Corporate and Other Laws · Incorporation of Company and Matters Incidental Thereto

Prospectus and Capital Raising Disclosures under the Companies Act

Updated 4 October 2026 · Fact-checked

A **prospectus** is any document described or issued as a prospectus, or any notice, circular or advertisement inviting offers from the public to subscribe for or buy securities. To solve questions, identify the document type, check the required disclosures, then apply the misstatement liability rules and separate a public offer from a private placement.

Understand Prospectus and Capital Raising Disclosures

A company that wants money from the public cannot just ask for it. The public cannot see inside the company, so the law forces the company to disclose the facts in one document. That document is the prospectus.

Section 2(70) defines it widely. It means any document described or issued as a prospectus. It includes a red herring prospectus, a shelf prospectus, and any notice, circular, advertisement or other document inviting offers from the public for subscription or purchase of securities of a body corporate. So the test is the purpose: does the document invite the public? If yes, it is a prospectus, whatever its name.

There are several forms. A red herring prospectus is issued before the price and quantity are fixed, so it lacks complete particulars on those. A shelf prospectus is used by such class or classes of companies as SEBI may specify by regulations (section 31), for a class of securities, so they do not file a fresh prospectus for each tranche. An abridged prospectus is a memorandum of the salient features of a prospectus, as specified by SEBI regulations (section 2(1)). It goes with the application form.

Because investors rely on the prospectus, the law attaches liability to untrue statements. A person who suffers loss can claim compensation (civil liability). A person who knowingly makes a misstatement or hides facts can face punishment as for fraud (criminal liability). Experts who give consent also carry responsibility for their part.

Finally, know the two routes to raise money. A public offer invites the general public and needs a prospectus. A private placement (section 42) is an offer to a select group, within a prescribed limit on the number of persons, made by a private offer letter and not by a prospectus. Public companies are those that are not private companies (section 2(71)), and a private company cannot invite the public to subscribe for its securities (section 2(68)).

Do not confuse two different 200 limits. Section 2(68) limits the members of a private company to 200. Section 42 limits the persons offered in a private placement to 200 in a financial year.

Key rules to remember

Meaning of prospectus: Prospectus = any 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; Section 2(70). The test is that the document invites the public. Name does not matter.
Abridged prospectus: Abridged prospectus = memorandum containing salient features of a prospectus, as specified by SEBI regulations; Section 2(1). It is a summary, not a separate type of offer.
Private company restriction: Private company: restricts share transfer; limits members to 200 (except One Person Company); prohibits invitation to the public; Section 2(68). Joint holders count as one member. Employees and ex-employee members are not counted. This is a limit on members, not the private placement limit.
Red herring prospectus: Red herring = prospectus without complete particulars of price / quantity; filed with Registrar at least 3 days before the opening of the subscription list and the offer; final particulars filed after closing; Section 32 (outside the section 2 text, so verify against the Act and Rules). Used in book-built issues. Remember the three-day gap.
Shelf prospectus: Shelf prospectus = one prospectus for one or more issues of a class of securities over a period, by such class or classes of companies as SEBI may specify by regulations; Section 31. The issuers are those SEBI specifies. Validity is as prescribed.
Validity of prospectus: Prospectus must be issued within 90 days from the date of its registration; Section 26. After 90 days it cannot be issued.
Private placement limit: Private placement offer to not more than 200 persons in a financial year (excluding qualified institutional buyers and employees under ESOP); Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Above this limit the offer is treated as a public offer. Money must come through banking channels. Different from the 200-member limit in section 2(68).
Misstatement liability: Untrue statement or omission in prospectus → civil liability (compensation for loss) + criminal liability (punishable as for fraud); Liable persons include directors, promoters, persons who authorised the issue, and experts for their own statements.

How to solve Prospectus and Capital Raising Disclosures questions

Use this order for any question on prospectus or capital raising. It keeps your answer in the provision, facts, conclusion format.

1Read the facts and find out who is raising money, from whom, and how many persons are approached.
2Decide whether the document invites the public. If yes, it is a prospectus under section 2(70), whatever it is called.
3Identify the type: ordinary, red herring, shelf or abridged. Match it to the clue in the facts (price not fixed, repeated tranches, summary with application form).
4Check the compliance points: contents and disclosures, filing with the Registrar, the 90-day issue window (section 26), and the three-day gap for a red herring (section 32).
5If the question mentions a false or missing statement, identify who is liable: director, promoter, person who authorised the issue, or expert.
6Separate civil liability (compensation to the investor) from criminal liability (punishment as for fraud). Apply the defences if the facts mention them, such as withdrawal of consent or lack of knowledge.
7For public offer versus private placement, count persons offered and check the 200-person limit (section 42) and the mode of offer.
8Write the conclusion in one clear line that answers what was asked.

Quickest way: Three-question filter for MCQs and written answers

When to use it: Use it when you have under four minutes for a 5 or 6 mark question, or about one minute for an MCQ.

Ask 1: Is the public invited? If yes, think prospectus. If the offer is to a select group of up to 200 persons, think private placement.
Ask 2: What is the clue word? Price or quantity missing means red herring. Many tranches by a class of companies specified by SEBI means shelf. Salient features only means abridged.
Ask 3: Is there a false statement? Then name who is liable and say both civil and criminal exposure exist.
In MCQs, remove options that mix up red herring and shelf, or that give a wrong number such as a different limit for persons offered. No negative marking, so always attempt.
In written answers, use three short blocks: provision, application to the facts, conclusion. Give one line to each. Step marks come from naming the rule and applying it.

Common mistakes in Prospectus and Capital Raising Disclosures

Thinking a document is a prospectus only if it is titled prospectus.
Students remember the word but not the definition.
Fix: Quote section 2(70): any notice, circular, advertisement or other document inviting offers from the public is a prospectus.
Mixing up red herring and shelf prospectus.
Both are special types and both sound like exceptions.
Fix: Red herring is about missing price or quantity details. Shelf is about repeated issues of a class of securities by companies of a class SEBI specifies, without a fresh prospectus each time.
Saying only directors are liable for a misstatement.
Students focus on the board.
Fix: Include promoters, persons who authorised the issue, and experts for statements made by them with their consent.
Writing only civil or only criminal liability.
Students remember one limb of the rule.
Fix: State both: compensation for loss to subscribers, and punishment as for fraud where the statement was made knowingly or fraudulently.
Treating a private placement as unlimited, or mixing its 200-person limit with the 200-member limit of a private company.
Students see the same number in two places and merge the rules.
Fix: Section 42: offer to not more than 200 persons in a financial year, excluding qualified institutional buyers and ESOP employees. Beyond it, the offer is a public offer. Section 2(68) separately limits the members of a private company to 200.
Forgetting that private companies cannot invite the public.
Students focus on the prospectus and skip the definition of private company.
Fix: Link to section 2(68): a private company prohibits any invitation to the public. A public offer by it would defeat its status.

Worked examples

Example 1

Delta Ltd, a public company, issued a prospectus stating that its main factory was free of any charge. In fact the factory was mortgaged to a bank. Ravi subscribed to shares on the faith of the prospectus and suffered a loss. Advise Ravi on the liability of the company's directors.

Show the solution

Provision: A prospectus must not contain an untrue statement or omit a material fact. Those responsible face civil and criminal liability.
Facts: The statement that the factory was free of charge is untrue, because it was mortgaged. Ravi relied on the prospectus and lost money.
Civil liability: Ravi can claim compensation for the loss from the directors and from other persons who authorised the issue, such as promoters.
Defences: A director can escape liability if he proves, for example, that he withdrew his consent before the issue, or that he did not know of the untrue statement and had reasonable ground to believe it true.
Criminal liability: If the statement was made knowingly or with intent to deceive, those responsible can be punished as for fraud.
Conclusion in a line: Ravi may recover his loss, and the persons responsible may also face criminal action.

Answer: Ravi can claim compensation from the directors and other persons who authorised the prospectus, subject to their statutory defences. If the false statement was made knowingly, those persons can also be punished as for fraud.

Example 2

Meera Pvt Ltd wants to raise funds by offering equity shares to 250 identified persons in one financial year through a private offer letter. None of them is a qualified institutional buyer or an ESOP employee. Is the plan valid as a private placement?

Show the solution

Provision: Under section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, a private placement can be made to not more than 200 persons in a financial year, excluding qualified institutional buyers and employees under ESOP.
Facts: The company plans to offer to 250 persons, and none falls in the excluded groups.
Application: 250 is more than 200, so the offer crosses the cap.
Consequence: An offer to more than 200 persons becomes a public offer. It cannot be treated as a private placement.
Link to status: A private company prohibits any invitation to the public under section 2(68). So Meera Pvt Ltd cannot make a public offer. Note that this is a separate point from the 200-member limit in section 2(68).
Advice: Reduce the offer to 200 persons or fewer, or convert to a public company and then follow the public offer route with a prospectus.

Answer: No. The offer to 250 persons exceeds the 200-person limit in section 42, so it is not a valid private placement. It becomes a public offer, which a private company cannot make under section 2(68). Meera Pvt Ltd should reduce the offer to 200 persons or convert to a public company.

Exam tips

Always begin a definition answer with section 2(70) and quote the key phrase: inviting offers from the public.
In misstatement questions, list the persons liable and then both limbs of liability. This earns most of the step marks.
Learn the three numbers: 200 persons for private placement (section 42), 3 days for red herring filing (section 32), 90 days for issuing a prospectus from its registration (section 26).
For differences between red herring and shelf prospectus, write a two-column comparison in the answer: purpose, who uses it, key feature.
In MCQs, read the clue word first (price missing, repeated tranches, summary, 200 persons) and match it to the type. Do not confuse the 200 persons offered with the 200 members of a private company.

Practice questions from Incorporation of Company and Matters Incidental Thereto

Prospectus and Capital Raising Disclosures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Prospectus and Capital Raising Disclosures: frequently asked questions

What is a prospectus under section 2(70) of the Companies Act, 2013?

It is any document described or issued as a prospectus. It includes a red herring prospectus, a shelf prospectus and any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of securities of a body corporate.

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

A red herring prospectus does not carry complete particulars of price or quantity and is filed with the Registrar at least three days before the opening of the subscription list and the offer (section 32). A shelf prospectus covers one or more issues of a class of securities over a period, and can be used by such class or classes of companies as SEBI may specify by regulations (section 31).

Who is liable for a misstatement in a prospectus?

Directors, promoters, persons who authorised the issue and experts for their own statements can be liable. Investors who suffered loss can claim compensation, and a knowing misstatement can attract punishment as for fraud. Defences such as withdrawal of consent or lack of knowledge are available on proof.

What is the difference between a private placement and a public offer?

A public offer invites the general public and needs a prospectus. A private placement (section 42) is an offer to a select group, limited to 200 persons in a financial year excluding qualified institutional buyers and ESOP employees, made by a private offer letter. This is different from the 200-member limit for a private company in section 2(68).

Does a private company issue a prospectus?

No. Under section 2(68) a private company prohibits any invitation to the public to subscribe for its securities. It raises money through private placement or from its existing members.