Prospectus

Prospectus
Definition
According to section 2(70) of the Companies Act 2013, Prospectus means any
document described or issued as a prospectus and includes red herring prospectus
referred in section 32 or shelf prospectus refereed on section 31 or any notice,
circular, advertisement or other document inviting deposits from the public or inviting
offers from the public for subscription or purchase of any securities of a body
corporate.
Features
▪Must be in writing
▪Invites subscriptions to shares and debentures
▪Invitation made to public
▪Invitation must relate to shares and debentures
▪Invitation must be made by or on behalf of the company
Requirements for prospectus
▪Dating and signing of prospectus
▪Reports
▪Experts consent
▪Registration of prospectus
▪Must be issued within 90 days of filling it with ROC
Contents of prospectus
▪General information: Company, Minimum subscription, Refund orders, Dates, Names
and address, Underwriting, Deposit of money, Credit rating
▪Capital structure of the company
▪Terms of present issue
▪Particulars of the issue
▪Company management and project
▪Stock market data
▪Particulars about company, listed under the same management
▪Outstanding litigation
▪Default
Types of prospectus
▪Shelf prospectus
▪Red herring prospectus
▪Abridged prospectus
▪Deemed prospectus
Mis-statements in prospectus
▪A prospectus contains the information which is relied on by the public to either
subscribe or purchase the securities of a company. If it contains any misstatement
then it would invite serious consequences.
▪Any statement that is incorrect or misleading is included in the prospectus then it
would be termed as mis-statements in prospectus.
▪Any inclusion or omission of a fact which is likely to mislead the public shall also be
termed as a misstatement. Where a matter which is material enough has been
omitted from the prospectus and such omission is likely to mislead the public, the
prospectus will be deemed to be a prospectus with an incorrect statement.
Liabilities for Mis-statements in
prospectus/ Remedies
1. Civil Liability
2. Criminal Liability
Civil Liability
• The Remedies available to a person who has subscribed for shares on
the faith of misleading prospectus may be grouped in two categories:
• Remedies against the company

1. Rescission of the Contract, and
2. Damages for fraud.
• Remedies against the directors, promoters and experts.
Rescission of the Contract
The person who purchased shares on the basis of the prospectus containing misstatements can rescind
the contract (cancel the contract). He is eligible for rescission whether the misstatement is made
intentionally or unintentionally. He has to surrender his shares to the company. Then his name will be
removed from the register of the members.
The money paid by him will be refunded by the company. The following are the conditions to be
satisfied for claiming rescission:
1. Prospectus was issued by or on behalf of the company.
2. There must be an untrue statement.
3. The misstatement must be material misrepresentation.
4. The misrepresentation must have induced the shareholder to take the shares and he must have
relied on the statement in applying for shares.
5. The statement must be of the fact and not of law.
6. The shareholder must apply for rescission within a reasonable time and before the liquidation of
the company.
Loss of Right to rescind the contract:
▪ Unreasonable delay
▪ Commencement of winding up
Damages for fraud
After rescinding the contract, the aggrieved shareholder can claim damages from the
company by filing a suit in the Court. He has to prove that the misstatement was
made fraudulently.
Remedies against the Promoters, Directors, Experts, and Persons
authorized the issue of the Prospectus
In case it is proved that a prospectus has been issued with the intent to defraud the
applicant than:
▪ Every person referred to section 35(1) shall be personally responsible.
▪ Without any limitation of liability
▪ For all or any of the damages that have been incurred by any person who
subscribed to the securities on the basis of such prospectus.
Defense of directors, promoters etc.:
▪ Withdrawal of consent
▪ Issued without knowledge
▪ Ignorance of untrue statement
Criminal Liability
Under section 34, where prospectus contains any untrue statement, every person who
has authorised the issue of the prospectus shall be punishable under section 447.
Punishment
Imprisonment Fine
Minimum amount involved in fraud
Minimum 6 Months
Maximum up to 3 times the amount
Maximum 10 years
involved in the fraud
Minimum Subscription
When the public company invites the public to subscribe for its shares, it cannot allot
those shares until the minimum amount stated in the prospectus has been
subscribed. This amount stated in the prospectus is known as the Minimum
subscription.

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• Remedies against the company

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