This document discusses types of prospectuses, registration requirements for prospectuses, and criminal and civil liabilities related to prospectuses under Indian company law. It outlines different types of prospectuses like shelf, red herring, abridged, and deemed prospectuses. It explains that prospectuses must be registered with the Registrar of Companies and lists the documents that must be submitted. Criminal liability under section 34 can arise if a prospectus contains untrue or misleading statements. Civil liability under section 35 allows investors who suffered losses due to false statements in a prospectus to claim compensation from responsible parties. Two court cases are also summarized regarding misleading statements in prospectuses.
2. Types of Prospectus
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SHELF(Sec 31)
-It has particular period
of validity(Not
exceeding 1 yr.)
-Required when
company need to raise
funds very frequently.
-”Information
memorandum is used
to convey all changes
which came after issue
RED HERRING
(Sec 32)
-Quantity and price
of securities are not
stated in this.
-Used for book
building
ABRIDGED
(Sec 33)
-It is summarised
form of prospectus
-Form given by
company to applicant
in order to subscribe
should be
accompnied with it
DEEMED
(Sec 25 )
-When some company or issuing
house, issue securities on behalf
of some other company then the
document used by it is deemed
prospectus of original company
-Document should be offered
within 6 months of agreement
between companies.
- Company received no
consideration till issue of sharres
to public
3. Registration of Prospectus
It is mandatory to get prospectus registered with registrar of companies before it is
issues to public.
● A copy of prospectus, duly signed by every person who is named there in as
director or a proposed director, Is filled with ROC.
● Documents need to be submitted with prospectus.
○ Copy of all the contracts entered into with respect to the appointment of managing
director, directors and other officers.
○ If the auditor or accountant of the company has made any adjustments in the
company’s account, the said adjustment and reason for it.
○ Copy of the application which is to be filled for the issue of securities.
○ Written consent of all named as Auditor, Solicitors , Bankers, Brokers etc
○ Consent to the issue of prospectus by an expert.
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4. ● Every prospectus must have these 2 statements on face of it.
○ A copy of prospectus has been delivered to the ROC for registration.
○ All specified documents required have been delivered to the ROC.
● A copy of prospectus must be filled with ROC.
● According to section 26, No prospectus is valid if it is issued after more then
90 days from the date on which it was delivered to ROC.
THESE WERE THE REQUIREMENTS NEED TO BE FULFILLED IN ORDER TO
GET PROSPECTUS REGISTERED UNDER SECTION 26.
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5. Criminal Liabilities (Section 34)
● Where prospectus is issued, circulated or distributed.
○ Includes any statement which is untrue or misleading in the form or context in
which it is included.
○ Where any inclusion or omission of any matter is likely to mislead.
Every person who authorised to issue such prospectus shall be liable under section 447
for fraud.
● Defence available by proving any of the following:-
○ That statement or omission was immaterial.
○ Person had reasonable ground to believe & did believed that statement was true.
○ Person has reasonable ground to believe & did believed that the inclusion or
omission was necessary.
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6. T.H. Chowdary v/s The Registrar of Companies, 2014
ISSUE - The only allegation against the company is that the company had given a rosy picture in the
prospectus and in the letter of offer attracting the public and shareholders to subscribe for shares and
debentures in the company, by mentioning expected future results.
DEFENCE - One has to be optimistic in life and cannot be expected to be pessimistic. No one can expect
future gloomy picture in the prospectus or letter of offer. At the same time, the subscribers will decide on
subscribing for shares and debentures having regard to market instabilities and other risks involving in the
subscription. Simply because the company expected to give more dividend and expected to earn more
profit which the company could not achieve in future years, it cannot be said that the contents of the
prospectus and letter of offer were full of false promises and false inducements. The company or its
directors did not promise any definite achievement in future.
HELD - The court accepted this argument and held that there was no misstatement in the prospectus and
the proceedings in lower court were quashed and all the appeals were allowed.
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7. Civil Liabilities (Section 35)
● Where a person has subscribed for the securities of a company acting upon any
misleading statement, inclusion or omission and has sustained any loss or damages as
its consequence, The company and every person who:-
○ Has authorised issue
○ Is a expert
○ Is a promoter
○ Is director at the time of issue
○ Has been named as director or as proposed director
Shall be liable to pay compensation to affected.
● Defence available by proving any of the following:-
○ He had withdrawn consent or never gave it.
○ The prospectus was issued without knowledge or consent and when he became
aware of it, he gave reasonable public notice about it.
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8. Possfund Custodian Trustee v Diamond(sec 35)
The High Court recently held that it is arguable that those responsible for the issue of a company's prospectus
owe a duty of care not only to initial subscribers but also to subsequent purchasers of that company's shares in
the market. Shares in Diamond Group Holdings (Diamond) were placed on the Unlisted Securities Market in April
1989. Most of the plaintiffs were subscribers but some had also made subsequent purchases of Diamond's
shares on the USM. Many false statements were found n prospectus of the company.
Thus, Diamond's shares turned out to be worthless. The plaintiffs sued the company's directors, financial advisers
and reporting accountants involved in the placing. It was agreed that a duty of care was owed by each of them to
the initial subscribers. The issue was whether a duty was also owed to subsequent purchasers in the after market.
The plaintiffs produced expert evidence to the effect that by 1989 the established purpose of a prospectus was
not simply to induce investors to subscribe, but also to induce the public to make after market purchases. A
significant factor in this respect was the Stock Exchange requirement for the prospectus to be printed on Extel
cards so that it could be made available to potential investors.
On the basis of this evidence, the judge held that it was at least arguable that a duty of care was owed to the
purchasers in the after market.
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