Prospectus and Allotment of Securities: formula sheet

Key formulas

Definition: prospectus, Section 2(70)

Prospectus = document described or issued as a prospectus + red herring prospectus + shelf prospectus + any notice, circular, advertisement or other document inviting offers from the public for subscription or purchase of securities of a body corporate

The test is the invitation to the public, not the heading on the document.

Abridged prospectus, Sections 2(1) and 33(1)

Abridged prospectus = memorandum containing salient features of a prospectus, as specified by SEBI by regulations; every application form must be accompanied by it (Section 33(1))

It is a short form. It does not replace the full prospectus.

Deemed prospectus, Section 25

Document offering securities for sale to the public, issued by a person (such as an issuing house) to whom the company allotted or agreed to allot them with a view to the offer = deemed prospectus issued by the company

Conclude that it is deemed a prospectus issued by the company, so prospectus rules and liabilities apply. Under Section 25(2), an offer within six months of allotment is presumed to be made with a view to a public offer.

Shelf prospectus, Section 31

One prospectus filed once, valid for issue of securities in one or more issues (tranches) over a period

Used by classes of companies as permitted. Avoids a new prospectus for each tranche. An information memorandum goes with it for later tranches.

Red herring prospectus, Section 32

Prospectus without complete particulars of price of securities offered and the quantum or number of securities

Used for book-built issues. Final particulars are filed later with the Registrar.

Prospectus contents, Section 26

Prospectus must state the specified matters and reports, be dated, be signed by directors, and be registered with the Registrar before issue

Apply the facts to the heads of disclosure, not to a memorised list of numbers.

Section 34: criminal liability

Untrue or misleading statement (or misleading inclusion/omission) in prospectus → every person who authorises the issue is liable under Section 447

Defence: he proves the statement or omission was immaterial, or he had reasonable grounds to believe, and did believe up to the time of issue, that the statement was true or the inclusion or omission was necessary.

Section 35(1): who pays compensation

Company + director at time of issue + person who has authorised himself to be named and is named in the prospectus as a director, or has agreed to become a director + promoter + person who authorised the issue + expert under Section 26(5)

Pays compensation to every person who subscribed acting on the misleading prospectus and sustained loss or damage. This is without prejudice to punishment under Section 36.

Section 35(2): defences

(a) withdrew consent as director before issue, and prospectus issued without his authority or consent; (b) issued without his knowledge or consent, and on becoming aware he forthwith gave reasonable public notice; (c) expert's statement fairly and correctly represented, and he reasonably believed the expert was competent and had consented

For (c), he must also have believed up to the time of issue that the expert had given consent under Section 26(5) and had not withdrawn it before filing a copy of the prospectus with the Registrar or, to his knowledge, before allotment.

Section 35(3): fraud

Prospectus issued with intent to defraud or for any fraudulent purpose → every person in Section 35(1) is personally responsible without any limitation of liability

Applies to losses of anyone who subscribed on the basis of the prospectus.

Section 36: fraudulent inducement

Knowingly or recklessly making a false, deceptive or misleading statement, promise or forecast, or deliberately concealing material facts, to induce another to enter an agreement → liable for action under Section 447

Covers agreements to acquire, dispose of, subscribe for or underwrite securities; agreements to secure profit from yield of or fluctuations in securities; and agreements to obtain credit facilities from a bank or financial institution.

Modes of issue by a public company (Section 23(1))

Public offer by prospectus | Private placement | Rights issue | Bonus issue

A listed company, or one intending to list, must also follow SEBI law for rights and bonus issues.

Modes of issue by a private company (Section 23(2))

Rights issue or bonus issue | Private placement

No public offer is allowed.

Number of persons in private placement (Section 42(2))

Identified persons ≤ 50 (or higher number prescribed) in a financial year

Qualified institutional buyers and employees under an ESOP under Section 62(1)(b) are excluded from the count.

Breach of Section 42(2) (Section 42(11))

Private placement not complying with Section 42(2) = deemed public offer

Then all the provisions of the Companies Act, the SCRA 1956 and the SEBI Act apply.

Offer to more than the prescribed number of persons (Explanation III to Section 42)

Offer, invitation or allotment to more than the prescribed number of persons = deemed offer to the public

It is governed by Part I of Chapter III (the prospectus provisions). This applies whether or not payment is received and whether or not the company intends to list.

Rights offer period (Section 62(1)(a)(i))

Not less than 15 days (or lesser prescribed number) and not more than 30 days

Counted from the date of the offer. If not accepted within the time, the offer is deemed declined.

Notice of rights issue (Section 62(2))

Dispatch at least 3 days before the issue opens

Mode must have proof of delivery, such as registered post, speed post, electronic mode or courier.

Allotment and refund (Section 42(6))

Allot within 60 days of receiving application money; else refund within 15 days after those 60 days

If refund is late, interest at 12% per annum runs from the 60th day.

Return of allotment (Section 42(8))

File with Registrar within 15 days of allotment

It must include a complete list of allottees with full names, addresses and number of securities.

Penalty for late return (Section 42(9))

₹1,000 per day of default, maximum ₹25 lakh

Liable: the company, its promoters and directors.

Penalty for contravention (Section 42(10))

Lower of amount raised or ₹2 crore

The company also refunds all monies with interest within 30 days of the penalty order.

Minimum subscription (Section 39(1))

Allotment allowed only if: amount subscribed ≥ minimum amount stated in prospectus AND application sums for it received

Applies to securities offered to the public for subscription. Payment must be received by cheque or other instrument.

Minimum application money (Section 39(2))

Application money per security ≥ 5% of nominal amount

Or such other percentage or amount as SEBI specifies by regulations. Example: nominal ₹10 means at least ₹0.50 on application.

Time limit for minimum subscription (Section 39(3))

Minimum amount subscribed and application money received within 30 days from the date of issue of prospectus

Or such other period as SEBI specifies. The 30 days is the time to reach the minimum, not a refund period. If the minimum is not met within it, the amount received is returned in the time and manner prescribed.

Return of allotment (Section 39(4))

Whenever a company having share capital allots securities, it must file a return of allotment with the Registrar in the manner prescribed

Section 39(4) requires filing in the prescribed manner. It gives no number of days or form name, so take any period or form from the Rules and say so if you cite it.

Penalty for default (Section 39(5))

₹1,000 per day of default, or ₹1,00,000, whichever is less

Applies to default under sub-section (3) or (4). Liable: the company and every officer in default, for each default.

Stock exchange permission (Section 40(1))

Apply to one or more recognised stock exchanges BEFORE making the public offer

The prospectus must name the exchange(s) if it states that an application has been made (Section 40(2)).

Application money account (Section 40(3))

Separate bank account in a scheduled bank

Use only for adjustment against allotment (where permission to deal is granted) or for repayment where the company is unable to allot.

Penalty under Section 40(5)

Company: fine ₹5,00,000 to ₹50,00,000. Officer in default: fine ₹50,000 to ₹3,00,000

Imprisonment for officers was removed with effect from 21-12-2020.

Securities premium credit

Securities premium = (Issue price − Face value) × Number of shares

Section 52(1) requires the premium actually received to be transferred to the securities premium account. Count only what has been received, so a premium due on a call not yet made is not yet credited.

Uses of securities premium, section 52(2)

Bonus shares | Preliminary expenses | Expenses, commission or discount on issue of shares or debentures | Premium on redemption of redeemable preference shares or debentures | Buy-back under section 68

Five permitted uses. Paying dividend is not in the list, so it is not allowed.

Section 52(3) additional uses for prescribed companies

Bonus equity shares | Expenses, commission or discount on issue of equity shares | Buy-back under section 68

An additional route, notwithstanding section 52(1) and 52(2), for prescribed classes whose financial statements comply with the accounting standards under section 133. It does not withdraw the section 52(2) uses. Notice that it speaks of equity shares.

Sweat equity conditions, section 54(1)

Special resolution + resolution specifies number of shares, current market price, consideration and class of directors or employees + class of shares already issued + SEBI regulations if listed, prescribed rules if not listed

The requirement of a class of shares already issued is in the opening words of section 54(1). Clause (c) of section 54(1) was omitted w.e.f. 7-5-2018. Quote only the conditions in the current text.

Rank of sweat equity

Sweat equity holders rank pari passu with other equity shareholders

Section 54(2). The rights and restrictions applicable to equity shares apply to them.

Redemption period of preference shares

Maximum period = 20 years from date of issue

Applies if the articles authorise it. Infrastructure projects (Schedule VI) can exceed 20 years under the first proviso, with a prescribed percentage redeemed annually at the shareholders' option. Irredeemable preference shares cannot be issued.

Conditions for redemption (second proviso, 'Provided further', to Section 55(2), clauses (a) and (b))

Redeem only (a) out of profits available for dividend OR out of proceeds of a fresh issue made for redemption, AND (b) only if fully paid

Partly paid shares cannot be redeemed, and redemption from any source other than distributable profits or a fresh issue is barred. Clauses (a) to (d) all sit in the second proviso. The first proviso is only about infrastructure projects.

Capital Redemption Reserve (CRR) (second proviso to Section 55(2), clause (c))

CRR transfer = nominal value of shares redeemed out of profits

If shares are redeemed out of a fresh issue, no CRR is needed. Reduction-of-capital provisions apply to CRR as if it were paid-up capital, except as the section provides.

Premium on redemption (second proviso, 'Provided further', to Section 55(2), clause (d))

Prescribed class (financial statements comply with Section 133 accounting standards): premium provided out of profits, before redemption [clause (d)(i)]. Other companies: premium provided out of profits or the securities premium account, before redemption [clause (d)(ii); Section 52(2)(d)]. Exception (the 'Provided also' proviso, which sits under clause (d)(i)): for preference shares issued on or before the commencement of the Act, even a prescribed-class company may provide the premium out of profits or the securities premium account.

The premium must be provided for before the shares are redeemed. For preference shares issued after commencement, the securities premium account is available for this purpose only to companies outside the prescribed class. The 'Provided also' proviso sits under clause (d)(i) and covers only shares issued on or before commencement.

Unredeemed preference shares (Section 55(3))

Consent of holders of three-fourths in value + Tribunal approval → issue further redeemable preference shares for the amount due including dividend

The Tribunal orders immediate redemption of shares held by non-consenting holders. This is not treated as an increase or reduction of share capital.

Sources for bonus shares (Section 63(1))

Free reserves | Securities premium account | Capital redemption reserve account

No capitalisation of revaluation reserve. Bonus shares must be fully paid and cannot be issued in lieu of dividend.

Conditions for bonus issue (Section 63(2))

Articles authorise + Board recommends and general meeting authorises + no default on fixed deposits/debt securities + no default on employee statutory dues + partly paid shares made fully paid + prescribed conditions met

All conditions must be satisfied together.

Rights offer period (Section 62(1)(a))

Offer open for at least 15 days (or such lesser number of days as may be prescribed) and not more than 30 days

If not accepted within the time, the offer is deemed declined.

Rights offer notice (Section 62(2))

Dispatch at least 3 days before the issue opens, by registered post, speed post, electronic mode, courier or any other mode with proof of delivery

Sent to all existing shareholders.

Other routes for further issue

Employees under ESOP (special resolution) | Any persons by special resolution at a price fixed by a registered valuer's report

These are alternatives to a rights offer under Section 62(1)(b) and (c).

Quick revision

• Section 23: a public company may issue securities by public offer, private placement, rights issue or bonus issue.
• Section 23: a private company may use rights issue, bonus issue or private placement, not a public offer.
• Private placement goes only to identified persons, not exceeding fifty or such higher number as prescribed, excluding qualified institutional buyers and employees under an ESOP scheme, in a financial year.
• A private placement offer and application cannot carry any right of renunciation.
• Subscription money for private placement must come by cheque, demand draft or other banking channel, not cash.
• Allot within sixty days of receiving application money, else repay within fifteen days after the sixty days, or pay interest at 12% per annum from the sixtieth day.
• Return of allotment under section 42 must be filed with the Registrar within fifteen days of allotment.
• A private placement that breaches the identified persons limit is deemed a public offer.
• No public advertisement or media channel may be used for a private placement.
• Section 52: premium received on shares goes to the securities premium account, and its use is limited to the listed purposes.
• The securities premium account can be used for fully paid bonus shares, preliminary expenses, issue expenses, commission or discount, premium on redemption and buy-back under section 68.
• Always write the answer as provision, facts, conclusion.

Common mistakes

• Saying a prospectus is only a document titled 'Prospectus'. Fix: Quote Section 2(70): it includes any notice, circular, advertisement or other document inviting offers from the public.
• Mixing up shelf and red herring prospectus. Fix: Shelf is about timing: one prospectus for many tranches. Red herring is about missing information: price and quantity not fixed.
• Treating Section 34 and Section 35 as the same liability. Fix: Remember: Section 34 is criminal and operates through Section 447; Section 35 is civil and gives compensation to subscribers.
• Giving compensation to anyone who read the prospectus. Fix: Check three facts: subscribed, relied on the misleading statement, suffered loss.
• Saying a private company can make a public offer or issue through a prospectus. Fix: Remember Section 23(2): a private company has only rights or bonus issue and private placement.
• Counting QIBs and ESOP employees within the 50-person limit. Fix: Write the limit as 50 (or the prescribed higher number) excluding QIBs and employees under an ESOP, per financial year.
• Applying Section 42 numbers (60 days, 15 days, fifty persons) to a public issue. Fix: Link Section 39 to public offers through a prospectus and Section 42 to private placement. Section 39 uses 30 days from the issue of the prospectus for reaching the minimum subscription.
• Saying minimum subscription is 90% of the issue. Fix: Section 39(1) requires the minimum amount stated in the prospectus to be subscribed. The Act contains no fixed 90% figure. Write it that way.
• Saying a company can never issue shares at a discount, with no mention of sweat equity. Fix: Write the rule as: the Act bars issue at a discount (section 53), but section 54 operates notwithstanding section 53, and the Act's definition describes sweat equity shares as shares issued at a discount or for consideration other than cash.
• Confusing section 52(2)(c), which allows writing off discount on an issue of shares, with permission to issue shares at a discount. Fix: Treat section 52(2)(c) as a use of the securities premium account for expenses, commission or discount already allowed on an issue. It does not permit a discounted share issue.

Exam tips

• Start every theory answer by quoting the Section 2(70) wording. It scores the definition mark immediately.
• For difference questions, give three points in a clear two-column style in plain lines: meaning, purpose, content or timing.
• In MCQs, look for the trigger word: tranches means shelf, price not stated means red herring, salient features means abridged.
• Do not over-quote section numbers. Use 2(70), 2(1), 25, 26, 31, 32 and 33(1), which you know well, and skip the rest.
• In case questions, always end with a one-line conclusion naming the document type.
• Write the section number with the rule: Section 34 for criminal liability, Section 35 for civil liability, Section 36 for fraudulent inducement.
• Always hunt for the defence hidden in the facts: consent withdrawn, issue without knowledge, public notice, expert correctly quoted, or reasonable belief.
• In case-study answers, assess each person separately: company, director, promoter, expert, person who authorised the issue.