Prospectus

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Introduction

In order to finance its activities, a company needs capital which is raised by a public company by the issue of prospectus inviting deposits or offers for share and debenture from general public. A private company is prohibited from making any invitation to the public to subscribe for any shares in, or debenture of , the company. Hence its need not issue a prospectus. The prospectus, is the basis on which the prospective investors from their opinion and take decisions as to the worth and prospectus of the company .

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Definition

Section 2(36) defines A prospectus as 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 debentures of, a body corporate, In simple words, any document inviting offers from the public for the subscribing of shares or debentures of a company is a prospectus.

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Essential Points for Prospectus.

Prospectus to be in writing only. An oral invitation to subscribe for share in, or debenture of, a company, or deposits is not prospectus, likewise an advertisement in television or a film is not treated to be a prospectus. Invitation to public. A document is not a prospectus unless it is an invitation to the public to subscribe for share in, or debenture of, a company. But If the document satisfied to condition of invitation to the public, it is prospectus even though it is issued to a defined class of the public.
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Signing of prospectus.

In case the prospectus is issued by an intended company, it has to be signed by the proposed directors of the company or by their agents authorized in writing. In case of existing companies, the prospectus has to be signed by every person who is named therein as director of the company or by his agent authorized in writing

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Registration of prospectus

A prospectus can be issued by or on behalf of a company only when a copy thereof has been delivered to the registrar for registration. The registration must be made on or before the date of publication thereof. The copy must be signed by every person who is named therein as director or proposed director of the company, or by his agent authorized in writing. The prospectus must be issued within 90 days of the date on which a copy thereof is delivered for registration.

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Penalty for non- registration of prospectus.

If a prospectus is issued without a copy thereof being delivered to the registrar for registration, or without the necessary documents or the consent of the experts, the company and every person, who is knowingly a partly to the prospectus, shall be punishable with fine which may extent to Rs. 50,000.

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Content of prospectus.

Prospectus is the window through which an investor can look into the soundness of a companys project. The investor must, thereof, be given a complete picture of the companys intended activities and its position. This is done through prospectus which must secure the fullest disclosure of all material and essential particulars and lay same in full view of all intending purchase of shares.

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Matter to be stated and reports to be set out in prospectus ( section 56).

Section 56 lay down that every prospectus issued by or on behalf of a company, or b) by or on behalf of any person engaged or interested in the formation of a company, shall 1) state the matter specified in part I of schedule II and 2) state out the report specified in part II of schedule II.

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A) Part I of schedule II.

1) General information. Name and address of registrared office of the company. Consent from the central government for present and issue. Name of regional stock exchange and other stock exchange where the application is made for listing of present issue. Declaration about the issue of allotment within a period of 10 week. Date of opening of the issue, date of closing of the issue. Date of earliest closing of the issue. Name address of auditor and lead managers. Name and address of trustee.
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Rating from CRISIL, if no rating obtained, this fact should be stated. Name and address of the underwriter and the amount underwrite by them. 2) Capital structure of the company. Authorized share capital, issued, paid-up capital. Size of present issue giving separately reservation for preferential allotment to promoters and others. Paid up Capital 3) Terms of the present issue. term of payment. right of instrument holders. How to apply availability of forms, prospectus and mode of payments. Any special tax benefit for company and its shareholders.

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4) Company management and project. History and main objective and present business of the company. Promoters and their background. Names, address and occupation of manager, managing director. Nominee and whole time director. location of project Plant and machinery, technology process etc. Infrastructure facilities raw material, water, electricity. Nature of product, approach to marketing and export possibilities.

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5.Particulars in regard to the company and other listed companies under the same management. Name of the company Year of issue. Type of issue. Rate of dividend. 6. Outstanding litigation(lawsuits) pertaining toMatter likely to affect operation and finance of the company including dispute tax liabilities of any nature, and criminal prosecution launched against the company and the director. particular of default, if any, in meeting statutory does, institutional dues, and dues towards debenture-holder. 7. Management perception of risk management. Difficulty for obtaining raw material. Foreign exchange rate fluctuation.
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B) Part II schedule II.

A. General information. Content of directors, auditors, solicitors/ advocators, manager to issue, registrar, banker to the company. Expert opinion obtained, if any. Change if any in director and auditor during 3 years and reasons thereof. Authority for the issue and detail of resolution passed for the issue. Procedure and time schedule for allotment and issue of certificate. Name address of the company secretary, legal adviser, lead manager, Co- manager, Auditor, banker to the company.

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B) Financial information. Report by auditor. Report by auditor of the company with respect to loss profit, assets and liabilities. Rate of dividend [provided by the company last preceding 5 year. Report by accountant. A report by the accountant ( who shall be qualified and who shall be named in the prospectus) on profit and loss of the business for preceding 5 financial year and assets and liabilities not more than 120 days before the date of the issue of prospectus. This report require to give before prospectus issue for inviting general public to purchase share. Principal terms of loan and assets charged as security.
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C) Statutory and other information. 1. Minimum subscription. 2. Expenses of the issue giving separately fees payable to: a) Advisor b) registrar to issue c) manager to issue d) trustees 3. Underwriter commission. 4. Information regarding a) Date of allotment Closing date Date of refund Date of listing on stock exchange b) issue is a premium or discount, the amount thereof. c) premium , if any, on each share which had been issued within the 2 year preceding the date of the prospectus.

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5. Commission on brokerage. 6. Debenture and redeemable preference shares and other instrument issued by the company outstanding as on date of prospectus. 7. Detail of purchase of property. 8. Detail of director, proposed directors, whole time directors, there remuneration, appointment, interest, their borowing power. 9. Right of member regarding voting, divident, the process ofor modification of such right and transfer of share and debenture. 10. Material contract of company. 11. Revaluation of assets. prospectus date and signed by the all director.
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Statement by the expert. Expert( accountant lawyer and any other person whose profession gives authority to a statement made by him) consent of prospectus containing statement by him section 58. He give written consent to the issue of the prospectus.

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Misstatement in prospectus and other consequence

The Golden rule as to framing prospectus was laid down by V C kindersely Those who issue prospectus holding out the public the great advantage which will accrue to person who will take share in a proposed undertaking, and inviting them to take shares on the faith of the representation therein contained, are bound to state everything in prospectus. Not omit fact within their knowledge.

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If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact, there may arise1. Civil liability 2. Criminal liability.

1. Civil(social) liability.
1) Remedies against the company.
if there is misstatement or withholding of a material information in a prospectus, and if it has induced any shareholder to purchase shares, he can 1. Rescind the contract 2. Claim damages from the company whether the statement is fraudulent or an innocent one. 23 - 20

1. Rescission of the contract.

Any person, who takes share on the faith of statement of fact contained in prospectus, can apply to the court for rescission of contract if statement given in prospectus is false. he must apply within reasonable period of time before company goes into liquidation. Its necessary to surrender to company the share allotted to him. His name is then removed from the register of member and he get back the money paid by him to the company along with interest.

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The contract can be rescinded if the following condition satisfied 1) The statement must be material misrepresentation. The mispresentation is material when it is likely to influence a reasonable man in his judgment whether or not to apply for the shares. A statement of fact must be different from statement of opinion or expectation. Statement that the property of a company is worth a certain sum of amount that due to the hard work and efficiency of directors the profit are expected to reach a certain figure. On this ground shareholder could not rescind. 2) The Statement must have induce the shareholder to take the share.

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3) Statement must be untrue. 4) The deceived shareholder is and he must have relied on the statement in the prospectus. If a person purchase shares in the open market, he has no right against the company. Example:A company issue a prospectus containing false information. Amit relying on the prospectus, applied for share, later he sold these share to Prem. The company was wound up Prem had to pay nearly 10,000 as a contribution. P sought an indemnity for his loss from company director. Held, the director were not liable to P.

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5) The omission of material fact must be misleading before rescission is granted. 6) The proceedings for recession must be started as soon as the allotted comes to know of a misleading statement in the prospectus on the faith of which he had subscribed for share and before the company goes into liquidation may defeat this right of the allotted.

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2) Damages for deceit.

Any person induced by a fraudulent statement in a prospectus to take shares is entitled to sue the company for damages. He must prove the same matter in claiming damages for receipt as in claiming rescission of the contract,. He cannot both retain the share and get damages against the company. He must show that he has repudiated(not accepting) the share and has not acted as a shareholder after discovering the fraud or misrepresentation.

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2. Remedies against the director, promoters and experts.

The person who liable for pay compensation for any loss or damage to subscribers for any shares or debenture on the faith of a prospectus containing untrue statement are the A) Directos at the time of the issue of the prospectus, B) persons who have authorized themselves to be named as director in the prospectus. C) Promoters. D) persons who have authorized the issue of the prospectus.

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1. Liability for damages for misstatement in prospectus. Section 62.

Every director, promoter and every person who authorized the issue of the prospectus (no matter whether he had seen it or not) is liable to pay compensation to the aggrieved(hurrt) party for loss or damage he may have incurred by reason of any untrue statement in the prospectus.

Defense of directors, promoters, etc.

A director etc. shall not liable if he puts up the following defences. 1. absence of consent. where a prospectus was issued without a directors etc. knowledge or consent, and on becoming aware of its issue, he forthwith gave reasonable public notice of that fact, he is not liable. 23 - 27

2. ignorance of untrue statement. A director may sometimes be ignorant of the untrue statement contained in the prospectus. If after the issue of the prospectus and before allotment there under, he on becoming aware of any untrue statement give notice of the withdrawal and of the reason therefore, he is not liable. 3. Statement of expert. if the statement given by expert who competent to make it and given his consent, do for that matter director is not lible for any loss.

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2. liability for damages for non- compliance (agreement) with section56.

The omission from the prospectus of a matter required to be by section56 may give rise to an action for damage at the instance of shareholder for share who has suffered loss. So according to section 56 director are liable for the loss occur due to information not provide in prospectus which according to section 56 company must provide information.

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3. Liability under the general law. under general law, shareholder can hold all or any of the person responsible for the issue of prospectus liable for any misstatement or fraud. A person can only be liable in fraud in a prospectus where he makes a statement to be upon by other, which is false is made a) knowledge. b) without belief it is truth. c) not caring whether it was true or false. Remedy under general Law Right with share holder to rescind the contract.

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2.Criminal liability.
where a prospectus contain any untrue statement, every person who authorized the issue of the prospectus is punishable with imprisonment which may extend to 2 years, or with fine which may extent to 50,000 or with both. That the statement was material . Penalty for fraud for fraudlently inducing persons to invest money section 68. A person shall not 1) either knowingly by making any statement, promise or forecast which is false, deceiptive. 2) By any dishonest concealment of material facts, induce or attempt to induce another person to enter into or to offer to enter into any of the following

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a) Agreement of acquiring, or subscribing, underwriting share denture. If does any of above things, he shall be punishable with imprisonment for term may extend 5 year or with fine which may extent 100,000 or with both. Statement in lieu of prospectus. its use by public company when its does not want to issue share from the general public but want from private source, it need not issue a prospectus to the public. In this case prepare draft prospectus known as statement in lieu of prospectus which should contain the information require to be disclosed by schedule III of the act. Penalty under section70. 2 year custody or 50,000 rs. Or both.

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