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Content

INTRODUCTION
Object of a Prospectus
Nature of Prospectus
When the Prospectus need to be issued
Golden rule in prospectus
Legal requirement
Prospectus
Contents of Prospectus
CONCLUSIONS
BIBLIOGRAPHY:

regarding

issue

of

INTRODUCTION
Prospectus is a document that invites the public to subscribe to the share capital
or debentures of a company. If it does not do that, it cannot be called a
prospectus. According to the Companies (Amendment) Act, 1971, an invitation
to the public inviting deposits is also deemed to be a prospectus. Some
companies do not directly to the public themselves, but allot the entire share
capital to an intermediary, which then offers the shares to the public by an
advertisement of its own. Any document by which such offer for sale to public
is made is deemed to be a prospectus.
After getting the company incorporated, promoters will raise finances. The
public is invited to purchase shares and debentures of the company through an
advertisement. A document containing detailed information about the company
and an invitation to the public subscribing to the share capital and debentures is
issued. This document is called prospectuses. Private companies cannot issue a
prospectus because they are strictly prohibited from inviting the public to
subscribe to their shares. Only public companies can issue a prospectus. Section
2 (36) of the Companies Act defines prospectus as, A prospectus means any
document described or issued as prospectus and includes any notice, circular,
advertisement or other documents invent deposits from public or inviting offers
from the public for the subscription or purchase of any shares in or debentures
of a body corporate.
The prospectus is not an offer in the contractual sense but only an invitation to
offer. A document constructed to be a prospectus should be issued to the public.
A prospectus should have the following essentials.

There must be an invitation offering to the public.

The invitation must be made on behalf of the company or intended


company.

The invitation must to be subscribed or purchase.

The invitation must relate to shares or debentures.

A prospectus must be filed with the Registrar of companies before it is issued to


the public. The issue of prospectus is essential when the company wishes the
public to purchase its shares or debentures.
If the promoters are confident of obtaining the required capital through private
contacts, even a public company may not issue a prospectus. The promoters
prepare a draft prospectus containing required information and this document is
known as a statement is lieu of prospectus. A prospectus duly dated and signed
by all the directors should be field with Register of Company before it is issued
to the public.
A prospectus brings to the notice of the public that a new company has been
formed. The company tries to convince the public that it offers best opportunity
for their investment. A prospectus outlines a detail the terms and conditions on
which the shares or debentures have been offered to the public. Every
prospectus contains an application from on which an intending investor can
apply for the purchase of shares or debentures. A company must get minimum
subscription within 120 days from the issue of prospectus. If it fails to obtain
minimum subscription from the members of the public within the specified
period, then the amount already received from public is returned. The company
cannot get a certificate of commencement of business because the public is not
interested in that company.

Object of a Prospectus
The objects of issuing a prospectus are as under:
1.

To invite the public to invest in the shares or debenture of a market.

2.
To give a bureau of a condition on which the public is invited to invest in
shares and debentures.
3.
To make a declaration that the directors of the company are liable for the
condition stated in the prospectus.

Nature of Prospectus
As said earlier that the prospectus is an invitation to the public to invest in the
shares or debentures of a company. But the term public is nowhere defined in
the Companies Act. So, far as it is related to prospectus, public is meant to be
the ordinary common people. Whether or not the invitation for investment is
made to the public depends upon some situation, such as:
1.

How many copies of the prospectus were printed?

2.

To how many members of the public were the copies distributed.

3.

How many members of the public accepted the copies?

4.
Under what conditions did the member of the public accept the
prospectus?

When the Prospectus need to be issued


In the following situation, there is no need for a prospectus to be issued.
1.
When the shares and debentures are to be allotted to the existing holders
of shares and debentures.
2.
When the shares and debenture to be allotted are similar to the current
(already issued) shares and debentures that are being traded in a recognized
stock exchange.
3.
When the allotment of shares and debenture is not permissible by law as
in the case of a private company.
4.
When the invitation is to some such person who has a contract for
underwriting the shares and debentures of the company

Golden rule in prospectus


Prospectus is the basis of the contract between the company and the persons
who incest in the companys shares or debentures. The officers of the company
have knowledge of the companys present status and its prospects in future or
have the means to acquire such knowledge. But the potential investor has no
such knowledge, nor the means to acquire it. It, therefore, becomes the duty of
those who issue the prospectus that they not only projects the companys image
in the right perspective but also makes sure that no vital information which
could be of interest to the potential investors in the companys shares and
debentures is left out from the companys prospectus. it therefore become
important that the prospectus states the basic important facts about the company
with utmost honesty and good faith and that no information that is important is
twisted or partially presented. That is what is refers to as the golden rule for
making a prospectus.
In short the following must be kept in mind when preparing the prospectus of a
company:
1.
The prospectus must be an honest statement of the companys profile;
there must be no misleading, ambiguous or erroneous reference to the company
in its prospectus.
2.

Every important aspect of a contract of the company should be clarified.

3.
The contents of the prospectus should conform to the provision of the
Companies Act.
4.

The restrictions on the appointment of directors must be kept in mind.

5.
The conditions of civil liability as laid down must be strictly adhered to
issue and registration of prospectus or legal requirement regarding issue of
prospectus.

Legal requirement regarding issue of Prospectus


The Companies Act has defined some legal requirements about the issue and
registration of a prospectus. The issue of the prospectus would be deemed to be
legal only if the requirements are met.
1.
Issue after the incorporation: As a rule, the prospectus of a company can
only be issued after its incorporation. A prospectus issued by, or on behalf of a
company, or in relation to an intended company, shall be dated, and that date
shall be taken as the date of publication of the prospectus.
2.
Registration of prospectus: it is mandatory to get the prospectus
registered with the Registrar of Companies before it is issued to the public. The
procedure of getting the prospectus registered is as under:
a.

b.

A copy of the prospectus, duly signed by every person who is named


therein as a director or a proposed director of the company must be
filed with Registrar of Companies before the prospectus is issued to
the public.
The following document must be attached thereto:
(i)

(ii)
(iii)
(iv)
(v)

c.

Consent to the issue of the prospectus required under any person


as an expert confirming his written consent to the issue thereof,
and that he has not withdrawn his consent as aforesaid appears in
the prospectus.
Copies of all contracts entered into with respect to the
appointment of the managing director, directors and other officers
of the company must also be filed with Registrar.
If the auditor or accountant of the company has made any
adjustments in the companys account, the said adjustments and
the reasons thereof must be filed with the documents.
There must be a copy of the application which is to be filled for
the issue of the companys shares and debentures attached with
the prospectus.
The prospectus must have the written consent of all the persons
who have been named as auditors, solicitors, bankers, brokers, etc.

Every prospectus must have, on the face of it, a statement that:

(i)
(ii)
d.

A copy of the prospectus has been delivered to the Registrar for


registration
Specifies that any documents required to be endorsed by this
section have been delivered to the Registrar.

A copy of the prospectus must be filed with the Registrar of


Companies. The Registrar should register the prospectus only when:
(i)
(ii)
(iii)
(iv)

The prospectus is dated. The date shall, unless the contrary is


proved, be taken as the date of publication of the prospectus.
The contents of prospectus conform to Section 56 of the Act.
The consent of the expert, if it is necessary, has been obtained. But
such expert should not be engaged or interested in the formation or
promotion of the company.
The written consent of the expert with respect to the issue of his
statement included in the prospectus has been obtained.

If the above provision of law has been fulfilled, or the necessary documents
have been attached, the Registrar can refuse to register the companys
prospectus.According to the Section 60(4), no prospectus shall be issued more
than ninety days after the date on which a copy thereof is delivered for
registration. Of the prospectus is so issued. It shall be deemed to be a
prospectus a copy of which has not been delivered to the Registrar. If a
prospectus issued in contravention of the above stated provisions, then the
company and every person who knows a party to the issue of the prospectus
shall be punishable with a fine.

Contents of Prospectus
The main contents of a prospectus are:
1.
Main object of the company with the names, addresses, description
and occupation of signatories to the memorandum and the number of shares
subscribed for by them.
2.
Number and classes of shares and the nature and extent of the
interest of holders thereof in the property and profits of the company.
3.
The number of redeemable preference shares intended to be issued
and the date of redemption or where no date is fixed; the period of notice
required for redeeming the share s and proposed method of redemption.
4.
The number of shares. If any, fixed by the Article as the
qualification of a director and the remuneration of the directors for the service.
5.
The names, occupation and addresses of directors, managing
director and manager together with any provision in the Articles or a contract
regarding their appointment remuneration or compensation for loss of office.
6.
The time of opening of the subscription list should be given in the
prospectus.
7.
The amount payable on application and allotment on each share
should be stated. If any prospectus is issued within two years, the details of the
shares subscribed for any allotted.
8.
The particular about any option or preferential right to be given to
any person to subscribe for shares or debentures of the company.
9.
The number of shares or debentures which within the two preceding
year been issued for a considerations other than cash.
10. Particulars about premium received on shares within two preceding
years or to be received.
11. The amount or rate of underwriting commission.
12. Preliminary expenses.
13. The names and addresses of auditors, if any, of the company.
14. Where the shares are of more than one class, the rights of voting and
rights as to capital and dividend attached to several classes of shares.
15. If nay reserve or profits of the company have been capitalized,
particulars of capitalizations and particulars of the surplus arising from any
revaluation of the assets of the company.
16. A reasonable time and place at which copies of all accounts on which
the report of auditors is based may be inspected.

Conclusion
A public company raises its capital from the public and it issues prospectus for
this purpose. Sometimes, the promoters of a company decide not to approach
the public for raising necessary capital. They are hopeful of raising funds from
the friends and relations or through underwriters. In that case a prospectus need
not be issued but a Statement in Lieu of Prospectus must be filed with the
registrar at least three days before the first allotment of shares. Such a statement
must be signed by every person who is named therein as a director or proposed
director of the company. This statement will be drafted strictly in accordance
with the particulars set out in a part I of Schedule III of the Act.

BIBLIOGRAPHY

Sen and Mitra-Commercial Law and Industrial Law.


Singh. Avtar- Company Law
Ramaiya. A GUIDE TO THE COMPANIES ACT
Davis. Paul.L-Gowers Principles of Modern Company Law