A Simple note on Prospectus:According to Section 2(36) of the Companies Act,1956, a Prospectus means any document described or
issued as a prospectus and includes any notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for the subscription or purchase of any shares
in, or debenture of, a body corporate.
In the Companies Act, 1956, Schedule II, Part I and Part II enumerates the contents of a prospectus. Part III of
the Schedule contains certain provisions which apply to Part I and II such as who is a vendor, when the
expression lessor in the prospectus means a vendor, an year means a financial year, the term „officer‟ in the
prospectus includes a „proposed Director‟ but not an „auditor‟ etc.
A broad outline of the contents of the prospectus ( as required by the Companies Act,1956):Schedule II
1) General Information like a) name of the Company b) address of Regd. Office, c) Stock exchanges
where listing applied, f) statement on refund if minimum subscription is not received or stock
exchange listing is not made or denied or of over subscription, g) dates of opening, closing, and
the earliest closing of the issue, names and addresses of Auditors, and lead managers, debenture
trustee, underwriters to the issue, whether rating of Crisil or any other rating agency obtained
2) Capital structure of the Company
3) Terms of the present issue, like terms of payment etc.
4) Particulars of the issue, like objects, projects cost, means of finance etc.,
5) Company management and project.
1) General Information:- on Directors, Auditors, Solicitors, Advocates, Managers to the issue, Registrars
to the issue, bankers to the Company, bankers to the Issue etc.
2) Financial Information:- a) report of Auditors as to Profit & Loss Account and Assets & Liabilities,
b) report on subsidiaries, c) a detailed report on how the proceeds or part of proceeds of the issue of
shares or debentures are or is to be applied directly or indirectly to various purposes.
3) Statutory and other information;- a) minimum subscription b) expenses of the issue like fees payable
to Advisers, Registrars to the issue, Managers to the issue, debenture trustee , underwriting commission
and brokerage, previous public or rights issue, issue of shares otherwise than for cash, debentures,
redeemable preference shares and other instruments issued by the company outstanding on the date
of the prospectus.
Certain Statutory requirements as to prospectus:- A prospectus issued by a Company shall be dated and that date (unless contrary is proved) be taken as
the date of the publication of prospectus. S.55 of the Companies Act.
- On or before the date of its publication, a copy of the prospectus signed by every person who is named
therein as a director or proposed director of the Company or by his agent authorized in writing, is to be
delivered to the Registrar of Companies (ROC) for registration. Certain documents like expert‟s
consent, copies of every contract referred to in the prospectus etc., are to be attached with the
- According to Section 60(4) of the Companies Act, 1956, no prospectus shall be issued more than 90 days
after the date on which a copy thereof is delivered to the ROC for registration. If a prospectus is issued
more than 90 days after the date on which a copy thereof is delivered to the ROC for registration, it shall
be deemed to be a prospectus, a copy of which has not been delivered to the ROC. The Company and
every person knowingly a party to the above shall be punishable with fine which may extend to Rs.50,000/-
Mis-statements in a prospectus and their consequences:- The prospective shareholders are entitled
to true and faithful disclosures in the prospectus. The persons issuing the prospectus are bound to state
everything accurately and include all material facts. The expression „include‟ with reference to a
prospectus means included in the prospectus itself or contained in any report or memorandum
appearing on the face thereof or by reference incorporated therein or issued therewith. Thus, in regard
to considering a prospectus as fraudulent, it is not necessary that there should be false representation in
it: even if every word included in the prospectus is true, the suppression of material facts may render it
fraudulent. To judge its effects, it should be read as a whole. It is not necessarily enough if the
prospectus refers to the contracts and puts the intending shareholder upon enquiry as to their contents.
However, mere silence cannot be a sufficient foundation for setting aside the allotment of shares. The
withholding of facts should be such that if not stated it makes that which is stated absolutely false.
A person who has applied for shares in the company, and who has been allotted shares has certain
remedies against the company and the Company issuing the prospectus. But a buyer of shares in
the open market (unless the prospectus is with a view to induce persons to buy shares from the open
market also) or a subscriber to the memorandum has no such right.
Liability for Mis-statements in a prospectus:______________ ___ I__________________
Civil Liability(Secs.62 & 56)
Against the promoters,
Against the promoters,
Directors, other officers
Directors and other
officers (not available
Sections 62 and 56
upto 2 years
Under Section 62 of the Companies Act, 1956, every subscriber shall be compensated for the loss he may
have sustained by reason of untrue statement contained in the prospectus by a person who has authorized the
issue of the prospectus, an expert who has given his opinion, by every person who is a director of the company
at the time of the issue of the prospectus and every person who is a promoter of the company for certain untrue
statements contained in the prospectus.
An omission from a prospectus of a matter required to be stated under Section 56 may give rise to an action for
damages at the instance of a subscriber of shares WHO HAS SUFFERED LOSS THEREBY(which he has to
prove) even if the omission does not make the prospectus false or misleading.
What is the “Golden Rule” for framing a Prospectus?
The “Golden Rule” for framing of a prospectus was laid down by Justice Kindersely in New Brunswick &
Canada Rly.& Land Co.V. Muggeridge(1860), which, in brief, is as follows:Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will
take shares in the proposed undertaking. Public is invited to take shares on the faith of the representations
contained in the prospectus. The Public is at the mercy of company promoters. Everything must, therefore, be
stated with strict and scrupulous accuracy. Nothing should be stated as fact which is not so, and no fact should
be omitted the existence of which might in any degree affect the nature or quality of the principles and
advantages which the prospectus holds out as inducement to take shares. In a way, the true nature of the
company‟s venture should be disclosed.
Statement in lieu of prospectus:Under Section 70(1) of the Companies Act,1956, a Public Company, having a share capital is required to file
with the ROC, a statement called „statement in lieu of prospectus‟ in the following cases, namely:a) Where it does not issue a prospectus on or with reference to its formation(because it feels that it can raise
enough capital without inviting the subscription from the public)
b) where it issues a prospectus but has not proceeded to allot any of the shares offered to the public for
subscription (because the issue has been a failure and the minimum subscription has not been received)
The „Statement in lieu of Prospectus‟ must be filed with the ROC at least three(3)days before any allotment of
shares or debentures is made.
Schedule III to the Companies Act contains a model form of a statement in lieu of prospectus to be filed with
the ROC under the above two circumstances.
Further, it is provided in Section 44(1) of the Companies Act, 1956, that if a Private Company ALTERS its
articles in such a manner that they no longer include the provisions WHICH, under clause (iii) of sub-section(1)
of Section 3, are required to be included in the articles of a company in order to constitute it a Private Company,
the Company shall:a) as on the date of the alteration, cease to be a private company AND
b) shall within a period of thirty(30)days after the said date, file with the ROC, either a prospectus or a
statement in lieu of prospectus. Schedule IV contains a model form of a statement in lieu of prospectus when a
private company is converted into a public company in pursuance of Section 44.