Unit II

Meaning of Prospectus

A document inviting the public to purchase the
shares or debentures of the company is called
Prospectus.
A prospective investor would like to know the financial
background of the company, its activities, its future
programs, nature of investment, risk, etc.
Prospectus of a company shall provide all the required
information.


Prospectus
The 2013 Act has introduced a new section [sec 23]
to explicitly provide the ways in which a public or
private company may issue securities.
This section explains that a company may issue
securities in any of the following manners:
To public through prospectus.
To private companies through private placements.
Through rights issue or a bonus issue.
Definition - Prospectus

According to Section 2
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 corporate body.
Shelf prospectus (sec 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.
Once, a shelf prospectus has been issued, there will
be no requirement of any further prospectus for any
subsequent offer of securities issued during the
validity period.
For any subsequent issue, company shall file an Information
Memorandum.
This information memorandum shall contain all material facts
relating to
New charges created; and
Changes in financial position of the company from
first/previous offer to this second/subsequent offer under
this Shelf Prospectus.
SEBI will prescribe the list of Companies allowed to issue a
Shelf Prospectus
The provision will no more be limited to Public Financial
Institutions, Public Sector Banks or Scheduled Banks


Red Herring Prospectus (sec 32):

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.
It does not have details of either price or no of
shares being offered or the amount of issue.
That is, in case, price is not disclosed, number of
shares and the upper and lower price bands are
disclosed.
Cont..
It has to carry the same obligation as
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
Objectives of Registration of
Prospectus
a) To keep an authenticated record of terms and
conditions of issue of securities and
b) To pinpoint the responsibility of the persons
issuing the prospectus for statements made by
them in the prospectus.
Registration of Prospectus
A copy of prospectus shall be delivered to the
Registrar for registration,
It has to be signed by every person who is named as
a director or proposed director of the company or
By his duly authorized agent on or before the date
of its publication and only then it shall be issued by
or on behalf of a company.
Essentials of Prospectus
The objects of the issue;
The purpose for requirement of funds;
The funding plan (means of finance);
The summary of the Project Appraisal
Report, if any
The interim use of funds, if any
Formalities in issuing a prospectus
Prospectus issued by or on behalf of a company must be dated
and its called as date of publication.
Prospectus signed by every director or proposed director or by
his agent must delivered to the registrar on or before the date of
Publication.
Has to get acknowledgement from SEBI.
Every application form needs to accompanied by a copy of
prospectus.
It must contain the necessary information to enable the public
to decide whether or not to purchase from the company.


Information to be stated in the
prospectus
Name 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;
Dates of the opening and closing of the issue, and declaration
about the issue of allotment letters and refunds within the
prescribed time;
Cont..
A statement by the Board of Directors about the separate bank
account where all money received out of the issue are to be
transferred and disclosure of details of all money including
utilised and unutilised money out of the previous issue in the
prescribed manner;
Details about underwriting of the issue;
Consent of the directors, auditors, bankers to the issue, experts
opinion, if any, and of such other persons, as may be prescribed;
Cont..
The authority for the issue and the details of the resolution
passed there for;
Procedure and time schedule for allotment and issue
Capital structure of the company
Main objects of public offer, terms of the present issue and
such other particulars
Main objects and present business of the company and its
location, schedule of implementation of the project
Details of directors including their appointments and
remuneration, and such particulars of the nature and extent of
their interests in the company.
Disclosures in such manner as may be prescribed about
sources of promoters contribution
Cont..
Particulars relating to
Management perception of risk factors specific to the
project;
Gestation period of the project;
Extent of progress made in the project;
Deadlines for completion of the project; and
Any litigation or legal action
Disclosures of any litigation
Any litigation or legal action pending or taken by any
ministry or department of the government or a
statutory authority against any promoter of the issuer
company during the last five years shall be disclosed.
Details of pending litigation involving the issuer,
promoter, director, subsidiaries, group companies or
any other person.
Pending proceedings initiated against the issuer
company.
Details of default and non-payment of statutory dues.
Dematerialization of Securities
As per companies act 2013 sec 29
Every company making public offer shall issue
securities only in Demat form.
As per companies act 1956 sec 68B
IPO beyond an issue size of Rs.10 crores required
to be in Demat form
Change in terms of Contracts
Company has raised money from public through prospectus
shall not vary the terms of contracts except by passing a
special resolution through postal ballot
Notice of the proposed special resolution shall contain the
following particulars:-
The original purpose,
The Total Money raised
The money utilized for the objects of the company stated in
the prospectus
The reason and justification for seeking variations and
The risk factors pertaining to the new objects
Reports in the Prospectus
The reports by the auditors with respect to profits and losses
and assets and liabilities.
The reports relating to profits and losses for each of the five
financial years or where five financial years have not expired,
for each of the financial year immediately preceding the issue
of the prospectus shall.
If the company has no subsidiaries, deal with the profits or losses of the
company for each of the five financial years immediately preceding the
year of the issues of the prospectus and
If the company has subsidiaries, deal separately with issuer companys
profits or losses as provided and in addition, deal either
As a whole with the combined profits or losses of its subsidiaries
Individually with the profits or losses of each subsidiary
Statement in Lieu of Prospectus
Where a public company does not invite public
to subscribe for shares , but arranges to get
money from private sources, it need not issue a
prospectus to the public.
In such a case, the promoters are required to
prepare a draft prospectus known as a Statement
in lieu of prospectus.
Provisions relating to statement in lieu of
prospectus is removed under the companies Act
of 2013.
Membership in a company
Members or Shareholders of a company are
the persons who collectively constitute the
company as a Corporate entity.
The term member, Shareholder and
Holder of share are used interchangeably.
In case of Unlimited company or a Company
limited by guarantee, a member cannot be a
shareholder, for such a company may not have
share capital
Members and Shareholder
Distinction
Share Capital
Bearer of a Share Warrant
Legal representative of a deceased member
Who can become a member?
Any person competent to contract (Sec 11 of Indian contract act 1872).
This is subject to provision of the MoA & AoA, of the company.
The articles may provide that following persons cannot become members
Minor
Partnership firm
Company
Insolvent
Foreigner

How to become a Member?
1. Membership by subscription
Subscribers to the MoA of a company are deemed to
have agreed.
Names are entered as members in the register of
members
2. Membership by application and registration
a) By application and allotment
b) By transfer
c) By succession
d) Agreement to be in writing
3. Membership by beneficial ownership
4. Membership by qualification shares
Cessation of Membership
A person may cease to be a member
Act of the parties
Operation of law
Cessation of members by act of the parties
a) If he transfers his shares
b) If his shares are forfeited
c) If the companies sells his shares under some provision in
its articles
d) If he rescinds the contract to take shares on the grounds of
mis-representation in the prospectus
e) If redeemable shares are redeemed
f) If he surrenders his share, where surrender is permitted
g) If share warrants are issued to him in exchange of fully
paid shares.
Cont
2. Cessation of membership by operation of law
a) Insolvency
b) Death
c) Sale of shares
d) Winding up of the Company-surplus assets