Corporate Laws

Prospectus
 Meaning Of Prospectus
According to section 2(70) , “prospectus” means any document described or
issues as a prospectus and includes a red herring prospectus referred to in
section 32 or shelf prospectus referred to in section 31 or an
notice ,circular ,advertisement or other document inviting offers from the
public for the subscription or purchase of any securities of a body corporate

Thus , prospectus is a document inviting general public to subscribe to the

share capital of a public company. Any document which has the object of
securing the required capital or public deposits for a company comes within
the definition of prospectus.
 Types of Prospectus

PROSPECTU
DEEMED

ABRIDGED

S SHELF
RED
HERRING
 Invitation to Public
Where a company allots or agrees to allot any securities of the company with a view to all or
any of those securities to being offered for sale to the public, any document for such offer
shall, for all purposes, be deemed to be a prospectus issued by the company. The term
‘public’, therefore, includes any section of the public howsoever selected.

CASE LAW – RE SOUTH OF ENGLAND NATURAL GAS V PETROLEUM CO.

LTD

FACT
3000 copies of document in the form of a prospectus were
distributed among the members of certain gas companies
only.

JUDGEMENT
Although the offer was only to a limited class, it was
nevertheless an ‘offer to the public’, as those persons were
nonetheless ‘the public’, vis-à-vis the company. It must
therefore contain the particulars as required by the Act.
 Prospectus By Implication
As per the provision of section 25 ,where a company allots or agrees to allot any
securities of the company with a view to these being offered by the allottees for sale
to the public , the document by which such an offer for sale to the public is made ,
shall be taken as a prospectus by implications issued by the company:-
 the allottee offers these shares or debentures to the public for sale within six
months after the allotment or agreement to allot, or
 At the date to offer to the public the company has not received the whole
consideration in respect of the shares or debentures
Thus , sale of shares through an ‘issue house’ does not in any way reduce the
liability of the company’s directors, promoters or other officers. On the other hand, in
addition to them , the issue house incurs its own liabilities .It shall have effect as if
the persons making the offer were persons named in a prospectus as directors of a
company.
 Abridged Prospectus
As per section 33 (2 )(1), abridged prospectus is a memorandum containing the salient
features of a prospectus, in order to cut the cost involved in publication of large
numbers of prospectus that are to accompany the application forms for shares or
debentures.
Fine 50000 Rs

In the following cases, the requirement of abridged prospectus does not apply:
 where offer is made only to existing members of the company
 in relation to shares or debentures not offer to public
 when application form is issued in connection with a bona fide invitation to a person to enter
into an underwriting agreement with respect to shares or debentures.
 Shelf Prospectus
As per section 31, shelf prospectus is issued by any financial institution or bank for one or
more issues of the securities or class of securities specified in that prospectus.

Provisions of the Act

 Only companies prescribed by SEBI can file a shelf prospectus with the Registrar
 The period of validity shall be one year from date of opening of the first offer of securities
under the prospectus.
 An information memorandum containing all material facts relating to new charges created,
changes in the financial position of the company as have occurred between the previous and
succeeding offer of securities etc is required to be filed as well.
 Where an information memorandum is filed, every time an offer of securities is made, such
memorandum together with the shelf prospectus shall be deemed to be a prospectus.
 Red Herring Prospectus
As per section 32, Red Herring Prospectus does not include complete particulars of
the quantum or price of the securities included therein:

 A company proposing to make an offer of securities may issue of red herring prospectus
prior to the issue of securities.
 It must be filed with the Registrar at least 3 days prior to the opening of the subscription
list and the offer.
 Any variation between the red herring prospectus and a prospectus must be highlighted as
variations in the prospectus.
 Upon the closing of the offer of securities under this section, the prospectus stating therein
the total capital raised, whether by the way of debt or share capital, and the closing price of
securities, and any other details as are not included in the red herring prospectus shall be
filed with the Registrar and SEBI.
 LEGAL REQUIREMENTS AS TO
PROSPECTUS

The legal requirements as to the issue of a prospectus are as follows :

 The "SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009",as
amended from time to time, regarding capital issues to the public must have been
complied with for the proposed issue of shares or debentures to the public, and a
statement to that effect must be made in the prospectus.
 A copy of the prospectus, duly dated and signed by all the directors, must have
been registered with the Registrar and the fact must be stated on the face of
prospectus. The copy for registration must be accompanied with :
a) the consent in writing of the expert if his report is to be published in the
prospectus. The expert should be unconnected with the formation or management
of the company;
b) the consent in writing of the directors, auditors, legal advisor banker and broker,
etc., of the company to act in that capacity.

 The prospectus must be issued within 90 days of the date on which a copy thereof
is delivered for registration. If it is not issued within this period, it shall be
deemed to be a prospectus, a copy of which has not been delivered to the
Registrar. The reason for imposing the time limit is that if the issue of the
prospectus delayed too long, conditions may alter and what is stated in the
prospectus may no longer be valid. The company and every person who is
knowingly a party to the issue of the prospectus without registration shall be
punishable with fine ranging from 50,000 to 3,00,000. (Sec. 26)
 MISLEADING PROSPECTUS
 A contact of shares in a company is an uberrimae fedei i.e. “utmost good faith contract.
 Section 34 ~ “A statement included in a prospectus shall deemed to be untrue, if the
statement is misleading in the form and context in which it is included; or where any
inclusion or omission of any matter is likely to mislead”
 The intending purchasers of shares are entitled to true and correct disclosure of all the facts
in the prospectus. Neither any information which the law requires to be disclosed to the
public to be concealed or omitted to be stated from the prospectus nor should the
information given be false or misleading.
 A statement can also become false because it produces a wrong impression of actual
facts. However, an untrue statement will not include in its definition a mere expression of
opinion or expectation.
 CASE LAW
 Rex v. Klysant
 The director of the Royal Mail Steam Packet Company, Lord Kylsant, had falsified a
trading prospectus with the aid of the company accountant to make it look as if the
company was profitable and to entice potential investors.
 Following an independent audit instigated by HM Treasury, Kylsant and John Moreland,
the company auditor, were arrested and charged with falsifying both the trading prospectus
and company records and accounts.
 Although they were acquitted of falsifying records and accounts, Kylsant was found guilty
of falsifying the trading prospectus and sentenced to twelve months in prison.
 The company was then liquidated, and reconstituted as The Royal Mail Lines Ltd with the
backing of the British government.
 REMEDIES IN CASE OF
MISREPRESENTATION IN THE
PROSPECTUS

Against the company Against the Directors

and Others

Compensation (Civil Action for Deceit

Recission Damages
Liability)

Criminal Liability
LIABILITY OF DIRECTORS,
PROMOTERS ETCLIABILITY (Section 34)
 CRIMINAL

Where a prospectus, issued, circulated or distributed:

 Includes any statement which is untrue or misleading in form or context in which it is
included;
 Or where any inclusion or omission of any matter is likely to mislead;
 Every person who authorizes the issue of such prospectus shall be liable under section
447 i.e. fraud.

Defences available in this section are:

  Person prove that statement or omission was immaterial;

  Person has reasonable ground to believe and did believe that statement was true; or
  Person has reasonable ground to believe and did believe that the inclusion or omission
was necessary.
  CIVIL LIABILITY (Section 35)
Where a person has subscribed for securities of a company acting upon any misleading statement,
inclusion or omission and has sustained any loss or damage as its consequence, the company and
every person who:

  is a director at the time of the issue of prospectus;

  has named  as director or as proposed director with his consent;
  is a promoter of the company;
  has authorized the issue of the prospectus; and
  is an expert;
 shall be liable to pay compensation to effected person. This civil liability shall be in addition to
the criminal liability under section 36.

Defences under this section are:

  he has withdrawn his consent or never give his consent;

  the prospectus was issued without his knowledge or consent and when he become aware, gave a
reasonable public notice that prospectus was issued without his knowledge or consent.
  LIABILITY UNDER GENERAL LAW

Persons responsible for the issue of prospectus can also be held liable in an action for deceit,
under general law as provided by section 19 of the Indian Contract Act.
But the plaintiff will have to prove the following:

 There was a fraudulent mis-statement.

 A fraud is said to have been committed if a false representation is made knowingly or
without belief in it’s truth or recklessly, whether it be true or false.

 Representation related to some existing material facts.

 Material facts mean facts which are important for the contract.

 He has been actually deceived.

 There can be no action unless the shareholder has actually been deceived. A deceit which
does not deceive is no fraud. Besides mere misreading of a prospectus cannot form the
basis of an action for deceit.
 He had seen the prospectus and is the original allottee.

 A person who had not purchased the shares on the basic of the prospectus, which contained
false and misleading statements, shall not be entitled to any remedy, either that of
rescinding the contract or that of claiming the damages.
 The leading case is that of Peek v. Gurney.

Peek v. Gurney
 Gurney issued a fraudulent prospectus on behalf of a company. No shares were
purchased by Peek at that time. Several months afterwards, Peek purchased 2,000
shares of the company from the stock exchange. He brought an action against the
directors for deceit.
 Held, the directors were not liable.
 LIABILITY OF THE COMPANY
 RIGHT OF RESCISSION

 Established by the Truth in Lending Act (TILA) under U.S. federal law, the right of
rescission allows a borrower to cancel a home equity loan, line of credit, or refinance with a
new lender, other than with the current mortgagee, within three days of closing.

 The right of rescission is provided on a no-questions-asked basis.

 The right of rescission is intended to protect the public against inaccurate and unfair credit
billing and credit card practices.

 Lenders must give borrowers a notice advising them of their right to rescind.
  RIGHT OF ACTION FOR DAMAGES

In cases where mis-statements amounts to fraud, aggrieved investor also gets a right of action
for damages against the company. This right is available even after the company has gone into
liquidation.

In order to claim damages, from the company the claimant shall have to prove that:

 The misrepresentation in the prospectus was made fraudulently,

 It related to a material fact and not a mere promise, forecast or expression of opinion
or expectation,

 He was a class of person intended to act upon it and that

 He had actually acted upon it and suffered damages. Allottee cannot, however, both
retain the shares and get damages against the company.
 Book Building
Book Building is a systematic process of generating, capturing and recording investor demand for securities.
It is an alternative method of making a public issue in which applications are accepted from large buyers.

As per SEBI guidelines, a public issue through Book Building has the following routes:

75% Book Building Process 100% Book Building Process

a)100% through Book Building

Process
OR
75% through Book b)75% through Book Building
25% at fixed Process and 25% at the price
Building Process
price determined through Book
Building Process
Characteristics of Book Building
 Price range is the range of price at which offer for the subscription of securities is made
 Floor price is the minimum price set by the lead manager in consultation with the issuer.
 Tendering process is the process through which subscriptions are invited for a public offer
of securities.
 Bid is what an investor places with the authorized lead manager for the price.
 Allotment of shares is done to the investors who have bid at or above the fixed price.
 Participants:
1) Retail Individual Investors(RII)- < Rs 2,00,000
2) Non Institutional Investors(NII)- > Rs 2,00,000
3) Qualified Institutional Buyers- Investors with expertise, for eg. Banks
 Principal Parties Involved

The Book Running

The Syndicate
The Issuer/Company Lead Manager
Members
(BRLM)
 Process of Book Building
Circulate
Submit Draft
Form Offer Ask for bids
Nominate Offer
Syndicate of Document on price and
BRLM Document to
Brokers etc. among quantity
SEBI
Syndicate

Securities Forward all

Issued and offers to
Listed BRLM

Firm up
Allot Run the
Underwritin Determine
Securities to Issue Final Book to
g final issue
successful Prospectus maintain
Commitment price
Bidders record
s
 Private Placement
As per section 42, Private Placement means any offer of securities or invitation to subscribe to
securities to a select group of persons by a company (other than by way of public offer)
through issue of a private placement offer letter and which satisfies the conditions specified in
this section.

 The offer shall be made to persons not exceeding 200 in a financial year.
 No fresh offer or invitation under private placement shall be made unless the allotments
with respect to any offer or invitation have been completed or withdrawn or abandoned by
the company.
 All monies payable towards subscription of securities under this section shall be paid
through cheque or demand draft but not by cash.
 Proceeds from a private placement can not be utilised till the filing of return of allotment.
 Global Depository Receipt
 Global Depository Receipts are securities certificates issued by intermediaries such as
banks for facilitating investments in foreign companies. A GDR represents a certain
number of shares in a foreign company that is not traded on the local stock exchange. One
GDR usually holds 10 shares, but the ratio can be anything higher or lower than this. The
shares in the GDR trade on their domestic stock exchange.
 Financial Intermediaries such as depository banks purchase the shares in one country,
create a GDR containing those shares, and sell the GDR in the foreign market. It helps
companies raise capital from foreign markets.
 GDR is a negotiable instrument, which can be denominated in any freely convertible
security.
 Global Depository Receipts are based on the historical American Depository Receipts, the
difference being ADRs are traded in America and GDRs are traded in multiple countries.
 Green Shoe Option
 A Green shoe option is an over-allotment option. In the context of an Initial
Public Option(IPO), it is a provision in an underwriting agreement that grants the
underwriter the right to sell investors more shares than initially planned by the
issuer if the demand for a security issue proves higher than expected.
Basics of a Green Shoe Option
 Over-allotment options are known as Green shoe options because, in 1919, Green
Shoe Manufacturing Company (now part of Wolverine World Wide, Inc. (WWW)
was the first to issue this type of option. A green shoe option provides additional
price stability to a security issue because the underwriter can increase supply and
smooth out price fluctuations. It is the only type of price stabilization measure
permitted by the Securities and Exchange Commission (SEC).
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