Law and You > Corporate Laws > Companies Act, 2013 > Prospectus
In this article, we are going to study a “Prospectus of a company”, its objects and types. Section 23 of the Companies Act, 2013 provides for its need.
Section 23: The Companies Act, 2013
Public offer and private placement.—
(1) A public company may issue securities—
(a) to public through prospectus (herein referred to as “public offer”) by complying with the provisions of this Part; or
(b) through private placement by complying with the provisions of Part II of this Chapter; or
(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder.
(2) A private company may issue securities—
(a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or
(b) through private placement by complying with the provisions of Part II of this Chapter. Explanation.—For the purposes of this Chapter, “public offer” includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.
The biggest monetary advantage enjoyed by a public company is that it can raise huge amounts of capital by inviting members of the public to subscribe to the shares and debentures by issuing a prospectus. It is not obligatory for a public company to issue prospectus and invite members of the public to subscribe to the shares and debentures. Under Section 42 of the Companies Act, 2013 it may finance itself by what is known as ‘private placement’, as for instance, when it sends an offer letter to select a group of persons. Every public company either issue a prospectus or file a statement in lieu of prospectus.
A private company, however, is by definition, prohibited from inviting members of the public to purchase its shares and debentures, and therefore a private company cannot issue prospectus. But when a private company converts from private to public company, it must have to either file a prospectus if earlier issued or it has to file a statement in lieu of prospectus.
Under Section 33(1) of the Companies Act, 2013 no form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus.
As per Section 33(1)(a) and (b) above requirement is not to apply if it is shown that the form of application was issued—(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or (b) in relation to securities which were not offered to the public.
As per Section 33(2), a copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.
As per Section 33(3), if a company makes any default in complying with the provisions of this section, it shall be liable to a penalty of fifty thousand rupees for each default.
Section 2(70) of the Companies Act, 2013 defines a prospectus as ““Any documents described or issued as a prospectus and includes any notices, circular, advertisement, or other documents inviting deposit from the public or documents inviting offer from the public for the subscription of shares or debentures in a company.” A prospectus also includes shelf prospectus and red herring prospectus. A prospectus is not merely an advertisement.
Essentials of Prospectus:
- It invites subscription to shares or debentures or invites deposits.
- The aforesaid invitation is made to the public.
- The invitation should be made by the company or on behalf company.
Characteristics of the Prospectus:
- It is a document by which the company procures its share capital needed to carry on its activities;
- It is an invitation to a member of the public i.e. the public is invited to subscribe to the shares or debentures of the company. It is a general offer open to all;
- It includes any notice, circular, advertisement inviting deposits from the public.
- It must not be exaggerated and it must contain full and honest disclosures. All material facts must be disclosed and should not be concealed. It must not contain false details and untrue statements.
Objectives of Issuing Prospectus:
- To bring to the notice of the public that a new company has been formed.
- To preserve the authentic record of the terms and allotment on which the public have been invited to buy shares or debentures of the company.
- To secure that the directors of the company accept responsibility for the statements in the prospectus.
Liabilities During Issuing of Prospectus:
- Civil Liability: In case, misleading documents during the issue of securities amounts to misrepresentation, the aggrieved persons can repudiate the contract. They can claim a refund of their money. Damages can also be claimed from the persons found guilty.
- Criminal Liability: In case any deliberate concealment is made, directors will be punished with a fine of Rs. 5,000 or imprisonment up to two years or both. If it is fraud the fine will extend to Rs. 10,000 or 5 years imprisonment or both.
Statement in Lieu of Prospectus:
When the prospectus is not issued by the company a statement in lieu of prospectus, must be filed with the Registrar at least three days before the allotment of shares. The contents of the statement in lieu of prospectus are very much similar to the prospectus. The statement must be signed by all the directors or their agents authorized in writing.
A private company is prohibited from inviting the public to subscribe to their shares and thus cannot issue a prospectus. Hence these provisions do not apply to a private company.
Case Laws:
In Re. South of England Natural Gas and Petroleum Co. Ltd., (1911) 1 Ch. D. 573 case, 3,000 copies of a document in the form of a prospectus were sent out and distributed among the members of certain gas companies only. The Court held that though the offer was only to a limited class, it was nevertheless an “offer to the public,” as those persons were nonetheless “the public”.
In Nash v. Lynde, (1929) App cases 158 case, Nash applied for certain shares in a company on the basis of a document sent to him by Lynde, the managing director of the company. The document in the form of the prospectus was marked “strictly private and confidential.” The document did not contain all the material facts required by the Act to be disclosed. Nash filed a suit for compensation for loss suffered by him by reason of the omissions. The court observed, “The public is, of course, a general word. No particular numbers are prescribed. Anything from two to infinity may serve. The point is that the offer as such is to be open to anyone who brings his money and applies in due form, whether the prospectus was addressed to him on behalf of the company or not. Private communication is not thus open and does not construe to be a prospectus”. Thus the Court held that the prospectus not to have been “issued”.
Raising Finance:
Companies need funds to sustain in business. These funds can be required for long term or short-term purposes. To suffice their long-term needs, companies issue shares. Issue of shares can be done in three ways which are
- private placement of shares
- public issue
- Issuing the share to existing shareholders
Public Offer:
A public company may issue securities to the public through the prospectus, this offer is referred as a public offer. This offer must be in compliance with the provisions of the Part I Chapter 3 on Prospectus and Allotment of Securities and SEBI Act, 1992.
Section 23 of the Companies Act, 2013 mentions Public issue as a way of raising funds through the public. It means the selling or marketing of share for subscription by the public by issue of prospectus. The importance of the public offer is by issuing share to public and getting listed to recognized stock exchanges in India.
There can be two types of public offer-
- Initial Public Offer: It is the first offer made by a company to the public. Initial public offer is usually made to raise the capital of a small scale company to expand it.
- Further Public Offer: It is issuing shares to investors by a company already listed on a stock exchange. It is a stock issue of extra shares made by a public company that has already gone through its initial public offer process.
The public offer can be made by the company as well as the existing shareholders either as a fresh issue of securities or as an offer for sale. A fresh issue of securities is the issue of shares by the company to the public, whereas an offer for sale is the proposal by existing shareholders to sell their shares.