Law Chart

Prospectus & Allotment of Securities

Prospectus & Allotment of Securities

Public Offer & Private Placement

(Section 23)

As per Section 23 (1), a public As per Section 23(2), a private company

company may issue securities: may issue securities;

a. To public through b. Through private c. Through a rights b. Through private

a. By way of rights
prospectus placement issue or a bonus issue placement
issue or bonus issue

Public offer includes initial public offer (IPO) or further public offer
(FPO) of securities to the public by a company, or an offer for sale of
securities (OFS) to the public by an existing shareholder, through issue
of a prospectus.
Students are advised to note; that Further Public Offer also known as As per Section 23(4), The CG may, by notification,
Fellow-on Public Offer, whereas OFS is sometimes called deemed Public exempt any class or classes of public companies
Offer. referred to in sub-section (3) from any of the
provisions of this Chapter, Chapter IV, section 89,
As per Section 23(3), Such class of public companies may issue section 90 or section 127 and a copy of every such
such class of securities for purposes of listing on permitted notification shall, as soon as may be after it is issued,
stock exchanges in permissible foreign jurisdictions or such be laid before both Houses of Parliament.".
other jurisdictions, as may be prescribed.

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Prospectus & Allotment of Securities

Mode of Issue Public Private *For a listed company or a company proposed to be listed.
Company Company
1. Public Offer (including Yes No
IPO, FPO or OFS) Regulation of issue and transfer of securities etc.
2. Private Placement Yes Yes (Section 24)
3. Rights issue / Bonus
Issue Yes Yes Securities and Exchange Board of India is empowered to administer those
4. Compliance with SEBI provisions under chapter III and IV of the Act, which pertains to issue &
rules & regulations Yes* No transfer of securities and non-payment of dividend; by listed companies or
those companies which intend to get their securities listed on any
recognised stock exchange in India, by making regulations in this behalf.
Prospectus

What is prospectus? [Section 2(70)] Contents of prospectus [Section 26]

DATED (Date of
means includes Publication)

Any document Signed by: Directors/ Proposed Director/ Attorney of director

Shelf Any notice, circular,
described or
prospectus advertisement or
issued as a
(section 31) other document Financial Info (as specified by SEBI and CG)
prospectus
inviting offers from
the public
Red herring Declaration
prospectus (1) Regarding compliance of Companies Act, 2013
(2) Nothing in prospectus is contrary to CA, 2013, SEBI Act,
(section 32)
1992 & SCRA, 1956.

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Prospectus & Allotment of Securities

Contents of prospectus [Section 26]

EXPERT REPORT (to be (2) Expert has not Cover Page of Prospectus
given only when expert is:) withdrawn the consent

State that the copy has been Required documents are attached
delivered to ROC for filing to such copy delivered to ROC
(1) Not engaged/ (3) Experts gives the
interested in formation/ consent in writing
promotion of Co.
Process For Variation In Terms Of Contract
Of Prospectus [Section 27]

Publish in newspaper
Special
(including justification
Resolution Give Exit offer to Dissenting
for such variation)
shareholders

Penalty For Contravention Of Section 26

Company Any person knowingly a party to issue of

prospectus

Fine
Min. Rs 50,000 Fine
Max. Rs3 lacs Min. Rs 50,000; Max. Rs3 lacs

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Prospectus & Allotment of Securities

Deemed Prospectus (Section 25)

i) Documents which deemed ii) Securities offered for iii) Person making an offer
to be a prospectus: sale to public: is a co. or a firm:

a) where a co. allots or agrees to allot any unless contrary is proved, be evidence Disclosure to be made in Deemed
securities of Co. with a view to all or any that an allotment of, or an agreement to Prospectus-
of those securities being offered for sale allot, securities was made with a view to a) net amt of consideration received
to public, any document by which offer securities being offered for sale to public or to be received by Co. in
for sale to public is made shall, for all if it is shown- respect of securities to which
purposes, be deemed to be a prospectus a) that an offer of securities or of any of offer relates;
issued by Co them for sale to public was made within 6 &
& months after allotment or agreement to b) time & place at which contract
b) all enactments & rules of law as to allot; or where under said securities have
contents of prospectus & as to liability in b) that at date when offer was made, been or are to be allotted may be
respect of mis- statements, in & omissions whole consideration to be received by Co. inspected
from, prospectus, or otherwise relating to in respect of securities had not been
prospectus, shall apply. received by it.

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Prospectus & Allotment of Securities

It means a prospectus in respect of which securities or class of securities included therein are issued Shelf prospectus (Section 31)
for subscription in one or more issues over a certain period without the issue of a further prospectus

i) Filing of shelf prospectus ii) Filing of information memorandum

iii) Memorandum together with
with registrar: with shelf prospectus:
shelf prospectus shall be deemed
to be a prospectus:

any class or classes of companies, as A co. filing a shelf prospectus shall be

Securities & Exchange Board may required to file an information memorandum
Where an information
provide by regulations in this behalf, containing all material facts relating to new
memorandum is filed, every
may file a shelf prospectus with charges created, changes in financial
time an offer of securities is
Registrar at stage- position of co. as have occurred between
made under sub- sec (2), such
first offer of securities or previous offer of
memorandum together with
securities & succeeding offer of securities &
shelf prospectus shall be
a) of first offer of securities included such other changes as may be prescribed,
deemed to be a prospectus
therein which shall indicate a period not with Registrar within prescribed time, prior
exceeding 1 year as period of validity of to issue of a second or subsequent offer of
such prospectus which shall commence securities under shelf prospectus
from date of opening of first offer of
securities under that prospectus, &
Provided that where a co. has received applications for
b) in respect of a second or subsequent
allotment of securities along with advance payments of
offer of such securities issued during
subscription before making of any such change, co. shall
period of validity of that prospectus, no
intimate changes to such applicants & if they express a
further prospectus is required
desire to withdraw their application, Co. shall refund all
monies received as subscription within 15 days.

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Prospectus & Allotment of Securities

It means a prospectus which does not include complete particulars of quantum or

Red Herring Prospectus (Section 32) price of securities

i) Issue a red herring ii) Filing with the registrar: iii) Same obligation: iv) Filing of red herring
prospectus prior to issue of a Co. proposing to issue a red A red herring prospectus prospectus with registrar &
Co. may issue a red herring herring prospectus shall file shall carry same obligations SEBI upon closing of offer:
prospectus prior to issue of a it with Registrar at least 3 as are applicable to a Upon closing of offer of
prospectus. days prior to opening of prospectus & any variation securities under this sec,
subscription list & offer. between red herring prospectus stating therein
prospectus & a prospectus total capital raised, whether
shall be highlighted as by way of debt or share
variations in prospectus capital, & closing price of
securities & any other details
as are not included in red
Abridged prospectus (Section 33)
herring prospectus shall be
filed with Registrar &
It means a memorandum containing such salient features of a prospectus as may be Securities and Exchange
specified by Securities & Exchange Board by making regulations in this behalf. Board

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Prospectus & Allotment of Securities

Public offer of securities to be in dematerialised form

1) Section 29(1) states that every Co. making public 2) Any Co, other than co. mentioned in sub-section (1), may
offer; & such other class or classes of companies as may convert its securities into dematerialised form or issue its
be prescribed under Rule 9 shall issue securities only in securities in physical form in accordance with the provisions
dematerialised form by complying with provisions of of this Act or in dematerialised form in accordance with
Depositories Act, 1996 & regulations made thereunder. provisions of Depositories Act, 1996 & regulations made
thereunder.
In case of such class or classes of unlisted companies as Securities could be held in physical or dematerialised form.
may be prescribed, the securities shall be held or However public offer of securities has to be mandatorily in
transferred only in dematerialised form in manner laid demat form in accordance with Depositories Act, 1996.
down in Depositories Act, 1996 & regulations made Demat ensures fool proof control over issue, sale, purchase,
thereunder pledge, extinguishment of securities lending transparency &
credibility to entire process & securities markets

Securities to be dealt with in Stock Exchanges

i) Filing of an application with recognised stock exchange ii) Prospectus to state name of stock exchange:
every co. making public offer shall, before making such prospectus shall also state name or names of stock exchange
offer, make an application to one or more recognised stock in which securities shall be dealt with
exchange or exchanges & obtain permission for securities
to be dealt with in such stock exchange or exchanges

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iii) To maintain separate bank account: iv) Condition purporting to waive

v) In case of default:
All monies received on application from the compliance shall
a) Company = fine – 5 Lacs to 50 Lacs
public shall be kept in a separate bank account Any condition purporting to require
in a scheduled bank & shall not be utilised for b) Officer = imprisonment upto 1 year
or bind any applicant for securities
any purpose other than- or fine -50thousand to 3Lacs or both
to waive compliance with any of
a) for adjustment against allotment of requirements of this section shall be
securities void
b) for Repayment of monies within time
specified by SEBI
vi) Payment of commission:
Conditions for payment of commission:
a) payment of such commission shall be authorized in Co's
articles of association
b) commission may be paid out of proceeds of issue or profit of
Co. or both
c) Rate of commission –
Shares Debentures
• shall not exceed 5% of price • shall not exceed 2.5% of
at which shares are issued or price at which debentures are
• rate authorised by articles issued or as specified by co's
• Whichever is less Article • Whichever is less

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Prospectus & Allotment of Securities

Allotment Of Securities [Section 39]

Allotment of securities
application money has been application money shall not be In case of default
Minimum amount
paid and received by the less than 5% or such other %age/
subscribed, and
company amt as specified by SEBI.

Company and its officer shall

Minimum amount not subscribed and application money not received pay penalty of 1,000 for each
day during which such default
within 30 days from date of issue of
prospectus, or
Such other period as specified by SEBI continues, or

₹ 1 lac
whichever is less
amount received shall be returned within 15 days from the
closure of issue

Where company makes an allotment of securities

shall file a return of allotment with the Registrar

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Misstatements in Prospectus

i) Criminal liability (Section 34) iii) Liability on defraud

ii) Civil liability (Section 35)
Where it is proved that a prospectus has
√every person who authorises issue of a) Liabilities of persons:
been issued with intent to defraud applicants
such prospectus shall be liable under where a person has subscribed for
for securities of a co. or any other person or
sec 447: securities of a co. acting on any
for any fraudulent purpose, every person
statement included, or inclusion or
referred to in sub-sec (1) shall be personally
√nothing in this sec shall apply to a omission of any matter, in prospectus
responsible, without any limitation of
which is misleading & has sustained any
person if he proves that such liability, for all or any of losses or damages
loss or damage as a consequence
statement or omission was immaterial that may have been incurred by any person
thereof, Co. & every person who-
or that he had reasonable grounds to who subscribed to securities on basis of such
√is a director of Co. at time of issue of
believe, & did up to time of issue of prospectus
prospectus
prospectus believe, that statement was √has authorised himself to be named
true or inclusion or omission was & is named in prospectus as a director
necessary. promoter of Co. b) Exceptions: No person shall be liable if
√ authorised issue of prospectus; & he proves-
√ is an expert referred to in sub- ►withdrew his consent to become director
section (5) of section 26, before issue of prospectus
►Prospectus issued without his knowledge
►Statement made by Expert

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Prospectus & Allotment of Securities

A private placement is a way of raising capital that involves the sale of securities Private Placement
to a relatively small number of select investors.

A private placement is different from a public issue in which securities are made
available for sale on the open market to any type of investor.

Private Placement [Section 42] ▪ any offer or invitation to subscribe or issue of securities
▪ to a select group of persons by a company (other than by way of public offer)
▪ through private placement offer-cum-application

To whom can the private Maximum No. of persons to Exclusions from the list Application for Private
placement be made? whom offer can be made of 200 members Placement

qualified institutional buyers,

only to a select not more than 200 Identified person may subscribe to the
or a employee of the company
group of persons in the aggregate in a private placement issue shall apply in the
under a scheme of employees
identified by the financial year private placement a application issued to
stock option [Sec 62(1)(b)]
Board ("identified such person along with subscription money
persons") paid either by cheque or demand draft or
Co. shall not utilise other banking channel and not by cash
Utilisation of Money received in monies raised through
private placement private placement unless
Co. shall file with the Registrar a return Return of allotment
allotment is made and the
return of allotment is of allotment within 15 days from the date
filed with the Registrar of the allotment

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Co. shall issue private placement offer cum application Private companies shall file with the Registry copy of the
letter only after the relevant special resolution or Board resolution or special resolution with respect to
Board resolution has been filed in the Registry approval under 179(3)(c)

Any private placement issue not made in compliance of

the provisions shall be deemed to be a public offer

Allotment of securities under private placement

within 60 days from If Co. does not allot If Co. does not repay
the date of receipt of within 60 days within prescribed period
the application money
shall repay the application money to Co. liable to repay that money with
the subscribers within fifteen days interest at the rate of 12% per annum
from the expiry of sixty days from the expiry of the sixtieth day

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