Following the incorporation of the firm, the next step is to raise the necessary resources for the company's operations. It is known that a private company is prohibited to invite the public to subscribe to its share capital. Hence, the need the public is invited to subscribe to the share capital only if a public company even a state-owned company if the managers are confident arranging the required capital privately, they do not need to issue a prospectus.

Generally, a public company increases its capital by issuing a prospectus. Moreover, when inviting investors, the purpose of issuing a prospectus is to inform them the company's activities, financial status, capital structure, future prospectus, management, etc. In this research paper; you will know the meaning, need and the importance of publishing the prospectus.

You will also notice the contents of the brochure, meaning of purported prospectus, shelf prospectus and advertisement. At the end, you will also learn about the golden rule of creating a brochure and allocation of shares under a fictitious name and also various remedies in case of loss to the investor if the prospectus contains false information.

Meaning of a Prospectus:

A prospectus is defined as a legal document that describes a company's securities that are offered for sale. Usually, the prospectus describes the business of the company and the purpose of the securities offered.

A prospectus is an important disclosure document that a company must submit when issuing investment securities to the public. These official documents provide potential investors with detailed information about investment funds, bonds, stocks and other investment offers offered to the public.[1]

A prospectus, as per Section 2(70)[2], means any document described or issued as a prospectus and includes a red herring prospectus or shelf prospectus 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.

Therefore, a prospectus can be more than just an advertisement; it can also be a notice or a circular.

If a document meets both requirements, it will be referred to as a prospectus:

1. It seeks subscriptions for or purchases of any other body corporate security, including shares, debentures;
2. The invitation is made public.

Importance of a Prospectus

In essence, under Section 42(2) of the Companies Act, an offer or invitation that doesn't fall within the criteria of a private placement is deemed to be an invitation to the public. If a company offers securities to over 200 individuals within a fiscal year, except for certain exempt categories like eligible institutional purchasers or employees eligible for assets through employee stock plans, it is considered a public offer.

Case law has established that a single private communication, such as in the Nash v. Lynde [3]case, passing through a small circle of friends, doesn't constitute an issue to the public. Similarly, offering shares to relatives or close associates of a director, as seen in Rattan Singh vs. Managing Director[4], Moga Transport Co. Ltd., is not regarded as an invitation to the public to purchase shares.

Regarding the requirement of an abridged prospectus under Section 33, it stipulates that an application form for securities must be accompanied by an abridged prospectus. However, exemptions apply: no abridged prospectus is needed if the application is for underwriting agreements or if the securities were not offered to the public. Additionally, upon request before the subscription period's closure, a person must be provided with a copy of the prospectus. Failure to comply with these provisions results in penalties.

An 'abridged prospectus' as defined in Section 2(1) is a memorandum containing key features of a prospectus as prescribed by the Securities and Exchange Board through regulations.

In summary, the Companies Act outlines rules regarding what constitutes a public offer, exceptions to such offerings, and requirements for providing abridged prospectuses and full prospectuses in the context of securities issuance and subscriptions.

Contents of a Prospectus

According to Section 23 of Companies Act, 2013, contents of a prospectus should include as follows:

• Information to be given in a Prospectus
  Prospectus required under section of the Companies Act and rule of the Companies Act (Prospectus and Allotment of Securities):
  1. Names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, trustees, if any, the names, addresses and contact details of the issuer's subsidiary., compliance officer of the issuer company, merchant bankers and co �managers of the issue, registrar of the issue, bankers of the issue, issuers' stockbrokers, issuers, rating agency of the issue, organizers of the instrument, names and addresses of organizers of any number, other persons prescribed in the regulations of the Securities and Exchange Commission.
      
  2. The date of start and end of the issue and a note in the brochure of the board or of the committee authorized by it about the issuance of certificates or the return of the application within fifteen days of the end of the issue or within of a shorter period. Before the deadline set by the Securities and Exchange Commission or otherwise, the application money will be returned to the applicants without delay, unless the applicants receive interest fifteen per cent annum for the delayed period.
      
  3. A statement by the Board of Directors about the separate bank account where all monies received out of the issue are to be transferred.
      
  4. Disclosure of details of all monies including utilised and unutilised monies out of the previous issue in the prescribe manner.
  5. Details about underwriting of the issue including the names, addresses, telephone numbers, fax numbers and e-mail addresses of the underwriters and the amount underwritten by them.
  6. Consent of the directors, auditors, bankers to the issue, trustees, solicitors or advocates, merchant bankers to the issue, registrar to the issue, lenders and experts.
  7. The authority for the issue and the details of the resolution passed therefore procedure and time schedule for allotment and issue of securities.
  8. The capital structure of the company shall be presented in the following manner, namely:
     1. the company's main objectives and current business activities and location
     2. the objects of the issue
     3. the purpose for which there is a requirement of funds
     4. the funding plan (means of finance)
     5. the summary of the project evaluation report (if available)
     6. the schedule of implementation of the project
     7. the interim use of funds, if any
         
  9. particulars relating to:
     1.  the understanding of management of project-specific risk factors
     2. gestation period of the project
     3. extent of project progress
     4. deadlines for completion of the project
     5. any litigation or legal action pending or taken by a government
  10. Department or a statutory body during the last five years...
  11. minimum subscription, amount payable by way of premium, issue of shares otherwise, then on cash.
  12. details of directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company, as may be prescribed.
  13. disclosure of the sources of the advertiser's contribution in the prescribed manner.
       
• Reports to be set out in Prospectus
  For the purpose of the financial information, the prospectus will list the following reports:
  
  1. The company's auditors' reports regarding its earnings and losses and assets and liabilities as well as the quantities and rates of any dividends paid by the issuer company for every share class across all five financial years right before the prospect issue year and other similar other issues that might be mandated;
      
  2. Reports submitted by the auditors in the format required regarding the earnings and losses for every one of the five fiscal years that preceded the fiscal year of the prospectus's release, which includes these reports from its subsidiaries and in a way that may be specified.
     
     However, in the event that a company's five-year formation period has not yet passed, the prospectus must outline in a way that may be required the reports pertaining to earnings and losses for every fiscal year that came before the fiscal year of the prospectus's release, which includes these reports from its subsidiaries;
      
  3. Reports submitted by the auditors in the format required regarding the earnings and losses incurred by the corporation throughout each of the previous five fiscal years just before the matter and the business's assets and liabilities on the final date on which the company's accounts were created, which was not more than one hundred years old and eighty days prior to the prospectus's release;
      
  4. Once more, in the situation of a company that has been involved for five years If time hasn't passed since the incorporation date, the prospectus will outline in the required way, the auditors' reports regarding the earnings and losses incurred by the company's operations during all fiscal years starting on the date of its establishment, as well as the business's assets and liabilities as of the final date prior to the prospectus's release; and
      
  5. Reports of the operations or transactions to which the money from either directly or indirectly, securities are to be employed;

Declaration
A declaration attesting to the Act's compliance with its requirements and a statement stating that nothing in the prospectus conflicts with the Act's, the Securities Contracts (Regulation) Act of 1956, and the 1992 Securities and Exchange Board of India Act as well as the rules and regulations laid down there.

Other matters
The prospectus should include any other information and outline any further reports that may be required.

Furthermore, highly detailed disclosure obligations are outlined in the SEBI Regulations, 2009 about the offer documentation. Businesses must adhere to the same rules.

1. Expert Declaration Found in a Prospectus
   A statement claiming to be from an expert may be found in a prospectus. The phrase "expert" comprises engineers, valuers, chartered accountants, and businesses secretary, a cost accountant, or anybody else with authority to grant a certificate issued in compliance with a legislation. There will be reports from and expert will be included in a prospectus, if:
   Such an expert is someone who, among other things:
   • Provides written consent to the prospectus's release and has not been involved in the company's formation, promotion, or management withheld the approval until the prospectus was given to the Registrar in order to registering,
   • A declaration indicating that he has granted and has not revoked his consent thereto is in the prospectus as well.
   Exemptions:
   • The aforesaid requirements of Section 26[5], that is, with respect to the contents do not apply to:
   • The issue of subscription rights, i.e. the prospectus given to the existing members or bondholders of the company or the registration form for the shares or bonds of the company, regardless of whether the applicant has the right to renounce the shares in favour of someone else or not.
   • Shares/Debentures Uniform in all respects: The provisions of Section 26 do not apply to the issue of a prospectus or form of application relating to share debentures which are, or must be identical in all respects to previously issued shares or bonds traded or listed on a recognized stock exchange.
      
   • Variation in terms of contract or objects in prospectus (Section 27)[6]: If, at any time, the company wants to vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, it cannot do so except by special resolution. The notice of the special resolution shall clearly state the reason for such change and shall be published in the newspapers (one English and one vernacular) of the city where the registered office of the company is located.
      
2. Offer of sale of shares by certain members of company (Section 28)[7]
   You may have noticed that provisions regarding the offer and sale of shares by specific company members to be carried out by the company on their behalf have been included for the first time in the Companies Act, 2013.
   
   It stipulates that in situations in which specific employees or body corporate suggest, after consulting the Board of Directors, providing whether all or a portion of their shareholdings are available to the public, they shall jointly Give the business permission to act in any way related to the offer of sale for and on in their stead. They will pay back the business for all of the costs it incurred on this issue.
   
   Section 28, in this regard provides that any document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company and all laws and rules made thereunder as to the contents of the prospectus and as to liability in respect of misstatements in and omission from prospectus or otherwise relating the prospectus shall apply as if this is a prospectus issued by the company.

Statutory Requirements in Relations to a Prospectus:

1. Dating of Prospectus:
   A prospectus published by, on behalf of, or in connection with a company that is intended to be acquired must be dated in accordance with Section 26. The Section further provides that the date on the prospectus shall be deemed to be the date of the publication of the prospectus.
    
2. Registration of Prospectus:
   In accordance with Section 26(1), a copy of the prospectus must be delivered to the Registrar by the date of publication, at the latest.
   
   Each person should sign the copy of the prospectus that was delivered in this manner identified as a director therein, as a proposed director, or by his legally authorized lawyer. Each prospectus published in accordance with subsection (1) must, on the face from it:
   
   1. declare that a copy has been sent to the Registrar for registration as required by subclause (4); and
   2. list any documents that must be attached to the submission in order for this section to be fulfilled, copy delivered in this manner, or make reference to the prospectus's statements, which mention these records.
   A prospectus cannot be registered by the Registrar unless all of the conditions listed in this section regarding registration are met and the prospectus has the written consent of every individual listed in the prospectus.
   
   Any planned company or an existing company must comply with the aforementioned requirements.
   
   A prospectus cannot be released more than ninety days following the date that a copy was sent one of them was given to the Registrar.
    
3. Refusal to Register the Prospectus - According to Section 26(7), the Registrar is not permitted to register a prospectus unless all of the Section 26 registration requirements are met and all parties' written consent is attached to the prospectus according to the prospectus. Consequently, the prospectus will not be registered by the Registrar if;
   
   1. It is not dated.
   2. It lacks the matters, reports, and declarations that are supposed to be included in it;
   3. It includes reports or statements from experts involved in the establishment, advancement, or management of the business;
   4. It includes a statement attributed to an expert without providing a statement of its own that he has authorized in writing the prospectus's release and has not revoked this consent prior to receiving a copy of the prospectus for registration, to the Registrar;
   5. Not all of the individuals named are signed a copy that is delivered to the Registrar therein as a director of the company, as a director-in-proposal, or by his legally authorized attorney.
4. Prospectus in the form of Advertisement (Section 30)[8] - It is necessary to include information about the goals, member liability, and share capital of the company's memorandum in any advertisement or prospectus that is published, regardless of the format of the business, as well as the names of those who signed the memorandum and the quantity of shares they subscribed for as well as the capital structure.

When Prospectus not Required to be Issued:
In the following situations, a company is not required to issue a prospectus:

1. A prospectus is not necessary for a private company to publish.
2. A prospectus is not required even for publicly traded companies if the promoters or Directors believe that by developing personal relationships, they can mobilize resources and relationships, so the shares or debentures aren't made available to the general public.
3. When the debentures or shares are made available to current shareholders or rights-issued debentures, either with or without the right of Abandonment in favour of another individual [Section 26 (2) (a)].
    

Types of Prospectuses

The provisions of Section 31, in this regard, are as follows:

1. Shelf Prospectus - The provisions of Section 31, in this regard, are as follows:
   
   1. A shelf prospectus may be issued by any class or classes of companies as the Securities and Exchange Board of India (SEBI) may provide by regulations in this behalf.
   2. A company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within the period a period of validity that cannot exceed one year.
   3. A company that presents a shelf prospectus must send notification of all significant circumstances related to new charges, changes in financial status have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed, prior to making of a second or subsequent offering of securities pursuant to a shelf prospectus.
   4. An Information Memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities. Information memorandum together with the shelf prospectus shall be deemed to be a prospectus.
   A "shelf prospectus" is a prospectus that covers securities or a class of securities that are issued for subscription in one or more issues over a predetermined period of time without the need for a follow-up prospectus Justification for Part 31.
   
   According to Section 31 subsection (1), a "shelf prospectus" may be published by any class of businesses that the Securities and Exchange Board (SEBI) recognizes may do so by means of regulations. Obtaining funds from the general public by employing different security measures is an exhausting procedure. Whenever any such when a new prospectus is needed, it must be submitted. Despite being a repetitive issue, the formalities require a significant amount of time.
    
2. Red herring prospectus - Section 32 of the Companies Act, 2013 contains the following provisions with respect to 'red herring prospectus':
   
   1. A company proposing to offer securities may issue a prospectus before issuing a prospectus.
   2. A company that intends to issue a herring prospectus in accordance with paragraph 1 must deliver it to the registrar at least three days before the opening of the subscription list and offer.
   3. The red herring brochure has the same obligations as the brochure, and any deviations between the red herring brochure and the brochure must be highlighted as brochure variations.
   4. After the end of the offer of securities in accordance with this section, a prospectus is indicated, in which the total capital acquired through debt or share capital and the closing price of the securities and other information not included in the offer are indicated. The red herring prospectus must be sent to the registrant and the Securities and Exchange Commission.
   Explanation: This section uses the term "introduction of a red herring quot; means a prospectus that does not contain complete information about the number or price of securities contained therein.
    
3. Abridged Prospectus: The abridged prospectus is a summary of a prospectus filed before the registrar. It contains all the features of a prospectus. The abridged prospectus briefly contains all the information contained in the prospectus, so that it is convenient and fast for the investor to receive all the useful information immediately. Section 33(1) of the Companies Act 2013 also provides that when the securities purchase form of a company is issued, an abridged prospectus must be attached to it. It contains all the useful and material information for the investor to make a solid decision and also reduces the cost of a public issue of capital because it is a short prospectus.[9]
    
4. Deemed Prospectus: If a company offering securities for sale to the public distributes or agrees to distribute securities, the document is considered a prospectus by which the offer for sale to the public is made. The document is considered for all purposes as the prospectus of the company and is subject to all the contents and obligations of the prospectus.
    

In the case of SEBI v. Kunnamkulam Paper Mills Ltd[10]., it was held by the court that where a rights issue is made to the existing members with a right to renounce in the favour of others, it becomes a deemed prospectus if the number of such others exceeds fifty.[11]

Misstatement in a Prospectus and its Consequences:

1. Criminal liability for mis-statements 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 contained or where the inclusion or omission of any matter is likely to be misleading, any person authorizing the issue of such prospectus shall liable under section 447
   
   Provided that nothing in this section shall apply to a person if he shows that such statement or omission was immaterial or that he had reason to believe, and until the prospectus was filed, he believed that the statement was true or that the addition or omission was necessary.
   
   According to section 34(1) of the Act, a statement included in a prospectus shall be deemed to be untrue:
   
   1. if the statement is misleading in the form or context in which it is included; or
   2. if it is likely that something will be added or omitted in the prospectus may mislead.
   In Rex v. Kylsant[12], all the statements included in the prospectus issued by the company were literally true. One of the statements disclosed the rates of dividends paid for a number of years. But dividends had been paid not out of 105 Prospectus trading profits but out of realised capital profits. This material fact was not disclosed. Held, that the prospectus was false in material particular and Lord Kylsant, the managing director and chairman, who knew that it was false, was held guilty of fraud.
   
   A mere silence cannot be a sufficient foundation of setting aside the allotment of shares. The concealment of facts should be such that if it is not mentioned it will make what is presented absolutely false. In Peek v. Gurney[13], the prospectus issued did not mention about certain liabilities. This created a false impression about the company being very prosperous. The prospectus was held untrue.
   
   Section 34 of the Companies Act states that if a prospectus is published, circulated, or distributed and contains any statements that are false, misleading in the context in which they are included, or if any information is included or omitted that could be construed to be misleading, Anyone who approves the distribution of such a prospectus faces consequences with a minimum term of six months' imprisonment, but a term that may last up to ten years, and there will also be a fine that cannot be less than less than the sum utilized in the deception, but potentially up to three times the quantity utilized in the deception.
    
2. Civil Liability (Section 35):
   According to Section 35(1), if an individual purchased securities from a company based on a misleading statement in the prospectus or on the inclusion or omission of any information, and they have incurred any loss or damage consequently, the business and each individual who:
   
   1. was a director of the business at the time the prospectus was released;
   2. is listed in the prospectus as a and has given permission to be named director of the business, or has consented to take on that role, either right away or after a delay;
   3. is a promoter for the business;
   4. has given permission for the prospectus to be issued; and
   5. is the expert mentioned in section 26 subsection (5), shall be responsible for compensating the parties in addition to facing penalties under section 36 everyone who has experienced such harm or loss.

Punishment for fraudulently inducing persons to invest money (Section 36) - Section 36 of the Act provides that any person who:

1. Either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading,
2. Or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into:
   
   1. contracts for the acquisition, delivery, subscription or guarantee of securities or
   2. any contracts whose purpose or alleged purpose is to secure a profit to the party from the income of securities or is based on the fluctuation of the value of securities; or
   3. any agreement for, or with a view to obtaining credit facilities from any bank or financial institution, will be held liable for action under section 447.
       

Defenses:

No one will be held accountable under Section 35 (1) if they can demonstrate either;

1. that they withdrew their consent to become a director of the company prior to the prospectus's release, or
2. that the prospectus was released without their permission
3. that he was not informed or given permission for the prospectus to be issued, and that as soon as he learned of the problem, he promptly issued a reasonable public notice that he was not informed or given permission for its issuance.

Conclusion
The process of raising capital for a company is a crucial stage following its establishment. Among the various steps involved, issuing a prospectus holds significant importance, especially for public companies. A prospectus serves as a comprehensive document informing potential investors about the company's activities, financial status, management, and future prospects, among other crucial details.

Throughout this research paper, we have delved into the meaning, necessity, and importance of publishing a prospectus, as well as its contents, types, statutory requirements, and repercussions for false information.

The prospectus, as defined by Section 2(70), encompasses various forms such as a red herring prospectus, shelf prospectus, or even any document inviting offers from the public for subscription or purchase of securities. Its contents, as mandated by Section 26 and other regulations, outline extensive details, including the company's financial information, management, objects of the issue, and much more.

Importantly, the law imposes stringent obligations and liabilities regarding the accuracy and completeness of the prospectus. Sections 34, 35, and 36 of the Companies Act, 2013, hold individuals accountable for false statements, misleading information, or material omissions in the prospectus. This includes both criminal and civil liabilities, underscoring the necessity for accurate and transparent disclosure in the prospectus.

Moreover, the paper has touched upon exemptions where a prospectus might not be required, along with various types of prospectuses such as shelf prospectus, red herring prospectus, abridged prospectus, and deemed prospectus, each serving specific purposes within the realm of public offerings.

The legal framework outlined in the Companies Act, supported by cases and provisions, emphasizes the importance of truthful and comprehensive disclosures in a prospectus. It serves as a safeguard for investors' interests, ensuring they have access to critical information before making investment decisions.

In conclusion, the prospectus stands as a pivotal document in the corporate landscape, offering transparency, safeguarding investor interests, and ensuring compliance with legal obligations. Its issuance involves careful attention to detail, accuracy, and adherence to regulatory requirements, ultimately contributing to the integrity of capital markets and investor confidence. A prospectus plays an important role for any public company and it must be under the provisions laid down under the Companies Act 2013.

References:

• Avtar Singh, Company Law, Eastern book Company, 2016 Edition
  

1. https://economictimes.indiatimes.com/definition/prospectus
2. Companies act
3. Nash v. Lynde, [1928] UKHL J1112-1
4. Rattan Singh vs. Managing Director, AIR 1959 P H 196
5. Companies Act, 2013, 26, No. 18, Acts of Parliament, 2013 (India).
6. Companies Act, 2013, 27, No. 18, Acts of Parliament, 2013 (India).
7. Companies Act, 2013, 28, No. 18, Acts of Parliament, 2013 (India).
8. Companies Act, 2013, 30, No. 18, Acts of Parliament, 2013 (India).
9. Ipleaders, https://blog.ipleaders.in/concept-prospectus-companies-act-2013/, (last visited Nov. 25, 2023)
10. SEBI v. Kunnamkulam Paper Mills Ltd, (2013) 178 Comp Cas 371 Ker
11. Ipleaders, https://blog.ipleaders.in/concept-prospectus-companies-act-2013/, (last visited Nov. 25, 2023)
12. Rex v. Kylsant, [1932] 1 K. B. 442, 448
13. Peek v Gurney [1873] LR 6 HL 377

Written By: Kanishka Shaktawat

Also Read:

• Prospectus
• An Analysis: Prospectus
• A Comprehensive Guide to Prospectus and Remedies for Misrepresentation
• Criminal And Civil Liability For Mis-Statements In Prospectus
• Inability To Meet The Requirements In A Prospectus Can Lead To Disqualification Of A Candidate