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Chapter 3 : Prospectus and Allotment of Securities

Overview

  • This chapter outlines the provisions for issuing a prospectus and allotment of securities under the Companies Act, 2013.
  • It contains guidelines on public and private placements, the meaning of a prospectus, and the legal implications of their issues.
  • The chapter also discusses criminal and civil liabilities concerning misstatements in the prospectus and outlines procedures for allotting securities.

Key Topics

Definition and Types of Prospectus

  • A prospectus is defined as any document described or issued as a prospectus, including red herring and shelf prospectuses.
  • Types of prospectus include: 1) Deemed Prospectus, 2) Abridged Prospectus, 3) Shelf Prospectus, 4) Red Herring Prospectus.
  • Each type has specific regulations governing its issuance and content.

Deep Dive

  • Red Herring Prospectus does not provide complete details about price and quantity; allows flexibility in pricing during book building.
  • Shelf Prospectus allows multiple issuances over a period without repeated filings, thus streamlining capital raising.

Procedure for Issuing a Prospectus

  • A public company can issue securities through a public offer or private placement, complying with specified sections of the Act.
  • In public offers, advertisements must be in place to protect investors from fraud.
  • Minimum Subscription and Application amounts must be specified.

Deep Dive

  • Application for shares must be submitted along with the required subscription amount (minimum 5%).
  • Failed applications result in 15-day refund obligations upon closing the issue.

Civil and Criminal Liabilities

  • Liabilities arise from fraudulent misstatements or omissions in the prospectus leading to legal repercussions under sections 34 and 35.
  • Civil liabilities include compensation for losses due to misleading statements; criminal liability can involve penalties or imprisonment.

Deep Dive

  • ‘Untrue’ statements could lead to serious consequences, including personal liability for directors involved in issuing misleading prospectuses.
  • Judgments like Rex v. Kylsant highlight the importance of complete transparency in prospectuses.

Allotment of Securities and Compliance Procedures

  • Securities allotment is defined as accepting the offer for subscription, requiring compliance with the Companies Act provisions and prior approvals.

Deep Dive

  • Allotments must adhere to minimum subscription requirements, and failure can result in illegal allotments and associated penalties.
  • Return of allotment must be filed within 30 days after allotment, detailing allottees’ information.

Private Placement Regulations

  • Private placement consists of offering securities to select individuals (maximum 200 in a financial year).
  • Companies need to pass special resolutions before issuing private placements.

Deep Dive

  • Non-compliance with private placement rules deems the offer a public issue, subjecting it to stricter regulations.
  • Both public and private companies can make private placements, with defined thresholds for qualified institutional buyers.

SEBI and Regulatory Bodies’ Roles

  • SEBI regulates matters pertaining to listed companies and those intending to get listed, ensuring compliance with securities law.
  • The Central Government oversees unlisted companies in relation to securities.

Deep Dive

  • Understanding the roles of regulatory bodies is crucial for proper corporate governance and compliance with securities law.
  • Companies must adapt to changing regulations from SEBI that affect capital-raising processes.

Advertisements and Communication of Securities Offer

  • All advertisements related to prospectus must comply with specified requirements, outlining key aspects of the company’s formation and share capital.

Deep Dive

  • Communication must adequately inform prospective investors regarding the company’s financials and share structure.
  • Failure to comply results in legal repercussions and can impact investor confidence.

Deemed Prospectus and Legal Implications

  • Deemed prospectus refers to documents inviting offers that implicitly act as a prospectus, gaining legal scrutiny.

Deep Dive

  • The law aims to protect investors by requiring disclosures even in deemed prospectuses.
  • Court cases have underscored the importance of full disclosures and the risks associated with misleading information.

Punishments and Penalties for Compliance Failures

  • Specific penalties are outlined for various offences regarding prospectus issuance and allotment processes.

Deep Dive

  • Fines and/ or imprisonment can arise from fraudulent practices; thus, strict compliance is essential for all stakeholders involved.
  • Legal cases often illustrate enforcement, urging companies to adopt best practices in prospectus management.

Summary

The chapter on Prospectus and Allotment of Securities provides a thorough overview of issuing securities in compliance with the Companies Act, 2013. It emphasizes the definition and types of prospectus, the procedural aspects for their issuance, and the associated civil and criminal liabilities for misstatements in prospectuses. The text highlights the distinction between public offers and private placements, outlining necessary compliance procedures and penalties for violations. Key regulatory roles of SEBI and the MAC are stressed. Furthermore, it advocates for greater transparency and regulatory adherence to protect investor interests.