12.5.7 Definition of a Prospectus

A prospectus, as per s.2 (36), means any document described or issued as 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. Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:

  1. It invites subscriptions to share or debentures or invites deposits.

  2. The aforesaid invitation is made to the public.

What constitutes an offer to the public? Section 67 lays down two-way criteria as to what shall constitute an invitation to the public. These are:

            1. An invitation to the public shall include an invitation to any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner. However, a document by way of invitation to existing members or debenture holders to subscribe to shares or debenture by way of right is not a prospectus [s.56 (5)].

            2. An invitation shall not be an invitation to the public if it cannot be calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the invitation. Thus, it will not be an invitation to public where B, a friend of A who receives the invitation, also desires to subscribe, but his offer shall be refused because he was not invited to make the same. On the other hand, it will become an invitation to public where his (B's) offer shall also be accepted.

The offering of shares of kith and kin of a director is not an invitation to the public to buy shares [Rattan Singh v. Moga Transport Co. Ltd. (1959)].20 comp. cas. 165]. Furthel the learned judge in this case held that in all cases the determination of the question of an offer being made to the public depends upon the facts and language of the notice and the particular circumstance of each case.

In Nash v. Lynde (1929, A.C. 1585).Justice Viscount Summer observed: "The 'public' is of course a general word. No particular numbers are prescribed. Anything from two to infinity may serve; perhaps even one, if he is intended to be the first of a series of subscribers, but makes further proceeding needless by himself subscribing the whole. The point is that the offer is such as to be open to any one who brings his money and applies in due form, whether the prospectus was addressed to him on behalf of the company or not."

Shelf prospectus and information memorandum (s.60,A' and 60B)

Section 60A.makes provisions for a self-prospectus in certain situation. A ‘shelf-prospectus ‘means a prospectus issued by any financial institution or bank for one or more issue of the securities class of securities specified in that prospectus.

Any public financial institution, public sector bank or scheduled bank whose main object is financing shall file a shelf prospectus with the registrar. In such a situation such a company need not file a prospectus afresh at every stage of offer of securities by it within a period of validity not exceeding one year.

But a company filing a shelf prospectus is required to file an information memorandum (as given in s. 60B below) on all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of securities within such period as may be prescribed b the Central Government, prior to making of a second or subsequent offer of securities under the shelf prospectus.

An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities that prospectus.

Where an update of information memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus.

Information Memorandum

Section 60B provides as folows as regards information memorandum:

            (i) A public company making an issue of securities may circulate information memorandum to the public prior to filing of a prospectus.

            (ii) A company inviting subscription by an information memorandum is bound to file a prospectus prior to the opening of the subscription lists and the offer as a redherring prospectus, at least three days before the opening of the offer.

            The 'red-herring 'prospectus means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered.

            (iii) The information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of a prospectus.

            (iv) Any variation between the information memorandum and the red-herring prospectus have to carry same obligations as are applicable in the case of prospectus.

            (v) Every variation as made and highlighted under (iv) is to be individually intimated to the persons invited to subscribe to the issue of securities.

            (vi) In the event of the issuing company or the underwriters to the issue have invited or received advance subscription by way of cash or post-dated cheques or stock-invest, the company or such underwriters or bankers to the issue shill not encash such subscription moneys or post-dated cheques or stock invest before the date of opening of the issue, without having individually intimated the prospective subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid.

            (vii) The applicant or proposed subscriber can exercise his right to withdraw from the application on any intimation of variation within seven days from the date of such intimation and shall indicate such withdrawal in writing to the company and the underwriters.

            (viii) Any application for subscription which is acted upon by the company or underwriters or bankers to the issue without having given enough information of any variations, or the particulars of withdrawing the offer or opportunity for cancelling the post-dated cheques or stock-invest or stop payments for such payments shall be void. Further, the applicants shall he entitled to receive a refund or return of its post-dated cheques or stock-invest or subscription moneys or cancellation of its application, as if the said application had never been made and the applicants are entitled to receive back their original application and interest at15% from the date of encashment till payment of relisation.

            (ix) Upon the closing of the offer of securities, a final prospectus stating therein the total capital raised, whether by way of debt or share capital and the closing prive of the securities and any other details as were not complete in the red-herring prospectus shall be filed in a case of listed public company with SEBI and registrar and in any other case with the registrar only.

Small Depositors (s. 58AA)

To protect small depositors, twonew sections 58AA and 58AAA have been added by the companies (Amendment) Act, 2000. The provisions are summarised below:

            (i) A small depositor is one who has deposited in a financial year a sum not exceeding Rs 20000 in a company and includes his successors, nominees and legal representatives. However, the term does not include those depositors who renewed their deposits whose repayment is not made due to death or stay order of a competent court or authority.

            (ii) Any company accepting deposits shall have to inform the Company Law Bord (CLB) on monthly basis, the names and addresses of each small depositor about its default in repayment of deposit or payment of interest thereon. A period of 60 days is prescribed for intimation of any default to the CLB which shall, after giving the depositor an opportunity of being heard, pass an appropriate order within 30 days from the date or receipt of such intimation from the defaulting company.

            Such a defaulting company is prohibited to accept further deposits from small depositors at any time until the defaults are made gird.

(ii) The total numbers of small depositors and the amount due to them in respect of which default is made and the fats of wariver of interest accured on deposits shall be stated in all future advertisements and application forms inviting deposits from the public. Further every application form of accepting deposits shall contain a statement that the applicant has been apprised or every past default of the company in repayment of deposits and for payment or interest thereon to the small deposits.

            (iii) Every director of such a defaulting company such be prohibited to be appointed as a director of any public company for 5 years from the date of the default.

            (iv) No such defaulting company shall directly or indirectly make any loan to any body corporate, give guarantee or provide security or acquire security of any body corporate till such default continues.

            (v) Every non-compliance is punishable with imprironment upto 3 years and also fine not less than Rs 500 for everyday.

            (vi) An aggrived depositor is also entitled to make an application to CLB for redressal of his grievance against the company.

Derault in aceptance or refund of deposits to be cognizable (s. 58AAA)

Every offence connected with or arising out of acceptance of deposits under s. 58A or s. 58AAA is a cognizable offence under the code of criminal procedure, 1973.

Dating of prospectus (s.55). Section 55 states that every prospectus must be dated and that date is deemed to be the date of publication of the prospectus.

Powers of SEBI. The companies (Amdnedment) Act, 2000 has inserted a new s. 55A which provides that the provisions contained in sections 55 to 58,59 to 81,108-110, 112-113, 116-122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend shall be administered by BEBI in the following cases: (a) in case of listed companies; (b) in case of those public companies which intend to get their securities listed on any recognised stock exchange in India. In any other, the Central Government shall be the administering authority.