Prospectus

What is 'Prospectus'

A prospectus is a formal legal document providing detailed information about a company's financial securities being sold. It includes key data such as the company’s financial status, risks, and the terms of the offering, helping potential investors make informed decisions.

Official Definition of 'Prospectus'

A prospectus is defined in Section 2(a)(10) of the Securities Act of 1933 as any prospectus, notice, circular, advertisement, letter, or communication, whether written or broadcast through radio or television, that offers or confirms the sale of any security. The prospectus holds significant legal importance, and any fraud, misrepresentation, or omission within it can lead to legal action under Sections 11 and 12(a)(2) of the Securities Act.

In India, Prospectus under section 2(70) 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 body corporate.

Prospectus as Defined in Legislation

Companies Act, 2013

A public company can issue a prospectus by inviting applications for its shares or debentures. The definition of the prospectus is given under section 2(70) of the Company Act 2013 (from now on the Act 2013); any document issued or described as the prospectus, including a red herring prospectus referred to in section 32 or shelf prospectus, referred in section 31, or any notice, advertisement, or other documents, inviting offers from the public for subscription or purchase of any securities of a body of corporate.

A salient feature specified in a prospectus memorandum, as defined by SEBI through its regulations, is called an abridged prospectus, section 2(1) of the Act 2013.

Legal Provision Relating to Prospectus

Under the Companies Act 2013, criminal liability can be imposed on a company or individual who authorizes the issuance of a prospectus that contains false or misleading information. If the fraud is substantial, the punishment can include imprisonment for up to 10 years, a fine up to three times the amount of the fraud, or both. However, if the fraud is less than 10 lakh rupees or less than 1% of the company's turnover, the punishment may be imprisonment for up to 5 years, a fine of up to 50 lakh rupees, or both. In cases where the fraud impacts public interest, the law mandates a minimum imprisonment of 3 years. On the civil side, anyone who purchases shares based on a false prospectus can be held legally accountable for any damages incurred. This includes the company's directors, individuals who agreed to be named as directors, promoters or supporters of the company, and experts involved in the creation, promotion, or management of the company. These provisions ensure that individuals and entities that play a role in issuing misleading prospectuses are held responsible for the consequences, both criminally and financially.

Process of Filing and Issuing Prospectus

A prospectus from a public company must be dated, signed, and contain required information and financial reports. It should comply with SEBI regulations and confirm that it follows relevant laws like the Companies Act, Securities Contracts Act, and SEBI Act. Exceptions apply if the prospectus is for existing members or if it's about shares or debentures already traded on the stock exchange. The prospectus needs to be filed with the Registrar before publication, signed by directors, and include expert consent. If not filed within 90 days, it becomes invalid. Violations lead to fines for the company and individuals involved. Each prospectus must indicate that a copy has been filed with the Registrar, specify attached documents, and ensure all necessary materials are included and transparent.

Issue of Prospectus

A company must issue its Prospectus within 90 days from the date it delivers a copy to the Registrar. If the Prospectus is not issued within this prescribed time frame, it will be deemed invalid. If the Prospectus is found to violate Section 26 of the Companies Act, 2013, it will be considered invalid, and the company will be subject to a penalty as per Section 26(9), ranging from ₹50,000 to ₹3,00,000.

Additionally, if any individual becomes aware that a Prospectus has been issued in contravention of Section 26, they will be subject to the following penalties:

• Imprisonment for a term of up to 3 years, or
• A fine ranging from ₹50,000 to ₹3,00,000.

These provisions ensure compliance with the legal requirements for issuing a Prospectus.

Advertisement of Prospectus

Section 30 of the Act 2013, certain particulars of the prospectus be advertised, whenever there is a call for subscription to securities. It will include the contents of the memorandum, the liability of members, the amount of the share of capital, the name of signatories, the number of shares subscribed by each, and the structure of the company’s capital.

Conditions of Prospectus

A document will have to emanate conditions to consider as a prospectus under the Act 2013; they are as follows:

• Company Details: The name and registered office address of the company, along with information about the secretary, auditor, legal advisor, bankers, trustees, and other relevant entities.
• Issue Timeline: The dates for the opening and closing of the issue.
• Bank Account Information: A statement from the Board of Directors detailing the separate bank accounts where the proceeds from the issue will be held.
• Utilization of Previous Issue Receipts: A statement from the Board of Directors regarding the utilization or non-utilization of receipts from previous issues.
• Consent and Opinions: Written consent from the directors, auditors, and bankers regarding the issue, along with any expert opinions received.
• Authority and Resolutions: Details about the authority for the issue, including resolutions passed by the Board of Directors or shareholders authorizing the issue.
• Allotment Procedure: Information on the procedure and timeline for the allotment and issuance of securities.
• Capital Structure: A detailed description of the company’s capital structure as prescribed.
• Objectives of the Public Offer: The purpose and goals of the public offering.
• Business Overview: The company’s business objectives and the location of its operations.
• Risk Factors: A detailed description of potential risks related to the project, including gestation periods, pending legal actions, and other crucial information.
• Minimum Subscription and Premium Details: The minimum subscription required and the amount payable on the premium.
• Directors' Information: Information on the company’s directors, including their remuneration, interests in the company, and any other relevant details.
• Financial Information: Financial reports, including the auditor’s report, profit and loss statements for the last five financial years, business transaction reports, a statement of compliance with applicable laws, and any other relevant financial disclosures.

As per Section 26 of the Companies Act, 2013, a Prospectus must be issued on the date of publication not before or after. A copy of the Prospectus must be delivered to the Registrar for registration, and it should include the date of submission to the Registrar. Furthermore, the Prospectus must be signed by all the directors whose names appear in the document.

Remedies for Misrepresentation in a Prospectus

Investors use a company's Prospectus to assess its financial position, liabilities, and market standing. The Prospectus must have accurate and complete information without hiding anything.

A statement in the Prospectus is considered misleading if it is false, intended to create a false impression, hides important facts, or leaves out details that would impact an investor's decision. If an investor relies on a misrepresented Prospectus, they can either claim damages for any loss or back out of the investment.

Section 34 of the Companies Act 2013 deals with criminal liability for false statements in a prospectus. Those responsible for an inaccurate prospectus could face criminal charges unless they can prove the error was minor or they had legitimate reasons to believe the information was true.

Section 35 covers civil liability for false statements in a prospectus. If someone suffers a loss due to misleading information in a prospectus, the company and individuals like directors, promoters, and experts may have to pay compensation. However, if they can prove they withdrew consent before the prospectus was issued, they may not be liable. If a prospectus was issued with fraudulent intent, everyone involved will be personally responsible for any losses incurred.

Types of Prospectus

The Companies Act 2013 defines four types of prospectuses:

1. A Deemed Prospectus, as outlined in Section 25(1), is created when a company offers or agrees to allot securities, and any document offering securities to the public is considered a deemed prospectus by law.
2. A Red Herring Prospectus does not specify the price or number of securities offered and must be filed with the registrar at least three days before the opening of the offer and subscription list.
3. A Shelf Prospectus, described in Section 31, is issued when a company or public financial institution offers securities to the public, with a validity period of up to one year from the first offer, after which no new prospectus is required. However, an information memorandum must be provided.
4. Finally, an Abridged Prospectus is a summary of the full prospectus containing essential details as per SEBI guidelines, and a company cannot issue an application form for the purchase of securities without it being attached.

Securities are issued to the public through prospectus by public companies, which is also possible by issuing rights or complying with the issues provided in the Act. The companies listed comply with the provisions given in the SEBI Act 1992 and the rules & regulations given in it. In this, an order by the Securities and Exchange Board of India (SEBI) decided to provide monies with interest to subscribers where the issue of public shares was unsubscribed (2017) 200 Comp Cas 440 (Del). Within their review, the court opined that refund and interest should not be delayed any further to subscribers (2017) 200 Comp Cas 440 (Del).

As Defined in Case Laws

Kisan Mehta v. Universal Luggage Manufacturing Private Limited

In Kisan Mehta v. Universal Luggage Manufacturing Private Limited

The plaintiffs filed a public interest litigation (PIL) alleging that the first defendant, a company, issued a misleading prospectus that inflated its profits and made false representations. They argued that these misstatements could deceive investors, leading to public harm. The plaintiffs sought an injunction to prevent the company from proceeding with its share issuance and a declaration that the prospectus was fraudulent under Sections 56, 62, and 63 of the Companies Act, 1956.

The court looked at the legal issues of fraudulent misrepresentation in the prospectus. It found that the plaintiffs couldn't sue because they weren't directly affected by the false information in the prospectus. Only people who actually bought the subscription can seek remedies under Section 62. Public interest cases must show clear harm, but the plaintiffs only mentioned possible investor losses. The court rejected the plaintiffs' request for a lawsuit because they didn't have a valid reason, and there were no grounds for stopping the process. The request was denied, and the plaintiffs didn't have to pay any costs.

Vijay Kumar Gupta and Ors. vs. Eagle Paint and Pigment Industries

Vijay Kumar Gupta and Ors. vs. Eagle Paint and Pigment Industries

The petitioners' claims for amounts they assert were "fixed deposits" under the Companies (Acceptance of Deposits) Rules, 1975.

The petitioners claim they deposited Rs. 6,25,350 with the company, supported by fixed deposit receipts. The respondents argue it was an unsecured loan instead, given by the petitioners who were directors and shareholders. The Company Law Board stated that funds recognized as deposits by both parties are to be treated as deposits, not loans. As the necessary declarations were not filed, the borrowings were considered deposits, not exempt. The company failed to show compliance with regulations.

The Board ruled the company must repay the amount with 10% interest yearly in three equal instalments, following Section 58A(9) of the Companies Act, 1956. The Board's jurisdiction overrules the civil suit by the petitioners.