According to the Act, “ ‘prospectus’ means 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”.


Essentials of Definition

The definition of prospectus gives the following essential features:

a) Document.

b) Subscription.

c) Invitation to public.

d) Offer to public. 50 or more persons constitute public as per the amendment of the Act in 2000.


Necessary Pre-Requisites of Prospectus

a) Prospectus must be Dated: There are two dates relevant-one is the date of issue and the other is the date of publication.

b) Prospectus must be Signed: It must be signed by the director(s) or proposed director(s) or by their agents who have such authority in writing.

c) Prospectus must be Registered: It must be registered with the registrar of companies. Prospectus must be issued within 90 days from delivery date for registration.


Contents of Prospectus

Prospectus is the window through which an investor can look into the soundness of a company’s ventures.

It consists of the following:

a) Matters specified in Part I of Schedule II-It includes general information like name and address of the company, its objects, number and classes of shares, particulars of directors, and auditors, underwriters, details regarding the securities being issued, outstanding litigation, management perception of risk factors and details of any issue within past 3 years.


b) Matters listed in Part II of Schedule II - It contains reports by the auditors and the accountants, consent of directors, auditors etc. and some other statutory information.


c) Matters given in Part III of Schedule II- This would include :

i. For a company carrying on business for less than 5 financial years, then the reference is to the number of financial years for which the business has been carried on.

ii. If the prospectus is issued more than 2 years after the date at which the company is entitled to commence business, particulars of the signatories to the memorandum and  shares subscribed for by them and details of preliminary expenses need not be given.

iii. Statements by experts – Prospectus also contains statements made by experts like engineer, valuer, or an accountant. Experts need to give their consent in writing. Experts not connected with the formation of the company are included in the category of experts.


Golden Rule of Prospectus

There should be full frank and honest disclosure of all facts in the prospectus. These facts should be scrupulously accurate. There should not be any error of commission (mis-statements) nor any error of omission (non disclosure of relevant facts). Thus the golden rule of prospectus is that the true nature of the company’s venture to be disclosed.

Mis-statements in Prospectus and Liability

There should not be any mis-statements in the prospectus. Mis-statements are, saying that something is expected when in reality it is not or saying that the directors have an intention to do something when they have no such intention. Any mis-statements lead to the following liability:


a) Civil: This consists of liability against the company and against the directors, promoters and experts. This may include rescission of contract, damages or compensation.


b) Criminal: Fine upto Rs. 50,000 or imprisonment upto 2 years or both. If there is a fraud, penalty is increased to fine upto Rs. 1 lakh, or imprisonment upto 5 years or both. In case of allotment on fictitious names imprisonment can extend upto 5 years.


Deemed Prospectus

When a company allots shares or debentures to the public through the medium of issue houses, then the issue houses invite subscription from the public through their own offer documents. Such an offer document by the issue houses is treated as a prospectus by the company and known as a deemed prospectus or prospectus by implication.


Statement in lieu of Prospectus

Where a public company does not invite public to subscribe for its 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 ‘statement in lieu of prospectus’. It should contain the information required to be disclosed by Schedule-III of the Act. The statement In lieu of prospectus must be filed with the Registrar at least three days before any allotment of shares or debentures are made.

Shelf Prospectus and Information Memorandum

Shelf Prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in the prospectus. This is valid for a period of one year from the date of opening of the first offering of the shelf prospectus. For subsequent offering, information memorandum updating the information under the various heads will have to be filed and entire set comprising of shelf prospectus and the information memorandum shall constitute the prospectus and have to be circulated to the general public. This will help to reduce the expenses of preparation and issue of prospectus on the part of the issuer and will inform the investors up-to-date position of the issue.


Red Herring Prospectus

A red-herring prospectus is a prospectus, which does not have complete particulars on the price of securities offered and quantum of securities offered. Examples – when companies have resorted to red herring prospectus are Jet airways, Maruti Udyog, Suzlon, and Oriental Bank of Commerce.


Services and Exchange Board of India (SEBI) -The Administrative


The Companies (Amendments) Act, 2000, in relation to prospectus, has made SEBI as the administrative authority. Any complaint about violations regarding the prospectus should be made to SEBI which is now vested with powers to inquire into such complaints and punish those who are found guilty.






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