What do you mean by a prospectus and statement in lieu of prospectus?

Ans. Definition of Prospectus- According to S. 2(70), a prospectus mean “any document described or issued as prospectus and includes any notice, circular, advertisement or other document initiating offers from the public for the subscript ion or purchase of any shares in. or debentures of a body corporate”. In essence, any advertisement offering to the public shares or debentures of the company is known as Prospectus.

Essential of Prospectus-

(i) There must be an invitation offering to the public;

(ii) the invitation must be made, by or on behalf of the company or in relation to an intended company;

(iii) the invitation must “be to subscribe or purchase”, and

(iv) The invitation may relate to shares or debentures. Prospectus must be Issued to the Public- A document to be a prospectus must be “issued to the public” and,the provisions of the Act arc not attracted unless the prospectus is issued to the public. The facts of the case Nash V.s. Lynda, (1929) make this point further Clear. In this ease, several copies of a document marked “strictly confidential” and •’olitaining particulars of proposed issue of shares, were sent accompanied by application form by the managing director of the company to a co-, Iirector; who sent a copy to a solicitor who, in turn, gave it to a client \vim passed it on to a relation. Thus, the document was passed privately hrough a small group of friends of the director. The House of Lords tiled that there had been no issue to the public, and therefore, no action for compensation of loss caused to the allottees would sustain. Registration of Prospectus (Section 27 (7)] Sub-section (7) of Section 27 provides that no prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of publication, there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorised in writing. It must accompany the following documents

(a) the consent of the expert, if his report is to be published in the prospectus;

(b) a copy of every contract relating to the appointment or remuneration of managerial personnel;

(c) a copy of every material contract not being a contract entered into in the ordinary course of business of the company entered into within two years of the date of issue of prospectus ;

(d) a written statement relating to the adjustments, if any, in respect-of figures of any profits or losses, and assets and liabilities ;

(e) the consent in writing of the person, if any, named in the prospectus as auditor. Legal Adviser, Attorney, Solicitor, Issue House banker or broker of the company to act in that capacity ;

(f) the consent of director in respect of new directors, if any, named therein ;

(g) a copy of the underwriting agreement, if any, should also be filed along with the prospectus. Contents of prospectus The prospectus most contain a statement that a copy has been delivered for registration, indicating the requisite documents delivered therewith. It must be issued within ninety days of its registration,’ either by newspaper advertisement or otherwise. Section 26 of the Act requires that if the prospectus includes a statement purporting to be made by an expert, his consent in writing should be obtained and this fact be stated in the prospectus. It should also state that the consent has not been withdrawn. The term ‘expert’ has been defined in Section 2 (38) of Companies Act, 2013 and includes “an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him”. The expert should not be one who is himself engaged or interested in the formation, promotion or management of the company. In other words, he should be unconnected with the formation or management of the company. Section 26 further casts a statutory duty upon the company to disclose matters specified in Part I of Chapter III and for private placement, compliance with the provisions of Part II of the 2013 Act is required. `Private placement’ means any offer of securities or invitation to subscribe securities to select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in the respective clause. Other matters to be stated in the Prospectus are as follows

(I) The main objects of the company including the details about the signatories to the memorandum of association of the company. This is, however, not necessary when the prospectus is issued merely as a newspaper advertisement.

(2) The number and classes of shares and the interest of the share holders in the property and profits of the company. In case of redeemable pi cletenee shares, the date of redemption or the notice period for ‘limp’ ion and the proposed method of redemption. ( 11 Names, addresses, descriptions and occupations of the directors. 1 he qualification shares, if any, held by the directors and the terms of their appointment, remuneration and compensation for loss of office etc.

(4) Where shares are offered to the public, the minimum subscription amount which, in the opinion of the directors or signatories of the memorandum must be raised by the issue of shares offered to the public liar subscription to provide for the purchase price of any property acquired In to be acquired, preliminary expenses, underwriting commission, (*payment of loans etc.

(5) The time of the opening of the subscription list.

(6) The amount payable on application and allotment on each Aare and if any prospectus was issued within two years, the details of the shares subscribed for and allotted.

(7) Particulars of any options to subscribe for shares or debentures, including the time for exercise or option, the price to be paid and the consideration given for the option, and the persons entitled to the option.

(8) Particulars of shares and debentures issued as fully or partly paid up in the preceding two years otherwise than in cash, and the consideration for such issue, and of any shares issued or to be issued at prep ium.

(9) The names of the underwriters, if any, and the opinion of the directors that the resources of the underwriters arc sufficient to discharge their obligations.

(10) Particulars about vendors from whom any property has been or is to be acquired by the company and the price whereof is to be paid out of the proceeds of the issue.

(II) The amount or rate of underwriting commission.

(12) The amount or estimate of preliminary expenses and the expenses of the issue, by whom paid or payable.

(13) The amount paid or benefit given within two preceding years to the promoters of the company.

(14) Particulars of every contract appointing or fixing the enumeration of a managing director or manager whenever entered into, and every other material contract, unless made in ordinary course of business or more two previous years.

(15) The names and addresses of the Auditors of the company, if

(16) Particulars as to interest of every director or promotor in the

any. promotion or property of the company within two years of date of prospectus.

(17) Where the shares are of more than one class, the rights of voting and the rights as to capital and dividend attached to the several classes of shares:

(18) The restrictions, if any, imposed by the articles upon the members in respect of their right to participate at company meeting and to transfer shares or upon the directors in respect of their powers of management.

(19) In case of existing companies, the length of time during which the company has been carrying on its business ; and if the company proposes to acquire a business which has been carried on for less than three years, the length of time during which such business has been carried on.

(20) If any reserves or profits of the company or any of its subsidiaries have been capitalised, particulars of capitalisation and surplus arising from re-valuation of the assets of the company.

(21) A reasonable time and place at which copies of all accounts on which the report of the auditors is based, may be inspected. In addition to the matters stated above, the following Reports must also be set out in the prospectus

(1) A report by the auditors of the company relating to profits and losses and assets and liabilities of the company for each of the five financial years before the issue of the prospectus. The report must refer to the rates of dividends, if any, paid by the company in respect of each class of shares for each of the said years. The report of the auditors must also state separately the profits and losses of the Company’s subsidiaries and also combined profits and losses.

(2) If the company proposes to acquire any business, a report should he made by a chartered accountant, whose name should be disclosed, upon the profits and losses of the business for each of the five years before the date of the prospectus and assets and liabilities of the business.

(3) Reports about the business and translation to which the proceeds of the securities arc to be applied directly or indirectly. Voluntary Statements In Prospectus In addition to the compulsory particulars stated above, any other information is usually considered voluntary. Such an information may relate to the terms of the issue of share application to deal with shares of the company on the Stock Exchange. The prospective buyer is entitled to all true disclosures in the prospectus. A prospectus must therefore tell the whole truth and nothing should be concealed which ought to be disclosed. Thus the prospectus must reflect the company’s real position mid ma. nature of its venture. This is known as the ‘Golden Rule’ as to the !raining of prospectus and described as ‘golden legacy’ by Pagewood In Henderson v. Loran? The essence of the rule is that it is obligatory on the part of those toisponaible for the issue of prospectus not only to state accurately all Ilse relevant facts but also not to omit any fact which may be relevant to the prospective investor to know about the company. Issuing Houses and Deemed Prospectus (Section 251 It would be seen that the provisions relating to issue of prospectus ate “most stringent and extremely onerous.” In order to evade these onerous requirements the companies usually allot whole of their capital to an intermediary known as an ‘Issuing House’ which offer the shares to public by means of an advertisement of its own, which is obviously not prospectus. But now every such advertisement sponsored by an ‘Issuing !louse’ is known as an ‘Offer for sale of securities’ and is deemed to be a prospectus, issued by the company. Therefore, the responsibility of the company, its directors and promoters remains the same. In addition, the Issuing House incurs its own additional liability in respect of mis-statements contained in the document or otherwise in respect thereof. The intention of the company in making the allotment may be proved In any manner. But Section 25(2) provides that it will he presumed, unless the contrary is proved, that an allotment of or agreement to, allot shares or debentures was made with a view to the shares or debentures, being offered for sale to the public if it is shown

(a) that an offer for sale was made within six months of allotment or agreement for allotment to the Issuing House ; or

(b) that at the date of the offer for sale, the company had not received whole consideration for the shares or debentures. The prospectus issued by the Issuing House which is known as ‘offer for sale’ shall also set out the following additional information

(i) The net amount of consideration to be received by the company in respect of those shares or debentures to which the offer relates ; and

(ii) Since the offer for sale is a ‘Deemed Prospectus’, it must be registered under Section 26 of the Act. The copy sent for registration is to he signed by the persons making the offer as if they were named as directors of the company. If the offer for sale is made by a company or a tirm, aficast two directors or half the number of partners, as the case may be, must sign the prospectus.

(iii) The place and time at which relevant contracts may be inspected insist also be stated in the deemed prospectus. Restriction on Variation of terms in Prospectus (Section 27] A company shall not, at any time, vary the terms of a contract referred to in the prospectus or statement in lieu of prospectus except with the approval of the general meeting by way of special resolution. Provided that the company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. The dissenting share-holders who have not agreed to proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given exist offer by promoters or controlling share-holders at such price, and in such manner and conditions, as may be specified by SEBI by making regulations in this behalf. Liability for Omission or Fraudulent Mis-statements in Prospectus Omissions: Any omission from a prospectus of those matters which are required to be stated as per Section 26 shall render the directot or any other person responsible for the issue of prospectus, liable to fine not less than fifty thousand rupees, which may extend to three lakh rupees. In addition to this, the director or the official concerned may also incur civil or criminal liability for non-disclosure. However, in the event of omission to disclose the nature and extent of a ‘director’s or promoter’s interest in the promotion of or property acquired for to be acquired by the company, no director or other person shall incur liability unless it is proved that he had knowledge of the matters not disclosed. The liability for violation of provisions of Section 26(1) (a) of the Companies Act, 2013, will also be covered by Sections 34 and 35 of the 2013 Act.