or any of

the losses or damages that may have been incurred by any person who subscribed to the

securities on the basis of such prospectus.

According to section 34 of the Companies Act, 1956, where a prospectus includes any untrue

statement, every person who has authorized the issue of the prospectus shall be punishable u/s

447 which indicates:

1) Imprisonment for a term not less than 6 months which may extend to 10 years; and

2) Fine up to the amount involved in the fraud which may extend to 3 times of amount of

fraud.

However, where a person who has authorized the issue of the prospectus proves, either that

the statement was immaterial or that he had reasonable ground to believe, and did, up to the

time of issue of prospectus believe, that the statement was true.

Penalty for Fraudulently Inducing to Invest Money {Sec. 36}

Liability of imprisonment of not less than 6 months which may be extended to 10 years and fine

not less than the amount involved in the fraud which may be extended to 3 times of the amount

involved in the fraud provided by Section 447 against any person who, either knowingly or

recklessly has made a false, deceptive or misleading statement, promise or forecast or had by

dishonestly concealing material facts, induced another person to enter into, or to offer to enter

into:

a) Any agreement for or with a view to acquiring, disposing of, subscribing for, or

underwriting shares or debentures; or

b) Any agreement, the purpose or pretended purpose of which is to secure a profit to any

of the parties from the yield of shares or debentures or by reference to fluctuations in

the value of shares or debentures.

c) any agreement for, or with a view to obtaining credit facilities from any bank or financial

institution,

Liability for making application on the fictitious name {Sec.38}

(1) Any person who makes or abets

making of an application in a fictitious name or

making of multiple applications under different names or in different combinations

of his name or surname

Criminal liability for Mis-Statement in Prospectus (Sec. 34)



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to a company for acquiring or subscribing for its securities; or 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 i.e. imprisonment for

not less than 6 months which may extend to 10 years and fine of not less than amount

involved in fraud which may extend to 3 times of amount involved in fraud.

(2) The above provision shall be prominently re-produced in every prospectus or every

application form issued for securities.

(3) If any person found guilty under this section, court may order disgorgement of gain, if

made, seizure and disposal of securities in possession of such person.

(4) Amount received through disgorgement or disposal of securities shall be credited to IEPF.

Action by affected persons or Class suits {Sec. 37}

Global Depository Receipts

As defined by Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through

Depository Receipt Mechanism) Scheme, 1993

“Global Depositary Receipts” means any instrument in the form of a depositary receipt or

certificate (by whatever name it is called) created by the Overseas Depositary Bank outside

India and issued to non-resident investors against the issue of ordinary shares or Foreign

Currency Convertible Bonds of issuing company.

As per section 2(44) “Global Depository Receipt” means any instrument in the form of a

depository receipt, by whatever name called, created by a foreign depository outside India

and authorised by a company making an issue of such depository receipts.

A company may, after passing a special resolution in its general meeting, issue depository

receipts in any foreign country in such manner, and subject to such conditions, as may be

prescribed. (Sec. 41)

Note: GDR are discussed in detail under the chapter of shares.

Any person, group of persons or any association of persons affected by any misleading

statement or the inclusion or omission of any matter in the prospectus may file a suit or take

any other action u/s 34 or 35 or 36.

Documents

PROSPECTUS - · PDF fileKRISHAN COMMERCE CLASSES 6.1 Best Coaching available for CS & CA (Inter & Final Law Subjects) KRISHAN COMMERCE CLASSES #B-20/1458, Krishna Nagar, Ludhiana