PROSPECTUS MEANING:

• Company prospectus is released by company to

inform the public and investors of the various
securities that are available. These documents
describe about investments offered by the
company. A prospectus is generally accompanied
by basic performance and financial information
about the company.
• Prospectus is a formal legal document, that
provides details about an investment offering for
sale to the public, it should contain the facts that an
investor needs to make an informed investment
decision.
 DEFINITION: (Companies Act 2013)
Clause (70) of Section 2 of the Act define
“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. Section 26 deals with matters to
be stated in prospectus.
 What Is a Red Herring?
A red herring is a preliminary prospectus filed by a
company with the Securities and Exchange Commission
(SEC), usually in connection with the company's initial
public offering (IPO). A red herring prospectus contains
most of the information pertaining to the company's
operations and prospects but does not include key details
of the security issue, such as its price and the number of
shares offered. A company proposing to issue red herring
prospectus shall file it with registrar at least 3 days prior to
the opening of the subscription list and the offer. It carries
the same obligations as the prospectus.
 Shelf Prospectus
“A shelf prospectus is a prospectus in respect of which, securities or a 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.”
In other words, it is a prospectus that is issued at the stage of first offer of
securities and it is valid for one year. Therefore, if a company wants to issue
further securities later on in that year, they need not issue another prospectus.
They can just file an information memorandum which includes the details of
new charges created by the company, changes in the financial position of the
company and any other changes that are prescribed in the Act that occurred
during the validity period of the prospectus. This information memorandum is
filed with the ROC and it is deemed (assumed) to be a prospectus for the further
issue of securities.
PROSPECTUS WHICH COMPANIES ARE
REQUIRED TO ISSUE PROSPECTUS
• Every public listed company who intends to
offer shares or debentures of the company to
the public.
• Every private company who ceases to be a
private company and converts into a public
company and intends to offer shares or
debentures of the company to the public
REQUIREMENTS OF A PROSPECTUS
A document would be considered a prospectus
only if it meets the following requirements, viz.
 it should be in writing
 itshould be issued by or on behalf of a body
corporate
 it should be issued to public
 itshould contain invitation to public for making
deposits or for subscription of shares in or
debentures of a body corporate.
CONTENTS OF PROSPECTUS (SECTION-26)
It shall be dated and signed and shall contain the following things:
Every prospectus issued by or on behalf of a public company either with
reference to its formation or subsequently, or by or on behalf of any person
who is or has been engaged or interested in the formation of a public
company, shall be dated and signed and shall—
(a) state the following information, namely:—
(i) names and addresses of the registered office of the company, company
secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if
any, underwriters and such other persons as may be prescribed;
(ii) dates of opening and closing of the issue.
(iii) a statement by the BOD of separate bank account.
(iv) details about underwriting of the issue
(v) consent of the directors, auditors, bankers to the issue,
expert’s opinion, if any, and of such other persons, as may be
prescribed;
(vi) the authority for the issue and the details of the resolution
passed therefore;
(vii) procedure and time schedule for allotment and issue of
securities;
(viii) capital structure of the company in the prescribed manner;
(ix) main objects of public offer and such other particulars as
may be prescribed;
(x) main objects and present business of the company and its
location, schedule of implementation of the project;
 REPORTS IN PROSPECTUS:
1. Reports by the auditors of the company.
2. Reports relating to profits and losses of the
company.
(C) DECLARATION: Prospectus shall make a
declaration about the compliance of the provisions
of the act and nothing contained in the prospectus is
contravening the provisions of act, Securities and
exchange Board of India Act 1992.
 CONTRAVENTION OF SECTION 26 OF THE ACT
• If a prospectus is issued in contravention of the
provisions of the section, then
• Company shall be punishable with a fine not less than
Rs 50000 which may extend to Rs three lakhs, and
• Every person who is party to the issue of the
prospectus shall be punishable with an imprisonment for
a term which may extend to three years or with a fine
not less than Rs 50000 which may extend to Rs three
lakhs, or with both.
STATEMENT IN LIEU OF PROSPECTUS
STATEMENT IN LIEU OF PROSPECTUS
It is a statement which is delivered by a company, having share capital to
the Registrar for registration, at least three days before the first allotment
of shares or debentures under the following conditions:
• Where a company does not issue prospectus; or
• Where a company has issued a prospectus but has not proceeded to allot
any of its shares offered to the public for subscription.
2. SILOP is to be signed by every person who is named therein as a
director or a proposed director of a company.
3. Where a company which is required to submit a SILOP does not
comply with the requirement, it can not allot shares.
CONTENTS OF STATEMENT IN LIEU OF PROSPECTUS
1. The name of the company.
2. The nominal share capital of the company divided into number of ordinary
shares and par value per share.
3. Description of the business to be undertaken and its prospects.
4. Names, addresses, description and occupations of the proposed or appointed
directors , chief executive, managing agent and secretary of the company.
5. Provisions regarding the appointment and remuneration of the above officers
of the company.
6. Voting rights in the meetings of the company.
7. Numbers and the amount of shares and debentures agreed to be issued.
8. Names, occupation and addresses of vendors of property purchased or
proposed to be purchased by the company.
9. Amount payable in cash, shares or debentures, to each vendor of the property.
 Basis for Statement in Lieu of
Comparison Prospectus Prospectus
Prospectus refers to a legal- Statement in lieu of prospectus
document published by the is a document issued by the
Meaning company to invite general company when it does not
public for subscribing its offer its securities for public
shares and debentures. subscription.

To encourage public
Objective To be filed with the registrar.
subscription.
Capital is raised from general Capital is raised from known
Used when
public. sources.

It contains details prescribed It contains information similar

Content
by the Indian Companies Act. to a prospectus but in brief.

Minimum subscription Required to be stated Not required to be stated

 LIABILITY FOR
MISSTATEMENT IN
THE PROSPECTUS
Misstatements in the prospectus
Since prospectus is relied on by the members of the public to
subscribe or purchase the securities of a company, any
misstatements on it invite penal consequences. Misstatement
may occur when a statement which is untrue or misleading in
form or context is included in the prospectus. Also, any
inclusion or omission of any matter which is likely to mislead
will also be considered as a misstatement (sec. 34). For e.g., a
statement on the purpose of offering shares which is untrue, or
statement on the locations of offices for a company which is
misleading will amount to misstatement in the prospectus.
 Liability for misstatement in the prospectus

A person who has signed and given consent to the prospectus is liable for
misstatement. Persons who had the management of the whole, or
substantially whole of the affairs of the company can be held liable for
misstatement in prospectus if they have signed the prospectus and had
given consent for the same. Managers, Company Secretaries, and
Directors will come under this category.
Likewise, in Hafez Rustom Dalal vs Registrar of Companies, the
Gujarat High Court observed that while issuing notices, the respondent
authority has to point out the statements in the Prospectus which they
consider false or deliberate or made to induce the public for subscribing
the shares of the Company.
A misstatement in the prospectus can invoke criminal (sec. 34) and civil
liabilities (sec. 35). Misstatements can lead to punishment for fraud under
Sec. 447.
<<< Criminal liability >>>
A person who authorizes the issue of a prospectus which has untrue or
misleading statements is liable for punishment under Sec. 34. Such a
punishment is for fraud as set out in Sec. 447. “Fraud” under Sec. 447
includes an act, omission, concealment of any fact with an intent to deceive,
gain undue advantage, or to injure the interests of the company or its
shareholders or its creditors or any other person. It is not necessary that such
an act involve any wrongful gain or wrongful loss. Abuse of position
committed by a person is also considered fraud under this section. Sec. 447
further sets out the punishment for fraud:
 If the fraud involves an amount of ten lakh rupees or more,
or one per cent. of the turnover of the company (whichever is
lower) the person who is found guilty of fraud shall be punishable with
imprisonment for a minimum term of six months which may extend to
ten years. Such a person shall also be liable to a fine of an amount not less
than the amount involved in the fraud and the fine may extend to three
times of such amount.
 If the fraud involves an amount less than ten lakh rupees or
one per cent. of the turnover of the company (whichever is
lower) and does not involve public interest, the imprisonment may extend
to five years or with fine which may extend to fifty lakh rupees or with
both.
 If the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
Civil liability
Civil liability for misstatements in prospectus will arise when a person
has sustained any loss or damage by subscribing securities of a
company based on a misleading prospectus (sec. 35). In such instances
the following persons shall be liable under sec 447 and will have to pay
compensation to persons who have sustained such loss or damage:
 director of the company at the time of the issue of the prospectus;
 person who has agreed to be named as a director in the prospectus and
is named as a director of the company, or has agreed to become such
director;
 is a promoter of the company;
 has authorized to issue the prospectus; and
 is an expert who has been engaged or interested in the formation or
promotion or management of the company.
Prohibition of the Company and directors from dealing with
securities following misstatement
In the Matter of Taksheel Solutions Limited, the SEBI (25 Oct. 2013)
found that the Red Herring Prospectus/Prospectus had several missing
vital pieces of information which resulted in misstatement. SEBI had
earlier prohibited the company, its promoters/directors and independent
directors from buying, selling, or dealing in securities in any manner.
The Board noted that the company had the duty to make true and
correct disclosures and statements in the Prospectus to help the
applicants take an informed investment decision.
Suspension of the auditor for false certificate attached to the Prospectus
In The Institute of Chartered Accountants of India v. Mukesh Gang, Chartered
Accountant, Referred Case. No.2 of 2011, the High Court of Andhra Pradesh noted that
the prospectus is a special document and a false certificate is issued by the auditor
would amount to his failure to discharge his statutory duties. The court added that he
must be presumed to be aware of the consequences that flow from such gross
negligence of a false certification because the public subscribe to the shares based on
the invitation (Prospectus). The court further observed that as per Section 65 of the
Companies Act, 1956 untrue statements in the prospectus will result in liability for the
loss or damage sustained by a person while subscribing for shares or debentures based
on such statements in the Prospectus. Here, the court found that the certification by the
statutory auditor has resulted in misleading the general public into subscribing to the
shares of the company by placing faith on such a certificate. Therefore, the court
suspended the respondent from practising as a Chartered Accountant for a period of
three years under Section 21(5) of the Chartered Accountants Act, 1949.
Exceptions from liability for misstatements in Prospectus
 A person shall not be criminally liable under sec. 34 if he proves that: the
statement or omission was immaterial or
 he had reasonable grounds to believe that the statement was true
 Likewise, a person shall not be liable under sub-section (1) of sec. 35 (civil
liability), if he proves that:
 he withdrew his consent to become a director of the company before the issue of
the prospectus, and that it was issued without his authority or consent; or
 the prospectus was issued without his knowledge or consent, and
 on becoming aware of its issue, he gave a reasonable public notice that it was
issued without his knowledge or consent.
Conclusion
The prospectus being an invitation to the public to subscribe to the
securities of a company must be made with utmost care. The public rely
on the statements and reports attached to the prospectus to take an
investment decision. Therefore, the Companies Act provide for liabilities
and punishments for persons who provide misleading and untrue
statements in the prospectus.