Understanding Elements of Company Law: The Prospectus

Understanding Elements of Company Law: The Prospectus


To begin with, a prospectus can be referred to, as a legal document issued by the company that offer securities for sale. Or, a Prospectus is an invitation issued to the public to offer for the purchase or subscribe shares or debentures of a company. By way of issuing prospectus, the company secures capital as it invites deposits or offers for shares and debentures from the company.

Private Limited Companies are strictly prohibited from issuing prospectus and thus, cannot invite the public to subscribe to their shares. Only Public Limited Companies are allowed to do so.


Section 2(70) of the Companies Act 2013, defines prospectus as “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. “ In simple words, any document inviting offers from the public, for the subscription of shares or debentures.

Important Essentials

  1. A prospectus must be in writing. An oral invitation to subscribe is not a prospectus.
  2. A document is not a prospectus unless it is an invitation to the public, but if it satisfies the condition of invitation to the public, it is a prospectus.
  3. Whether shares have been “offered to public” is a matter of fact and will depend upon the circumstances of the case.
  4. Offer for subscription must not be made to more than 50 persons or such higher number as may be prescribed [Sec 40(2)].

Contents of Prospectus [Section 26]

  • Every prospectus issued by or on behalf of the company shall be dated and signed and shall
  1. Include following Information - names and addresses of registered office of the company, CS, CFO, auditors, bankers, trustees underwriters s may be prescribed; dates f the opening and closing of the issue and declaration of issue of allotment letters and refunds within prescribed time; a statement by the Board of Directors about separate bank account to manage all monies received out of issue; consent of all persons whose addresses are so ,mentioned; authority to issue; capital structure of the company; object of offer; object of present business of the company; minimum subscription; details of Directors; disclosures.
  2. Include following Reports – reports by the auditors about its financial performance; reports about profit and losses for each of the five financial years immediately preceding the financial year of the issue of the prospectus; reports about the business or transactions.
  3. Make a declaration about the compliance of the provisions of the Companies Act and a statement to that effect.
  4. State such other matter and reports as may be prescribed.

(5) A prospectus issued under sub-section (1) shall not include a statement purporting

to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the prospectus.

(6) Every prospectus issued under sub-section (1) shall, on the face of it,—

(a) state that a copy has been delivered for registration to the Registrar as required under sub-section (4); and

(b) specify any documents required by this section to be attached to the copy so delivered or refer to statements included in the prospectus which specify these documents.

Variation in terms of Contract or objects in Prospectus [Section 27]

  • A company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in general meeting by way of special resolution:

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;

Provided further that such company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company.

  • 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, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the Securities and Exchange Board by making regulations in this behalf.

Advertisement of prospectus [Section 30]

Avoiding the technical language of Section 30 of the Act, when advertising the prospectus, it is necessary to specify the contents of the memorandum and its capital structure. The contents of the memorandum are- object, liability of members and amount of share capital of the company, and the names of the signatories to the memorandum and the number of shares subscribed for by them.

Shelf Prospectus [Section 31]

Shelf prospectus is a prospectus issued by financial institutions, or bank for one or more securities or class of securities specified in that prospectus. Any financial institution, public sector banker scheduled bank whose main object is financing shall file a shelf prospectus.

There is a period of validity for such prospectus and the company need not produce afresh prospectus for subsequent offers within that period.

Red Herring Prospectus [Section 32]

Red herring prospectus is a prospectus which does not include complete particulars of the quantum or price of securities included therein.

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

(2) A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least three days prior to the opening o the subscription list and the offer.

(3) 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.

(4) 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.

Criminal liability for misstatements in prospectus [Section 34]

Where a prospectus, issued, circulated or distributed under this Chapter, 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 authorises the issue of such prospectus shall be liable under section 447:

Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

Civil liability for misstatements in prospectus [Section 35]

(1) Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who—

(a) is a director of the company at the time of the issue of the prospectus;

(b) has authorised himself to be named and is named in the prospectus as  director of the company, or has agreed to become such director, either immediately or after an interval of time;

(c) is a promoter of the company;

(d) has authorised the issue of the prospectus; and

(e) is an expert referred to in sub-section (5) of section 26,

shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.

Punishment for Misstatement [Section 36]

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce 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 securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure

a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or

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

shall be liable for action under section 447 which states that “ any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.”

Defence available

The Act has defined the following defences, based upon the nature of liability, whether it is Civil or Criminal:

  1. Defences against the Civil Liability:

According to Sec. 62(2) of the Companies Act, no decree for damage shall be passed if the person charged can prove any one of the followings:

(a) Withdrawal of consent: A person is not liable if he withdrew his consent before the issue of the prospectus.

(b) Issue without knowledge and consent: If the person can prove that the prospectus was issued without his knowledge or consent and, after becoming aware of its issues, he gave public notice that the same was issued without his knowledge and consent.

(c) Statement of an expert: If the statement which is alleged to be untrue purports to be a statement of an expert or a copy or of a valuation report of an expert, the person charged can be discharged from his liability if he can prove:

(i) It is a fair and correct copy or representation or extract of the expert’s statement;

(ii) He had reasonable grounds to believe;

(iii) The expert had given his consent to the issue of the prospectus;

(iv) The expert had not withdrawn his consent before registration.

(d) True Statement:

The person charged can escape from his liability if he can prove that he had reasonable ground to believe and did, up to the time of the allotment of shares or debentures, believe that the statement was true.

  1. Defences available to an expert:

Sec. 62(4) states that an expert whose opinion was included in the prospectus can use the following as defence:

(a) Withdrawal of consent:

After giving consent, he withdrew it in writing before delivery of a copy of the prospectus for registration.

(b) Knowledge of untrue statement:

If the person, on becoming aware of the untrue statement, withdrew his consent in writing and gave public notice with reasons thereof, after delivery of the copy of the prospectus to and before allotment.

(c) True statement:

He was competent to make such statement and he had reasonable grounds to believe and did up to the time of the allotment of shares and debentures, believe that the statement was true.

  1. Defence’s against Criminal Liability:

Sec. 63(1) states that a person charged in a criminal court will be acquitted if he can prove any one of the following:

(a) That the statement was immaterial, or

(b) That he had reasonable grounds to believe and did, up to the time of the issue of the prospectus, believe that the statement was true.

Click here to read about another element of Company Law: Registration of Charges in our next article.


Company Law
Private Limited Company
The Companies Act 2013
The Indian Companies Act 2013

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