Prospectus under Companies Act
Prospectus under Companies Act
What is a Prospectus?
A Prospectus is a legal document issued by a company to the public inviting them to subscribe to shares or debentures. It contains important information about the company’s business, financial position, management, and risks involved, aimed at helping investors make an informed decision.
Definition under Companies Act, 2013
Section 2(70) of the Companies Act, 2013 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 securities of a body corporate.”
Types of Prospectus
Red Herring Prospectus: Does not contain the price or number of securities offered but contains all other information.
Shelf Prospectus: Issued by a company to raise money from the public on multiple occasions over a period.
Deemed Prospectus: When a statement in any form (advertisement, notice) invites offers from the public, it is deemed a prospectus.
Abridged Prospectus: A summarized version of the prospectus containing key information.
Importance of Prospectus
Helps investors decide whether to invest or not.
Contains material facts and disclosures.
Protects investors against fraud.
Ensures transparency from the company.
Contents of a Prospectus (Section 26, Companies Act, 2013)
The prospectus must contain:
Name, situation, and registered office of the company.
Objects of the company.
Details about promoters and directors.
Capital structure.
Financial statements.
Material contracts.
Details of underwriters.
Any other material information.
Legal Requirements and Compliance
The prospectus must be filed with the Registrar of Companies (RoC) before it is issued (Section 26).
Must be signed by at least two directors and the company secretary, if any.
Must not contain any untrue statements or material omissions.
Any misstatements or omissions making the prospectus misleading can lead to civil and criminal liabilities.
Liability for Misstatements in Prospectus
Civil liability (Section 35): Every person who authorizes the issue of a prospectus containing false statements or omissions can be held liable to pay compensation to any person who has sustained a loss.
Criminal liability (Section 34): If the prospectus includes false or misleading statements knowingly or recklessly, the company, directors, and other officers are punishable with imprisonment and/or fine.
Relevant Case Law
1. R. v. Kylsant (1932) 1 KB 442
Held that the directors and promoters are responsible for the statements made in the prospectus.
The case emphasized the need for truthful and accurate disclosure in prospectuses.
2. Greenhalgh v. Arderne Cinemas Ltd. [1951] Ch 286
It was held that the prospectus must be truthful and complete.
Any material misstatement or omission renders the prospectus misleading and exposes the company and directors to liability.
3. Lilly v. Cahill [1969] 2 All ER 686
The court stated that a prospectus is a document on which investors rely; hence, accuracy is crucial.
Failure to disclose material facts can lead to action for damages.
4. Derry v. Peek (1889) 14 App Cas 337
Although not a company prospectus case specifically, it laid down the principle that fraud requires proof of intent to deceive or reckless disregard for truth.
This principle applies in criminal prosecution for false statements in a prospectus.
5. Pender v. Lushington (1877) 6 Ch D 70
Highlighted that a prospectus is a contract between the company and the investor.
Investors are entitled to rely on the statements made therein.
Summary:
A prospectus is a formal invitation to the public to subscribe to a company’s securities.
It must contain true, complete, and material information.
The Companies Act 2013 lays down strict disclosure requirements and penalties for false or misleading statements.
Directors, promoters, and others responsible can face civil and criminal liability for misstatements.
Case laws reinforce the principle of full disclosure, truthfulness, and accountability in prospectus issuance.
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