Prospectus and

Distinction between Pubic

and Private Company
Advocate Yam Kumar Yonjan
Faculty Member, Nepal Law Campus
(LL.M. Commercial Law and International Law)
 Prospectus
 “Prospectus means a document that gives details about new issues of share debenture
in the company.”
-Oxford Dictionary
 Prospectus means a prospectus to be published by a company pursuant to section 23.
-section 2(m) Companies Act, 2063
 “A prospectus means any document described or issued as prospectus and includes
any notice, circular, advertisement or other document inviting deposits from the
public or inviting offers from the public for the subscription or purchase of any shares
in or debentures of a body corporate.”- sec 2 (36) of Indian Companies Act, 2013
 In essence, prospectus is an invitation issued to the public to take shares or
debentures of the company or to deposit money with the company.
 Prospectus is a brief report of statement of the company usually in the form of
booklet. In other words, a prospectus is a formal notice or invitation to general public
to purchase the shares or debenture of the company. Prospectus may be in the form
of notice , circular handbill and advertisement.
A prospectus must disclose following essential information such
as:
(1) Firm's objectives
(2) Primary business activity
(3) Background and qualification of principal officers
(4) Current financial position
(5) Projected financial statements
(6) Assumptions underlying the projections
(7) Foreseeable risks to the firm
(8) Offering price on the stock (shares)
(9) How the interest and principal will be paid.
Characteristics of Prospectus:
(i) It is a document issued as a prospectus
(ii) It is an invitation to the member of the public
(iii) The public is invited to subscribe to the shares or
debentures of the company
(iv) It includes any notice, circular, advertisement
inviting deposits from the public
(v) It is a document by which the company procures its
share capital needed to carry on its activities.
Forms and Contents of the Prospectus:
(a) The contents of the Memorandum: It expresses the name of the company, objects,
nature of business, share capital and its division, liability of members, names and
addresses of the signatories and the number of shares subscribed by them.
(b) The qualification shares of the Directors: If the Articles of the company provides
that certain minimum number of shares to be possessed by the directors as qualifica­
tion, in that case, a person shall not be qualified to act as a director unless he holds
such number of shares.
(c) Number of redeemable preference shares: Particulars regarding debentures and
redeemable preference shares with their date of redemption must be stated.
(d) Remuneration of the Directors and Promoters: The prospectus must contain
the rate of remuneration for attending meetings and for other services of the
Directors and Promoters.
(e) The names, descriptions and addresses of the Directors and Managing
Directors: The names, addresses, descriptions, occupations of the Directors,
Managing Directors, Managers and the provisions regarding their appointment must
be stated.
 Forms and Contents of the Prospectus:
(f) The Minimum Subscription: The minimum subscription on which the
directors may proceed to allotment and the amount payable on application,
allotment etc. on each share should also be stated in the prospectus
(g) Time of opening: The time of the opening of subscription list should also
be stated.
(h) Names and Addresses: The names and addresses of vendors, if any, and the
mode of payment of purchase price and goodwill should also be contained in
the prospectus.
(i) Underwriting Commission, Brokerage etc.: The names of underwriters
and the opinion of the directors regarding their financial position and
business.
(j) Names of the auditors with their addresses: The reputation of the
auditors is also an important factor necessary for public patronage.
(k) Particular of Contracts: The dates of and parties to every material contract,
and reasonable time and place of its inspection are also significant.
(l) Preliminary Expenses: The estimated amount of preliminary expenses to
be incurred should also be furnished
Forms and Contents of the Prospectus:
(m) Particulars of Directors: Full particulars of the nature and interest of every
director or promoter in the promotion of or in the property proposed to be
acquired by the company within two years with statement of all sums paid or
agreed to be paid to him in cash or shares for service rendered
(n) Disclosure: Full disclosure on these matters should also be made in the
prospectus.
(o) Expected rate of dividend and voting rights: The rights of shareholders
relating to voting, meeting and dividends along with the nature and extent of
restrictions to be imposed by Articles on their right to transfer shares should
also be stated in clear and convincing terms.
(p) Capitalization of Profits and Surplus from revaluation of assets:
Capitalization of profits/reserves of a company or if any of its subsidiaries have
been capitalized (i.e. issuing bonus shares)— particular of such capitalization
and also surplus, if any, assets from the revaluation of assets should also be
stated.
Prospectus In Nepalese Companies Act, 2063:
Section 23 of Nepalese companies act has mentioned about prospectus.
Prospectus to be published:
(1) A public company shall publish its prospectus prior to issuing its securities publicly.
(2) Prior to the publication of prospectus under Sub-section(1), the prospectus signed by all directors
of the company has to be submitted, along with a written application made to the Securities Board
for approval, under the prevailing laws on securities.
(3) (3) Unless and until the Securities Board approves and gives permission for the public issue under
Sub-section (2) and a copy of such prospectus is registered with the office, no company or no
person, on behalf of such company, shall publish, or cause to be published , the prospectus of such
company.
(4) If it appears that the prospectus submitted pursuant to Subsection(2) omits any important matter
or contains any unnecessary matter the Securities Board shall cause such prospectus to be
amended or altered as required and grant approval to publish it in accordance with law.
(5) 5) If the prospectus submitted pursuant too Sub-section (2) is approved by the Securities Board,
the concerned company shall give to the Office information thereof, in writing, accompanied by a
copy of the approval letter of the Securities Board; and on receipt of that information, the Office
shall register the prospectus pursuant to this Section. Provided, however, that if it appears that
any matter contained in this Act has not been complied with, the Office may refuse to register it.
Prospectus In Nepalese Companies Act,
2063:
(6) If any person demands for a copy of the prospectus registered pursuant to Sub-
section (5) , the Office shall provide such copy by collecting the prescribed fees.
(7) In publishing the prospectus pursuant to Sub-section(1), the company shall also
mention that the prospectus has been approved by the Securities Board and
registered with the Office, and the date thereof.
(8) The covering page of each prospectus shall also mention that such prospectus has
been registered pursuant to this Section and that the Securities Board or the Office
shall not be liable to bear any kind of responsibility in respect of the matters
mentioned therein.
(9) Prior to the approval by the Securities Board of the prospectus of any company, the
concerned company shall make a declaration before the Securities Board that the
provisions of this Act have been complied with; and the Securities Board may, if it
deems necessary, seek opinion of the Office on that matter.
(10) Other procedures to be fulfilled in publishing the prospectus and the matters to
be set out in the prospectus shall be as mentioned in the prevailing law on securities.
Red Herring Prospectus:
 A Red Herring Prospectus is a document which is submitted by an issuer
company who intents to have public offerings of securities (i.e.; stock or
bonds).
 It is associated with an Initial Public Offering (IPO). It must be filed with
the Securities and Exchange Commission (SEC) or Stock Exchange Board.
 The term Red herring comes from the tradition where young hunting
dogs in Great Britain were trained in order to follow a scent by the use of
‘Red’ (i.e. salted and smoked) herring (i.e., kipper).
It is interesting to note that this pungent fish would be dragged across a
trail until the puppy learned to follow the scent. But the term is used in
prospectus simply due to disclosure statement which is printed in red
ink on the cover which clearly states that the issuing company is not
attempting to sell its shares.
Contents of Red Herring Prospectus:
(a) Purpose of the issue;
(b) Proposed offering Price Range;
(c) Promotion expenses;
(d) Copy of the underwriting agreement;
(e) Underwriter’s commission and discount;
(f) Disclosure of any option agreement;
(g) Balance Sheet;
(h) Net proceeds to the issuing company;
(i) Earning statement for .last three years;
(ii) (j) Legal option on the issue;
(iii) (k) Copies of the Articles of Incorporation of the issuer; and
(iv) (l) Names and addresses of all offices, underwriters, directors and
stockholders of the existing outstanding stock.
Mis-Statements in Prospectus:
 Mis-statements and false statements in the prospectus are instruments by
which dishonest company promoters may practice fraud on the public
money.
 In order to prevent this practice the law imposes certain duties and liabilities
on those persons who are responsible for such issues.
 If, however, the prospectus contains any Mis-statement of a material fact or
if the prospectus wants in any material fact, two types of liabilities will arise,
they are:
(1) Civil Liability
(2) Criminal Liability
 Before discussing the above we are to know the liability which may arise for
Untrue Statement.
 It is the duty of the authors of the prospectus to see that the prospectus does
not contain any untrue statement which may mislead the public.
Liability for matters contained in
prospectus
Section 24 of Companies Act, 2063 (2006) has mentioned about Liability for matters
contained in prospectus.
1) It shall be the duty and obligation of the concerned company to abide by the matters
contained in the prospectus published under Section (23).
2) The directors who have signed the prospectus as referred to in Sub-section (1) shall
be liable for the matters mentioned in that prospectus .
3) If any published prospectus contains false statements made maliciously or
deliberately and any person sustains any loss or damage by reason of his/her
subscription of securities on the faith of that prospectus, the directors who have
signed that prospectus shall be personally liable to pay compensation for the actual
loss or damage so sustained . Provided, however, that a promoter who resigns before
the decision made by the company to publish the prospectus or whom on becoming
aware of any false statement in the prospectus, publishes a notice of that matter to
the information of the general public prior to the sale or allotment of securities or
who proves that he/she did not know that the prospectus contained any false
statement shall not be liable to bear such compensation.
Underwriting Agreement
 An underwriting agreement is a contract between a group of investment bankers who
form an underwriting group or syndicate and the issuing corporation of a new securities
issue.
 The purpose of the underwriting agreement is to ensure that all of the players
understand their responsibility in the process, thus minimizing potential conflict.
 The underwriting agreement is also called an underwriting contract.

FEATURES OF UNDERWRITING AGREEMENT

1. An underwriting agreement takes place between a syndicate of investment bankers
who form an underwriting group and the issuing corporation of a new securities issue.
2. The agreement ensures everyone involved understands their responsibility in the
process.
3. The contract outlines the underwriting group's commitment to purchase the new
securities issue, the agreed-upon price, the initial resale price, and the settlement
date.
 Underwriting Agreement
The underwriting agreement may be considered the contract between a
corporation issuing a new securities issue, and the underwriting group that
agrees to purchase and resell the issue for a profit.
As mentioned above, the contract is generally between the corporation
issuing the new security and investment bankers who form a syndicate.
A syndicate is a temporary group of financial professionals formed to handle
a large financial transaction that would be difficult to handle individually.
The underwriting agreement contains the details of the transaction,
including the underwriting group's commitment to purchase the new
securities issue, the agreed-upon price, the initial resale price, and the
settlement date.
There are several different kinds of underwriting agreements: the firm
commitment agreement, the best efforts agreement, the mini-maxi
agreement, the all or none agreement, and the standby agreement.
Types of Underwriting Agreements
1. Firm Commitment Underwriting Agreement:
 In a firm commitment underwriting, the underwriter guarantees to purchase all the securities offered for
sale by the issuer regardless of whether they can sell them to investors. I
 t is the most desirable agreement because it guarantees all of the issuer's money right away. The more in
demand the offering is, the more likely it will be done on a firm commitment basis.
 In a firm commitment, the underwriter puts its own money at risk if it can’t sell the securities to
investors. Underwriting a securities offering on a firm commitment basis exposes the underwriter
to substantial risk.
 As such, underwriters often insist on including a market out clause in the underwriting agreement. This
clause frees the underwriter from its obligation to purchase all of the securities in case there is a
development that impairs the quality of the securities. Poor market conditions, though, are not a
qualifying condition.

2. Best-efforts underwriting agreement :
 In a best-efforts underwriting agreement, underwriters do their best to sell all the securities offered by
the issuer, but the underwriter isn't obligated to purchase the securities for its own account.
 The lower the demand for an issue, the greater the likelihood it will be done on a best efforts basis. Any
shares or bonds in a best efforts underwriting that have not been sold will be returned to the issuer. 
 A best-efforts underwriting agreement is mainly used in the sales of high-risk securities.
Types of Underwriting Agreements
3. A mini-maxi agreement:
 A mini-maxi agreement is a type of best efforts underwriting that does not become effective until a
minimum amount of securities is sold.
 Once the minimum is met, the underwriter may then sell the securities up to the maximum amount
specified under the terms of the offering.
 All funds collected from investors are held in escrow until the underwriting is completed.
 If the minimum amount of securities specified by the offering cannot be reached, the offering is
canceled and the investors’ funds are returned to them.
4. With an all or none underwriting;
 With an all or none underwriting, the issuer determines it must receive the proceeds from the sale
of all of the securities. Investors’ funds are held in escrow until all of the securities are sold. If all of
the securities are sold, the proceeds are released to the issuer. If all of the securities are not sold, the
issue is canceled and the investors’ funds are returned to them.
4. A standby underwriting agreement
 A standby underwriting agreement is used in conjunction with a preemptive rights offering.
 All standby underwritings are done on a firm commitment basis.
 The standby underwriter agrees to purchase any shares that current shareholders do not purchase.
The standby underwriter will then resell the securities to the public.
 Brokerage agreement
 A brokerage contract is a written contract by which a broker is employed as an
agent to make contracts in the name and on behalf of the principal.
 It will contain details of the terms of the business relationship between a broker
and his/her principal.
 On the basis of receiving signature from both parties, a brokerage contract
becomes a working document to which both parties must abide.
 Non fulfillment of conditions stipulated in a contract would make the contract
null and void.
 A broker usually receives a commission under the brokerage contract.
 It is also called as a brokerage agreement, dealer agreement, or a broker agreement.
A typical brokerage contract would cover issues such as acquisitions, proprietary
investment opportunities, sale, mergers, re-capitalizations, management buyouts,
financing or other typical business issues.
 Brokerage agreement
 A type or contract, whereby a person or company acts as a sales agent on
behalf of the exporting company (principal), introducing its products to
potential buyers in the external market, in exchange for a commission based
on the value of the business deals arranged and paid to the principal.
 As with the distributor, this relationship does not imply a formal
interdependence between the principal and the agent intermediary unless
the laws of the country of destination state, otherwise the mechanism
of commission agent or intermediary is therefore very useful to companies
that are launching their export operations.
 This type of contract is ideal for small companies with little or no experience
in international trade, as it allows them to access international markets
without having to make large investments.
 Everything is left in the hands of the agent.
 This type of contract is usually called Commission Sales Agreement
Distinction between a public company and
a private company
1. Minimum number of members:
The minimum number of persons required to form a ‘ public company is seven (if any
public company want to establish another public company seven person is not required or
not necessary) whereas in a private company it is one ( In India two person is necessary)
2. Maximum number of members:
There is no maximum limit on the members of a public company but a private company
cannot have more than 101 members.
3. Restriction on name:
The name of a public company must end with the word, “limited” But in the case of a
private company the word private limited must be used at the end of the name.
4. Commencement of business:
A public company can commence its business only after getting the certificate of
commencement of business. But a private company can commence its business as soon as
it is incorporated.
Distinction between a public company and
a private company
5.  Invitation to the public:
• A public company must issue a prospectus or statement in lieu of prospectus for inviting
public to subscribe to its shares or debentures. A private company on the other hand cannot
issue such invitation to the public.
6.  Transferability of shares:
There is no restriction on the transfer of shares in the case of a public company whereas the
articles of a private company must restrict its right to transfer its shares.
7.  Number of its directors:
A public company must have at least three directors and maximum eleven and women are
shareholder of the company at least one women director whereas a private company as
mentioned in AoA and it must have at least one directors and maximum eleven.
If there is at least seven member board of director in a company one independent director and
more than seven board of director two independent directors must be appointed.
8.  Restrictions on the appointment of directors:
A director of a public company shall file with the Registrar consent to act as a director or sign
the memorandum of association or enter into a contract for their qualification shares. The
directors of a private company need not do so and as per the consensus agreement.
Distinction between a public company and
a private company
9. Statutory meeting:
A public company must hold a statutory meeting and file with the Registrar a statutory
report. But a private company has no such obligations as per the consensus agreement.
10. Quorum:
If the articles of a company do not otherwise provide three members personally present
(representation of the fifty percent of existing shareholder) in the case of a public
company are quorum for a meeting of the company. It is as mentioned in AoA in the
case of a private company.
11.  Issue of share warrants:
A public company can issue share warrants but such a right is denied to a private
company.
12. Further issue of capital:
A public company proposing further issue of shares must offer them to the existing
members. A private company is free to allot new issue to outsiders with not exceeding to
101 shareholders.