The prospectus is nothing


The prospectus is nothing but a legal document for market participants and investors, which highlights the company’s financial securities for the participants or investor. The prospectus contains any notice, advertisement, circular, or any other document on behalf of the general public for subscription or purchase of shares or debentures of the company. This includes financial position, type of security offered, number of shares, etc.


The prospectus contents are mentioned in section 56 of the company act.

Part I of Schedule II states matters to be specified: –

Contents of the Memorandum:

It states the name of the company, objective, and nature of business, shares capital, the liability of members, and the number of shares subscribed by them.

Qualification shares of the Directors:

If the company has the criteria of holding a minimum number of shares for the director as his qualification, in that case, they will not be qualified as a director unless he holds a minimum number of shares. 

The number of redeemable preference shares:

Details about debentures and redeemable preference shares, including the date of redemption, must be provided.

Remuneration of the Directors and Promoters:

The prospectus must hold the rate of consideration for attending the meetings and for other favor of the Directors and Promoters.

Names of the directors and managing director, details and addresses:

The names, addresses, descriptions, occupations of the Directors, Managing Directors, Managers, and the provisions regarding their allocation must be provided.

Minimum Subscription:

The minimum subscription on which the directors may begin the allocation and the money payable on application, allotment, etc. on each share should be mentioned in the prospectus.

Time of opening:

The time of the opening of the subscription list should be mentioned in the prospectus.

Names and Addresses:

The names and addresses of sellers, if any, and the mode of payment of purchase and goodwill must be mentioned in the prospectus.

Underwriting Commission, Brokerage, etc:

The names of underwriters and the point of view of the directors related to their financial position and business integrity must be mentioned properly.

Names of the auditors with their addresses:

The image of auditors is also an essential element necessary for public sponsorship.

Particular of Contracts:

The dates of and every contracting party, and reasonable time and place of its investigation are also crucial.

Preliminary Expenses:

The approximate amount of preliminary expenses to be incurred must be provided.

Particulars of Directors:

Full details of each director’s or promoter’s nature and involvement in the promotion of or interest in the property proposed to be bought by the company within two years, along with a declaration of all amounts paid or expected to be paid to him in cash or shares for service provided.


Complete disclosure on these matters must be stated in the prospectus.

Expected rate of dividend and voting rights:

The rights of stakeholders relating to voting, meeting, and dividends along with the nature and extension of limitations to be imposed by Articles on their right to transfer shares must be mentioned very clearly.

Capitalization of Profits and Surplus from revaluation of assets:

Capitalization of a company’s profits/reserves or where some of the subsidiaries have been capitalized (i.e., offering incentive shares)—details of certain capitalization, as well as surplus assets through asset revaluation, should be mentioned.

Part II of the schedule II-states reports to be set out:

Report by the Auditor:

A company audit report relating to:

  1. The profits and losses, assets and liabilities, and so on.
  2. The dividend paid by the company for the five pre-prospectus financial years should also be given.
  3. Report by the Accountant:

The accountant must present a report related to profits or losses and assets and liabilities on a date that should not be more than 120 days before the date of issue of the prospectus.

Types of prospectus:

  1. Abridged prospectus: Abridged prospectus is nothing but a memorandum which contains all the salient features of the prospectus as specified by SEBI. Section 2(1) of the companies act of India, stated that a company cannot issue an application for purchase of any share or debenture unless it does not have the salient features of the memorandum. 
  2. Deemed prospectus: When a company allows or agrees to allot any shares or debentures of the company, the document is considered as a deemed prospectus. Section 25(1) of the company act mentions the deemed prospectus. Any document which offers the sale of share or debentures to the public is deemed to be a prospectus. 

Until proven otherwise, allocation or agreement for allotting shares or debentures is considered to be made for the purpose of offering the shares or debentures for sale to the public where it is demonstrated,

  1. That within six months of the allotment or agreement to allot, the shares or debentures of or either of them is offered for sale to the public; or
  2. That the entire consideration for the shares or debentures to be received by the company had not been received by the date when the offer was made.
  1. Shelf prospectus: Section 31 of the company act 2013, states about the shelf prospectus.When a public financial institution or company offers one or more securities to the public, a shelf prospectus is issued. A company should provide a validity period in the prospectus, which should not be more than one year. The validity period begins with the commencement of the first offer. After that prospectus are not needed for the further offer. A company should provide an information memorandum while filling the shelf prospectus. 
  2. Red herring prospectus: A Red Herring Prospectus is a preliminary prospectus that is submitted by an issuer company that intends to have public offerings of securities (i.e.; stock or bonds). A prospectus is associated with an Initial Public Offering (IPO).The prospectus must be submitted to the Securities and Exchange Commission (SEC). The front page of the prospectus has a red bold disclaimer which states the information provided in the prospectus is incomplete and may be changed later and securities may not be sold until the registration statement, submitted with the market regulator, becomes valid. Red herring prospectus does not contain complete information about the prices of securities offered and the number of securities to be issued instead it may contain the purpose of issue, proposed offer’s price range, balance sheet, legal opinion of the issue, etc.  According to the act, the firm should issue this prospectus to the registrar at least 48 hours before the public sale. 

Civil liability on a misstatement of prospectus:

Civil liability is defined under section 35 of the companies act 2013, which states that Where an individual subscribes for securities of a company based on a false statement, inclusion, or exclusion and suffers loss or harm as a result, the company and as well as every person who:

  1. is a director at the time the prospectus is issued
  2. has been appointed as director or as a potential director with his consent.
  3. is the company’s promoter
  4. has granted approval for the prospectus to be issued
  5. is an expert;

should be liable for payment of losses. In addition to criminal liability under section 36, civil liability shall be included. Where a prospectus has been issued with the intention of defrauding the applicants from securities of a company or any person or for any fraudulent purpose, every person is personally accountable for any or all losses or damages which any person who subscribed to the securities has incurred under such prospectus, without any limited liability.

Defenses for civil liability:

  1. he may take the defense of withdrawal of his consent or never given his consent: 
  2. When he became aware that the prospectus had been published without his consent or approval, he gave a fair public notice that the prospectus had been issued without his knowledge or consent.

Criminal liability on a misstatement of prospectus: 

Criminal liability is defined under section 37 of the companies act 2013, Where a prospectus, issued, circulated or distributed, includes an assertion that is false or misleading in the manner or context in which it is used; or; where any inclusion or exclusion of any matter is likely to mislead; Each and every person who authorizes the issue of such prospectus shall be liable under fraud which is stated under section 447. 

Imprisonment for such may not be less than 6 months and may extend to 10 years or amount not less than involved in fraud but it may extend to 3 times the amount involved or maybe both can be imposed as punishment.  

Defenses of criminal liability: 

  1. If the person proved that statement provided was immaterial;
  2. If the person has reasonable ground to trust and did believe that statement was true; or
  3. If the person has reasonable ground to trust and did believe that the inclusion or exclusion was important.

Defense of Directors and Experts:

They can get away from liability of damages if they prove that;

  1. Before the issuance of the prospectus, they have withdrawn their consent;
  2. The prospectus was issued without their knowledge;
  3. There was a reasonable ground of belief. 

The Doctrine of Attribution in Corporate Criminal Liability:

For criminal offenses, there must be malice as an essential element. The basic rule behind the criminal offenses revolves around 2 Latin Maxims Actus non facit reum, nisi mens sit rea, which means one can be held liable if he demonstrates that (a) a forbidden act or omission has been done (b) with deliberate intent. The company has no soul or body so the company can have malice for a criminal offense. If proven then the company can send it behind the bars? For resolving this issue doctrine of attribution was developed by the court. According to the doctrine of attribution, the person who is/ are ‘directing mind and will’ of the company will be held liable along with the company. The doctrine was developed in the United Kingdom, but it is taken into use in India for many past years. 

Case law:

Caparo Industries pIc v Dickman (1990);

Caparo Industries plc was intending to take over Fidelity plc, a manufacturer of electrical devices as Fidelity plc was struggling. In march fidelity plc accountant announced a profit wave, which had halved his shares prices. After two-month fidelity’s director announced the annual profit till March confirming it with a negative point of view. The shares started falling again, this time Caparo began to buy shares in large numbers In June accounts were issued to shareholders which include Caparo. Accounts were prepared with the help of Dickman.Caparo had 29.9 percent of the company’s shares before it made a general offer for the remaining shares, as allowed by the City Code’s takeover rules.Once, it had control, Caparo came to know Fidelity’s accounts were in an even worse state than disclosed by the director or auditor. Caparo sued Dickman for negligence in accounts and asked for recovery of his losses. 

Held:Caparo starts from the presumption no duty is owed unless the criteria of the three-stage test are satisfied.These parameters are: foreseeability, proximity, and whether imposing such an obligation is fair, just, and rational. No duty of care was owed by Dickman.There was insufficient proximity between Caparo and the auditors because the auditors were unaware of Caparo’s existence or the reason for which the accounts were being used.