CA INTER

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PROSPECTUS AND ALLOTMENT OF

3 SHARES

 Prospectus and Allotment of Shares

Securities can be allotted by the company in two ways

Public offer Private placement

Section 23-41 Section 42
Part 1 of chapter 3 Part 2 of chapter 3

How securities can be issued?

(Public offer and Private Placement of securities –
Section 23)

In case of In case of
public company private company

- Through public offer (IPO / FPO) - Through right issue

- Through private placement - Through bonus issue
- Through right issue - Through private placement
- Through bonus issue
Note –
(a) If company is listed, then company will
have to comply with SEBI regulations
as well
(b) Public offer includes IPO as well as FPO

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 What is prospectus?
Section 2(70) of the Companies Act, 2013 defines a prospectus as

any document described includes –

or issued as a prospectus (a) red herring prospectus,
and (b) shelf prospectus or
(c) any notice, circular, advertisement
or other document involving
offers from the public for the
subscription or purchase of any
securities of a body corporate.

A document shall be called a prospectus if it satisfies below given points:

(1) It must be in writing.

(2) TV or Film advertisement is not considered as prospectus
(3) The invitation is made to the public.
(4) A document is deemed to be issued to the public if the invitation to
subscribe is open to anyone.
(5) The invitation must be made by or on behalf of the company

Types of prospectus

Red Herring Shelf Abridged Deemed

Prospectus - Prospectus - prospectus - Prospectus -
Section 32 Section 31 Section 33 Section 25

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Shelf Prospectus – (1) When a shelf prospectus is issued then the issuer does not need
Section 31 to issue a separate prospectus for each offering
(2) He can offer or sell securities without issuing any further
prospectus.
(3) Validity period of shelf prospectus = maximum 1 year from the
date of opening of the 1st offer.
(4) In case of any issue during the said period, a company is just
required to file an information memorandum intimating the
changes that have happened since the last issue.
(5) Information memorandum along with shelf prospectus shall be
deemed to be prospectus.
(6) Where a company has received applications for the allotment of
securities along with advance payments of subscription before
the making of any such change, the company shall intimate
the changes to such applicants and if they express a desire to
withdraw their application, the company shall refund all the
monies received as subscription within 15 days
(7) Information memorandum shall be filed in form PAS-2 within
one month prior to the issue of a second or subsequent offer of
securities
Red herring (1) Red-herring prospectus means a prospectus which does not
prospectus – include complete details with respect to price or quantum of
Section 32 securities.
(2) A company issues red-herring prospectus in case of public issue
through book building process
(3) Company issues a red herring prospectus prior to the issue of a
prospectus.
(4) It shall be filed with the registrar at least 3 days prior to the
opening of the subscription list.
(5) It shall carry the same obligations as that of the prospectus
(6) After the offer is closed the prospectus containing total capital
raised, closing price and any other details as are not included
in the red herring prospectus shall be filed with the ROC and
SEBI

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Abridged (1) Abridged prospectus means a prospectus which contains salient

Prospectus – features of prospectus as specified by SEBI.
Section 33 (2) Such prospectus shall be attached with the application form
for purchase of securities of the company.
(3) Requirement of abridged prospectus does not apply in following
cases –
(a) In case where form of application was issued in connection
with a bona fide invitation to a person to enter into an
underwriting agreement with respect to such securities; or
(b) in relation to securities which were not offered to the
public.
(c) When the offer is made to existing members only.
(4) If any person requests copy of prospectus before closing of offer,
then company shall provide the same.

Deemed (1) Where a company allots or agrees to allot any securities of

prospectus – the company with a view to all or any of those securities being
Section 25 offered for sale to the public, any document by which the
offer for sale to the public is made shall be deemed to be a
prospectus issued by the company;
(2) In case of deemed prospectus, all the provisions of section 26
and liability for misstatement in prospectus will be applicable.
(3) For a document to be considered as deemed prospectus, any
one of the following conditions need to be satisfied –
(a) that an offer of the securities or of any of them for sale to
the public was made within six months after the allotment
or agreement to allot; or
(b) that at the date when the offer was made, the whole
consideration to be received by the company in respect of
the securities had not been received by it.

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Has the allottee sold shares

to Public within 6 Months

Yes No
Has the allottee paid full
Consideration to Company Yes Not a Deemed
before offer for sale to Prospectus
Public

No
Deemed Prospectus

 Matters to be stated in the prospectus – Section 26

(1) Every prospectus shall be signed and dated
+
Every prospectus should contain such details as specified by SEBI in consultation
with CG.
Until SEBI specifies the information and reports on financial information he regulations
made by the SEBI shall apply.
+
Prospectus should contain a declaration that nothing in the prospectus is
contrary to –
(a) The companies Act, 2013
(b) the Securities Contracts (Regulation) Act, 1956
(c) Securities and Exchange Board of India Act, 1992

Note –
Point 1 shall not apply –
(a) to the issue to existing members or debenture-holders of a company,
(b) issue relating to shares or debenture which are uniform in all respects with
previously listed issue.

(2) The prospectus is not to be issued by a company or on its behalf unless on

or before the date of publication, a copy of the prospectus is delivered to the
registrar for registration.

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(3) Prospectus shall be valid if it is issued within 90 days after the date on which
a copy is delivered to the ROC.

(4) Statement made Experts –

A prospectus issued shall not include a statement:
(a) Made by an expert who is engaged or interested in the formation or
promotion or management, of the company or
(b) Made by an expert whose written consent is not obtained or
(c) Made by an expert whose written consent is obtained but he has
withdrawn such consent before the delivery of a copy of the prospectus to
the Registrar for filing.

(5) The copy should be signed by every person whose name has been mentioned in
the prospectus as a director or proposed director or the assigned attorney on
his behalf.

(6) The prospectus should mention that its copy has been delivered to the registrar
on its face.

(7) Penalty –
If a prospectus is issued in contravention of the provisions of this section,
penalty shall be as follow –
(a) Upon company –
Fine – Minimum 50,000 but may extend to 3 lakhs
(b) Upon every person who is knowingly a party to the issue of such prospectus
shall be punishable with –
Fine – Minimum 50,000 but may extend to 3 lakhs; or both

 Variation in terms of prospectus – Section 27

(1) For making any changes in the objects of the prospectus after it is issued,
company need to pass special resolution.

(2) Details of such resolution shall also be published in 2 newspaper –

(a) one English newspaper and
(b) one vernacular language newspaper where the registered office of the
company is situated.

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(3) The shareholders who do not agree to variation in prospectus are called as
dissenting shareholders.

(4) Dissenting shareholders should be given exit opportunity as specified by SEBI.

 OFFER FOR SALE BY CERTAIN MEMBERS OF A COMPANY – SECTION 28

(1) Members of a company, in consultation with Board of directors, can offer the
whole or a part of their holdings of shares to the public.

(2) The document by which the offer of sale to the public is made shall be deemed
to be a prospectus issued by the company.

(3) All laws and rules in this case as to the contents of the prospectus shall apply
as if this is a prospectus issued by the company.

(4) Members whose shares are proposed to be offered to the public, shall collectively
authorise the company, to take all actions in respect of offer of sale for and on
their behalf and members shall reimburse the company all expenses incurred
by it on this matter.

 Advertisement of Prospectus – Section 30

Where an advertisement of any prospectus of a company is published it shall be
necessary to specify –
(a) Objects of the MOA,
(b) the liability of members
(c) the amount of share capital of the company,
(d) the names of the signatories to the memorandum
(e) the number of shares subscribed for by them,
(f) its capital structure.

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 Remedies for misrepresentation in prospectus –

Remedies against Company Remedies against Directors/

(1) Rescind the contract. Promoters/Expert:
(2) A person, who takes shares on the faith of a
prospectus containing false statements, may Criminal Liability Civil Liability for
apply to the Court for the contract to be set for mis-statement mis-statement in
aside, and his name to be struck off from the in prospectus prospectus
register of members.
(3) He may also claim his money back.
(4) Sue the company for damages for deceit. Explained in depth
on next page
 But the allottee must act within reasonable
time, before any proceedings to wind up  Mens rea  Loss or
the company have been commenced. (guilty mind is damage is
He will lose his right to rescind if he an essential an essential
attempts to sell the shares or attends condition condition
a general meeting of the company, or  Criminal  Civil
receives dividends. Procedure Code, Procedure
 This right is available only those persons 1973 applicable Code, 1908
who subscribe the shares.  Offence is applicable
The word 'subscribed' denotes that the regarded  Offence
shares were acquired directly from the committed against the
company by allotment. against the state counterparty
A subsequent purchase of shares in the
open market has no remedy against the
company or the directors or promoters.

Penalty under section 447 of Companies Act, 2013


Fine Imprisonment
Fraud of less than 10 lakh Upto 50 Lakhs or Upto 5 years
rupees or 1% of turnover
whichever is less
Fraud of equal to or Min: amount of fraud and Min: 6 months
more than 10 lakh Max: (amount of fraud) × 3 Max: 10 years
rupees or 1% of turnover
whichever is less

Involving Public Interest Min: amount of fraud and Min: 6 months

Max: (amount of fraud) × 3 Max: 10 years

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Liability for mis-statements in prospectus –

Criminal liability – Section 34 Civil liability – Section 35

Where a prospectus (1) Where a person has subscribed to the securities of the
includes any company based on the mis-statements made in the
statement which is prospectus then every person who–
untrue or misleading - was director of the company at the time of issuing
prospectus
every person who - has authorised his name as director in the prospectus
authorises the issue - is a promoter of the company
of such prospectus - has authorised issue of prospectus
shall be liable under - is an expert
section 447: shall be liable to compensate the person who has
sustained damage/loss
Provided that (2) Above mentioned persons shall not be liable if they prove
nothing in this - after consenting to become director of the company, he
section shall apply to withdrew the consent before issuing prospectus
a person if he proves - prospectus was issued without his authority
that such statement - prospectus was issued without his knowledge or
or omission was consent and that on becoming aware of its issue, he
immaterial or that forthwith gave a reasonable public notice that it was
he had reasonable issued without his knowledge or consent
grounds to believe - statement made by the expert was genuine and valid
and did up to the or he did not consent in writing for inclusion of his
time of issue of the statement in the prospectus.
prospectus believe, (3) if it is proved that the prospectus was issued with the
that the statement intention to defraud the applicants for the securities of
was true, or the a company or any other person or for any fraudulent
inclusion or omission purpose,
was necessary.
every person referred above 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.

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 Punishment for fraudulently inducing persons to invest money – Section 36

Section 36 prescribes punishment for any person who fraudulently induces persons
to invest money by making statement which is false, deceptive, misleading or
deliberately concealing any material facts

He will be held guilty for fraud punishable with imprisonment and fine under section
447, an offence which is non-compoundable.

 Action by Affected Persons – Section 37

A suit may be filed or any other action may be taken under section 34 or section 35
or section 36 by any person, group of persons or any association of persons (class
action suit)

 CONDITIONS OF ALLOTMENT –
(1) Allotment can only be done by board of directors or a committee on behalf of
the board.
(2) It should be made within reasonable time. Once allotted, securities must be
issued within a period of 2 months from the date of allotment.
(3) Allotment should be absolute and unconditional.
(4) It must be communicated. Posting of letter of allotment or allotment advice
will be taken as a valid communication.
(5) Allotment should always be against the application.
(6) It should not be in contravention of any law.
(7) No allotment shall be made, until minimum subscription as specified in the
prospectus has been received on such share applications.
(8) The application money shall be at least 5% of nominal value of the amount of
security.
(9) Application money must be received within a period of 30 days from the issue
of prospectus or such other date as may be prescribed by SEBI.
(10) If the money is not received within the 30 days, it shall be returned within
15 days from the closure of issue or the directors of the company who are
officer in default shall repay the money along with interest @ 15% p.a.
(11) A return of allotment is required to be submitted in Form PAS-3 within 30 days
of such allotment.

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 Application to Stock Exchange – Section 40

(1) Every company before making public offer shall make an application to
recognized stock exchange seeking their permission to list the securities.
(2) Prospectus shall also state the name or names of the stock exchange in which
the securities shall be listed.
(3) The application money received should be deposited in a separate account
(Escrow Account) in a Scheduled Bank before making any allotment. Such
money can be utilized only for the following two purposes:
(a) For adjustment against allotment of securities, where listing is permitted; or
(b) For repayment of money, where the company is for any other reason
unable to allot securities.

 Payment of underwriting commission – Section 40 read with Rule 13

A company may pay underwriting commission subject to following conditions –
(1) Authority to pay underwriting commission –
(a) Payment of underwriting commission shall be authorised by AOA.
(b) Commission may be paid out of proceeds of issue or the profit of the
company or both.
(2) Maximum rate of commission –
(a) In case of shares –
5% of price at which shares are issued
or whichever is lower
rate specified in the AOA,
(b) In case of debentures –
2.5% of price at which shares are issued
or whichever is lower
rate specified in the AOA,
(3) The prospectus of the company shall disclose –
• Name of the underwriters;
• Rate and amount of commission to be paid;
• Number of securities to be underwritten;
• Such other details as may be prescribed.

Note –
a copy of the contract for the payment of commission is delivered to the Registrar
at the time of delivery of the prospectus for registration.

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 Global Depository Receipt – Section 41

For issuing GDRs, co need to pass SR.

HOW GDR OPERATES ?

India Overseas

Depository
India Company Overscas
Agreement
Depository
Equity
Custodian
Shares
Agreement

Domestic Overscas
Custodian Investors

 Private placement of shares – Section 42 + Rule 14 of Companies (Prospectus and Allotment

of securities) Rules, 2014

Meaning Private placement means offer to a select group of persons,

to subscribe to the securities of the company for making an
invitation, who have been identified by the Board (herein
referred to as “IDENTIFIED PERSONS”)
Maximum number As per section 42 50 persons
Or such higher persons shall
of persons to whom number as may not include QIBs
be prescribed and Employees
securities can be offered who have been
under private placement allotted shares
under section
62(1)(b)
As per Rule 14 200 persons

Since higher number 200 is prescribed, we take the maximum

number as 200.
Note –
(1) The above limits should be counted individually for each
kind of security that is equity share, preference share or
debenture [i.e. 200 for equity shares, 200 for preference
shares and 200 for debentures].
(2) The above limits is for one financial year.

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Who can A public company or private company can issue shares on

issue securities through private placement basis by passing special resolution
private plcement ?
Other Conditions for (1) Private Placement Offer letter shall be made to IDENTIFIED
private placement PERSONS accompanied by an application form serially
numbered & addressed either physically or in electronic
form within 30 days of recording of names of such invitees.
(2) The private placement offer and application shall NOT
carry any right of RENUNCIATION.
(3) The company is not allowed to advertise such issue in any
form or in any form of print media. It is strictly given on
private basis.
(4) Company cannot make two offer of private placement
simultaneously.
(5) All the monies collected shall be kept in a separate bank
account & can only be collected by way of cheques and
not in cash.
(6) Offer Letter under such issue shall be filed in Form PAS-4
with ROC within 30 days from the date of circulation of
private placement offer letter.
(7) The money received should be deposited in a separate
account (Escrow Account) in a Scheduled Bank before
making any allotment. Such money can be utilized only
for the following two purposes:
(a) For adjustment against allotment of securities, or
(b) For repayment of money, where the company is for
any other reason unable to allot securities.

(8) Allotment shall be made within a period of 60 days from

the receipt of the application. If not, money received shall
be repaid within 15 days after the expiry of 60 days. If the
company fails to repay the application money within the
aforesaid period, it shall be liable to repay that money
with interest at the rate of 12% per annum from the expiry
of the 60th day.

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(9) Return of Allotment is required to be filed in Form PAS-3

with the ROC along with prescribed fee within 15 days of
allotment.
(10) A company shall not utilise monies raised through private
placement unless allotment is made, and the return of
allotment is filed with the Registrar.

(11) If the offer is made to a body corporate incorporated in or

a national of a country which shares a land border with
India then prior approval of CG shall be obtained.

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