PROSPECTUS (As per Companies Act 2013)

2. PROSPECTUS (As per Companies Act 2013)

3. DEFINITION • Clause (70) of Section 2 of the Act define “prospectus” means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 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. • Section 26 deals with matters to be stated in prospectus.

4. REQUIREMENTS OF A PROSPECTUS • A document would be considered a prospectus only if it meets the following requirements, viz. • it should be in writing • it should be issued by or on behalf of a body corporate • it should be issued to public • it should contain invitation to public for making deposits or for subscription of shares in or debentures of a body corporate.

5.  IS THE ISSUE OF PROSPECTUS COMPULSORY? • The issue of a prospectus by a company is not compulsory in the following cases • shares/debentures not offered to the public • private channels funding.

6. SHELF PROSPECTUS (SECTION 31): • “Shelf prospectus” means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. • The shelf prospectus shall indicate that validate period of the shelf prospectus is a period not exceeding one year from the date of first offer of securities under that prospectus. Once, a shelf prospectus has been issued, there will be no requirement of any further prospectus for any subsequent offer of these securities issued during this validity period.

7. INFORMATION MEMORANDUM • For any subsequent issue, company shall file an “Information Memorandum”. This information memorandum shall contain all material facts relating to (i) new charges created; and (ii) changes in financial position of the company from first/previous offer to this second/subsequent offer under this Shelf Prospectus. • When an offer of securities is made on shelf prospectus, the information memorandum together with shelf prospectus shall be deemed to be a prospectus.

8. RED HERRING PROSPECTUS • A company may issue a red herring prospectus before the issue of a prospectus. • “Red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. • The company shall file red herring prospectus with Registrar of companies at least three days before the opening of the subscription list and the offer. • A red herring prospectus shall carry the same obligation as are applicable to a prospectus. In case there is any variation between red herring prospectus and a prospectus shall be highlighted as variation in the prospectus. • Upon the closing of the offer of securities, the prospectus shall be filed with the Registrar and the Securities and Exchange Board of India. This prospectus shall state (a) total capital raised, (b) whether debt capital or share capital, (c) closing price of the securities and (d) any other details not included in red herring prospectus. .

9. ABRIDGED PROSPECTUS U/S 2 (1) “Abridged Prospectus” means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf.

10. WHEN PROSPECTUS IS NOT REQUIRED TO BE ISSUED? • When the shares or debentures are not offered to the public • When an offer is made to a person to enter into an underwriting agreement. • When an offer is made to existing members or debenture holders. • Where shares or debentures offered are in all respects are uniform to the previous issue. • Where the invitation to the public for subscription to the shares is made in the form of newspaper advertisement. • A private company is not required to issue the prospectus.

11. DEEMED PROSPECTUS ( Section-25) • When a company allots any securities of the company by offering them for sale to the public, then any such document by which the offer for sale to the public is made, shall be considered as a deemed prospectus issued by the company. • A deemed prospectus shall be binding as a prospectus and all rules and regulations applicable on prospectus will be applicable on deemed prospectus.

12. CONTENTS OF PROSPECTUS (SECTION-26) • It shall be dated and signed and shall contain the following things: • (1) Every prospectus issued by or on behalf of a public company either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall— • (a) state the following information, namely:— • (i) names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may be prescribed; • (ii) dates of opening and closing of the issue. • (iii) a statement by the BOD of separate bank account. • (iv) details about underwriting of the issue.

13. CONTD…. • (v) consent of the directors, auditors, bankers to the issue, expert’s opinion, if any, and of such other persons, as may be prescribed; • (vi) the authority for the issue and the details of the resolution passed therefore; • (vii) procedure and time schedule for allotment and issue of securities; • (viii) capital structure of the company in the prescribed manner; • (ix) main objects of public offer, terms of the present issue and such other particulars as may be prescribed; • (x) main objects and present business of the company and its location, schedule of implementation of the project;

14. CONTD…. • (xi) particulars relating to— • (A) management perception of risk factors specific to the project; • (B) gestation period of the project; • (C) extent of progress made in the project; • (D) deadlines for completion of the project; and • (E) any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company; • (xii) minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash; • (xiii) 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; and • (xiv) disclosures in such manner as may be prescribed about sources of promoter’s contribution;

15. CONTD…. • (B) REPORTS IN PROSPECTUS: • 1. Reports by the auditors of the company. • 2. Reports relating to profits and losses of the company. • 3. Reports about the business or transaction to which the proceeds of the securities are to be applied. • (C) DECLARATION: • Prospectus shall make a declaration about the compliance of the provisions of the act and nothing contained in the prospectus is contravening the provisions of act, Securities Contract regulation act 1956 and Securities and exchange Board of India Act 1992.

16. CONTRAVENTION OF SECTION 26 OF THE ACT • If a prospectus is issued in contravention of the provisions of the section, then • Company shall be punishable with a fine not less than Rs 50000 which may extend to Rs three lakhs, and • Every person who is party to the issue of the prospectus shall be punishable with an imprisonment for a term which may extend to three years or with a fine not less than Rs 50000 which may extend to Rs three lakhs, or with both.

17. LIABILITY FOR MISSTATEMENT IN THE PROSPECTUS • Those who issue prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting the to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature or extent and quality of the privileges and advantages which the prospectus holds as inducement to take shares.

18. LIABILITY FOR MISSTATEMENT IN THE PROSPECTUS 1.) CIVIL LIABILITY • AGAINST THE COMPANY • TO RESCIND THE CONTRACT • TO CLAIM THE DAMAGES • AGAINST THE DIRECTORS, PROMOTERS AND EXPERTS • COMPENSATION • DAMAGES • DAMAGES UNDER GENERAL LAW 2.) CRIMINAL LIABILITY

19. WHO CAN BE SUED? • The company • Every director • Every person whose name appeared in the prospectus as a proposed director • Every promoter • Every person who authorised the issue of prospectus • An expert ( an engineer, a chartered accountant, a company secretary, a cost accountant, etc.)

20. ONUS OF PROOF • An allottee must prove that: • The misrepresentation was of fact; • It was in respect of material fact; • He acted on the misrepresentation; and • He has suffered damages in consequence.

21. CIVIL LIABILITY FOR MISSTATEMENTS IN PROSPECTUS • 1.Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who— • a. is a director of the company at the time of the issue of the prospectus; • b. has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time; • c. is a promoter of the company; • d. has authorised the issue of the prospectus; and • e. is an expert referred to in sub-section (5) of section 26, shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.

22. CONTD….. • 2. No person shall be liable under sub-section (1), if he proves— • a. that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or • b. that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent. • 3. Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in subsection (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

23. REMEDIES AGAINST THE COMPANY • 1.) Recession of the contract: The right to rescind the contract is available if he proves the following: • Prospectus was issued by or on behalf of the company. • Statement must be untrue. • Statement must be material misrepresentation. • The misrepresentation must have induced the shareholders to rely on the statement in applying for shares. • Misrepresentation must be of the facts and not of law( expression of opinion). • That he has taken action promptly to rescind the contract. • 2.) Right of action for damages for deceit: This remedy is available even after the company has gone into liquidation only if following conditions are satisfied: • Person who issued the prospectus knew that statement was false. • That person was authorised to issue the prospectus. • That the allottee has suffered the loss due to misrepresentation.

24. REMEDIES AGAINST THE DIRECTORS, PROMOTERS AND EXPERTS • 1.) Compensation: The liability consists in paying damages by way of compensation to the aggrieved party. The compensation payable will be the difference between the price paid for shares and their value at the date they are allotted to the subscriber. • 2.) Damages for non compliance with section 26: The remedy is to recover damages and not of recession. • 3.) Damages under General Law: Plaintiff has to establish the following: • There was a fraudulent misstatement. • False representation related to material facts.

25. Defences of Directors, Promoters and Experts: • They can escape the liability for damages if they prove the following: • They withdrew the consent before the prospectus was issued. • Issued without the knowledge. • Reasonable ground for belief.

26. CRIMINAL LIABILITY FOR MISSTATEMENTS IN PROSPECTUS • 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 included or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be liable under section 447. • Imprisonment for a term which may not be less than six months but which may extend to 10 years; or • Amount not less than the amount involved in fraud but it may extend to three times the amount of fraud; • or both imprisonment and fine. • Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

27. MINIMUM SUBSCRIPTION ( SECTION- 39) • When a public company invites the public to subscribe for its shares, it cannot allot those shares until the minimum amount stated in the prospectus has been subscribed. This amount stated in the prospectus is known as the minimum subscription. • The amount payable on application on every security shall not be less than five percent of he nominal amount of security or such other percentage or amount as may be specified. • If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, all amount received shall be returned within prescribed time and in prescribed manner. • The company shall file with the Registrar of Companies a “Return of Allotment” in prescribed manner. • In case of any default, the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

28. DIFFERENCES BETWEEN THE POSITION OF UNDERWRITERS AND BROKERS • Underwriters give an undertaking to take up shares if the issue is under-subscribed. Brokers give no such undertaking to take up such shares or debentures • Underwriters get underwriting commission on the entire issue which is underwritten by them. Brokers get brokerage only on those shares or debentures for which they procure subscription. • Underwriters are entitled to underwriting commission at a rate not exceeding 5% of the issue price of shares and 2.5% percent of the issue price of debentures. They are entitled to get such brokerage which has been recognized by the companies to pay. • Underwriting commission is payable only on the shares or debentures which are offered to the public. Brokerage is payable on those shares or debentures for which subscription is procured even though not offered to the public • Underwriters are entitled to get underwriting commission only if the Articles authorizes such payment. The brokers are entitled to brokerage even if the Articles are silent regarding its payment. • The name, address, and occupation of each underwriter has to be disclosed in the prospectus. There is no such requirement in case of brokers.

29. BOOK BUILDING • DEFINITION • “Book Building is a process by which the issuer Company before filing the Prospectus builds up and ascertains the Demand for the securities being issued and assesses the price at which such securities may be issued and ultimately determines the quantum of securities to be issued.” - SEBI

30. TYPES OF BOOK-BUILDING • In the Book-Building, the books can be of two types: • 1. The Open Book-Building: In this system, there is an online display of the demand and the bids during the bidding. This facility is available on both NSE and BSE. This enables the investors to know the movement and quantum of bids during the period the bids are open. • 2. The Closed Book-Building: Under this system the book is not made public and the investors bid without having any details of the bids made by the other bidders.

31. BOOK-BUILDING PROCESS • For example – Reliance ltd. issued shares of Rs. 100 each amounting to Rs. 5000 crores. The company appointed a Merchant Banker as Book Runner who collected all the relevant information from various investors to initiate the process of book building. The prices quoted by the investors are: • Mr. A quoted a price @ Rs. 96 for 1000 Cr • Mr. B quoted a price @ Rs. 99 for 1500 Cr • Mr. C quoted a price @ Rs. 102 for 500 Cr • Mr. D quoted a price @ Rs. 98 for 800 Cr • Mr. E quoted a price @ Rs. 100 for 1200 Cr The weighted average is calculated on the basis of the quotes made by the various investors the in the following table: • Price quoted (X) Weights (W) WX 96 1000 96000 99 1500 148500 102 500 51000 98 800 78400 100 1200 120000 ΣW = 5000 ΣWX = 493900 • Weighted Average = ΣWX/ ΣW = 493900 / 5000= Rs. 98.78

32. STEPS FOR BOOK BUILDING • The following steps are undertaken for the Book-Building Procedure: • A book runner is appointed. The book runner is generally a merchant banker. After the appointment of the book runner, he prepares a draft document and submits it to SEBI to obtain the acknowledgement receipt. • Once the acknowledgement is received the issuer and the book runner decide the price range in which they will offer the shares. • In order to determine the demand the offer is received from the syndicate members comprising of the brokers, financial institutions, merchant bankers, mutual funds etc. • The number of days for which the bids will be received from the public is defined. • Once the bids are received, the issuer decides the cut off rate in consultation with the book runner.

33. CONTD…… • After the price at which the shares are to be issued has been decided the prospectus is filed with the registrar. • In order to collect application money two separate accounts are opened namely the placement portion and the public portion. • One day prior to opening issue to public, the book runner collects applicationforms and application money from institutional buyers and underwriters. • The allotment of share is done on the same day to both the placement and public portions. • In case of any under subscription, the placement portion is used to adjust under subscription and vice-versa. • All the records of Book-Building are to be maintained by the book runner and other intermediaries as per the SEBI requirements.

34. PRIVATE PLACEMENT • "any offer of securities or invitation to subscribe securities to a 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 this section including the condition that the offer or invitation is made to not more than 50 or such higher number of persons as may be prescribed in a financial year".