Business Laws · The Companies Act, 2013

Prospectus and Raising of Capital: CA Foundation Business Laws

Updated 4 October 2026 · Fact-checked

A prospectus is the document a company uses to invite the public to buy its securities. You solve questions by naming the provision, applying it to the facts, and concluding. Know shelf and red herring prospectus, civil and criminal liability for misstatement (Sections 34, 35), and allotment conditions (Section 39).

Understand Prospectus and Raising of Capital

A company needs money to run and grow. One way is to invite the public to subscribe to its shares or debentures. Because the public cannot see inside the company, the law forces the company to disclose the facts in one document. That document is the prospectus.

The Act also protects investors against false information. If a prospectus is misleading, the company and certain people connected with it can face civil liability (pay compensation) and criminal liability (punishment under Section 447). The idea is simple: those who make the invitation must stand behind what it says.

There are special forms. A shelf prospectus lets a company make one or more issues over a period without issuing a fresh prospectus each time. A red herring prospectus is issued before the final prospectus and leaves out complete details of quantity or price. Both carry the same obligations as a prospectus.

An offer for sale by existing shareholders is also treated as a prospectus. If a company allots securities to someone who then sells them to the public, the document used for that sale is deemed a prospectus (Section 25). Members who offer their shares to the public under Section 28 are covered the same way.

Finally, the law controls allotment. A company cannot allot securities offered to the public until the minimum subscription stated in the prospectus has been received. This protects investors from money being locked into an under-funded venture.

Key rules to remember

Red herring prospectus (Section 32): Prospectus without complete particulars of quantum or price; filed with Registrar at least 3 days before the subscription list opens; Same obligations as a prospectus. Variations must be highlighted in the final prospectus. After the offer closes, the final prospectus with total capital raised and closing price is filed with the Registrar and SEBI.
Shelf prospectus (Section 31): Validity: not more than 1 year, starting from the opening of the first offer; Filed at the first offer. No further prospectus for later offers in the validity period. An information memorandum must be filed before a second or later offer.
Information memorandum (Section 31): Shelf prospectus + information memorandum = deemed prospectus; It covers new charges, changes in financial position and other prescribed changes. Applicants who applied with advance payment before a change can withdraw and get a refund within 15 days.
Civil liability (Section 35): Subscriber acted on a misleading prospectus + suffered loss → compensation from the company and listed persons; Listed persons: directors at the time of issue, persons named as directors or agreed to become directors, promoters, persons who authorised the issue, and experts under Section 26(5).
Fraud under Section 35(3): Intent to defraud → listed persons personally responsible without limit of liability; Applies to losses of anyone who subscribed on the basis of that prospectus.
Criminal liability (Section 34): Untrue or misleading statement, or misleading omission → every person who authorises the issue is liable under Section 447; Defence: statement or omission was immaterial, or he had reasonable grounds to believe, and until issue did believe, it was true or that the inclusion or omission was necessary.
Allotment conditions (Section 39): Minimum subscription received + application money received before allotment; application money not less than 5% of nominal value (or SEBI-specified); If the minimum is not received within 30 days of the prospectus issue (or SEBI-specified period), the money is returned in the prescribed manner. A return of allotment must be filed with the Registrar.
Penalty (Section 39(5)): ₹1,000 per day of default or ₹1,00,000, whichever is less; Applies to default in refunding money under 39(3) or filing the return under 39(4). Company and every officer in default are liable.
Advertisement of prospectus (Section 30): Must state objects, liability of members, share capital, signatories to the memorandum with shares subscribed, and capital structure; Applies whenever a prospectus advertisement is published in any manner.

How to solve Prospectus and Raising of Capital questions

Use this method for any theory or case question on prospectus and capital raising. It gives you the provision-facts-conclusion structure that earns marks.

1Read the question and decide the issue: type of prospectus, liability for misstatement, or allotment.
2Define the key term in one line, for example what a shelf or red herring prospectus is.
3State the rule with its exact conditions, such as time limits, percentages and who is covered.
4List the facts that matter: who signed or authorised, what was false, who lost money, how much was collected.
5Check for defences or exceptions, such as withdrawal of consent, lack of knowledge, or immaterial statements.
6Apply the rule to the facts in two or three sentences.
7Write a clear conclusion that answers exactly what was asked (liable or not, valid or not, refund or not).
8Give the section number only if you are sure of it.

Quickest way: Three-line answer: Rule, Facts, Conclusion

When to use it: Use when time is short or the question carries few marks. It still shows the examiner your reasoning.

Line 1: Write the rule with its section and key condition.
Line 2: Match two or three facts from the question to that condition.
Line 3: Write the conclusion in one sentence.
For liability questions, first ask: was the statement misleading, did someone subscribe on it, and did they lose money? Then check who is in the listed persons.
For allotment questions, check minimum subscription and application money first. If missing, the answer is no allotment and a refund.

Common mistakes in Prospectus and Raising of Capital

Saying only the company is liable for a misleading prospectus.
Students focus on the company as the issuer.
Fix: Remember Section 35 also covers directors, promoters, persons who authorised the issue and experts, as listed.
Mixing up civil and criminal liability.
Both arise from the same misleading statement.
Fix: Civil (Section 35) means compensation to subscribers who lost money. Criminal (Section 34) means punishment under Section 447 for those who authorise the issue.
Calling a red herring prospectus a draft with no legal force.
The name suggests it is only preliminary.
Fix: It carries the same obligations as a prospectus. It just lacks full particulars of quantum or price.
Stating the shelf prospectus validity as one year from filing.
Students remember 'one year' but not the starting point.
Fix: The period is not more than one year and starts from the date of opening of the first offer.
Ignoring the minimum subscription before allotment.
Students jump to the allotment return and penalty.
Fix: First check that the stated minimum amount has been subscribed and application money received. Otherwise refund the money.
Forgetting the defences available to directors and others.
Notes often list liability but skip exceptions.
Fix: Learn the defences: withdrew consent before issue, issued without knowledge or consent with reasonable public notice, and for Section 34, immaterial statement or reasonable belief in its truth.

Worked examples

Example 1

Alpha Ltd issued a prospectus stating that its new plant had already been approved by the authorities. This was false. Ravi subscribed to shares relying on this statement and lost money. Advise Ravi on his rights and against whom.

Show the solution

Rule: Under Section 35, a person who subscribed on a misleading statement in a prospectus and suffered loss can claim compensation.
Facts: The statement about approval was false. Ravi subscribed because of it and incurred a loss.
Who is liable: the company and every person who was a director at the time of issue, was named as a director, is a promoter, authorised the issue of the prospectus, or is an expert under Section 26(5).
Criminal side: every person who authorised the issue may also be liable under Section 447 per Section 34, unless he proves the statement was immaterial or he reasonably believed it to be true.
Fraud: if the prospectus was issued with intent to defraud, those persons are personally responsible without limit of liability under Section 35(3).

Answer: Ravi can claim compensation under Section 35 from Alpha Ltd and the directors, promoters and others who authorised the prospectus. Those who authorised it may also face criminal liability under Section 34, subject to the stated defences.

Example 2

Beta Ltd offered shares to the public. The prospectus stated a minimum subscription. Thirty days after the issue of the prospectus, the minimum amount had not been received. Beta Ltd wants to allot shares to those who applied. Can it do so? What if it fails to return the money?

Show the solution

Rule: Under Section 39(1), no allotment of securities offered to the public can be made unless the minimum amount stated in the prospectus has been subscribed and the application money has been received.
Facts: The minimum amount was not received within 30 days of the issue of the prospectus.
Under Section 39(3), if the minimum is not subscribed and the application money not received within 30 days (or such other period as SEBI specifies), the amount received must be returned in the prescribed time and manner.
Conclusion on allotment: Beta Ltd cannot allot the shares.
Default: under Section 39(5), the company and each officer in default are liable to a penalty of ₹1,000 for each day of default or ₹1,00,000, whichever is less.

Answer: Beta Ltd cannot allot the shares. It must return the application money in the prescribed manner. If it fails, the company and officers in default face a penalty of ₹1,000 per day or ₹1,00,000, whichever is less.

Exam tips

Write the section number only when sure. A correct rule without a number still earns marks.
Learn the definitions of shelf and red herring prospectus almost word for word. They are common short-note questions.
In liability cases, list the persons under Section 35 and then state the defences. Both parts earn marks.
Use the provision-facts-conclusion order and end with a clear verdict.
Memorise the numbers: 3 days (red herring filing), 1 year (shelf validity), 15 days (refund on withdrawal), 5% (application money), 30 days (minimum subscription).

Practice questions from The Companies Act, 2013

Prospectus and Raising of Capital: frequently asked questions

What is a prospectus under the Companies Act, 2013?

It is the document through which a company invites the public to subscribe to its securities. It must disclose the facts an investor needs. An offer for sale to the public is also deemed a prospectus under Sections 25 and 28.

What is the difference between a shelf prospectus and a red herring prospectus?

A shelf prospectus covers one or more issues over a period of up to one year without a fresh prospectus each time. A red herring prospectus is issued before the final prospectus and lacks complete particulars of quantum or price. Both carry the same obligations as a prospectus.

Who is liable for a misleading prospectus?

Under Section 35, the company and directors at the time of issue, persons named as directors, promoters, persons who authorised the issue and experts are liable to pay compensation. Under Section 34, persons who authorise the issue face criminal liability. Each has defences if they prove the conditions given in the Act.

When can a company allot securities offered to the public?

Only after the minimum amount stated in the prospectus has been subscribed and the application money has been received. Application money cannot be less than 5% of the nominal value unless SEBI specifies otherwise. If the minimum is not met within 30 days, the money must be returned.