CA Intermediate · Corporate and Other Laws
Prospectus and Allotment of Securities: CA Intermediate Study Guide
This chapter covers how a company raises money from investors under the Companies Act, 2013: through a prospectus (public offer), private placement, rights or bonus issue. To solve questions, identify the mode of issue, apply the rule with its exact condition, state the facts, then conclude with the liability or consequence.
What this chapter covers
This chapter explains how a company issues securities. A public company can go to the public through a prospectus, use private placement, or issue rights or bonus shares. A private company can use rights, bonus or private placement. Section 23 sets out these routes, and the rest of the chapter explains the rules for each.
You will study the prospectus first: its meaning, types and contents, and the liability for a misstatement in it. Then you move to private placement under section 42, allotment and the return of allotment, and the treatment of share premium (section 52), discount and sweat equity. The chapter ends with preference shares, bonus shares and rights issues.
This chapter connects to the rest of Paper 2. It builds on incorporation and share capital, and it leads into topics like debentures, charges and the powers of the Board. Many scenario questions mix these topics, so a clear grasp here helps across Part I of the paper. Remember the paper has 30 marks of MCQs and 70 marks of written answers, and this chapter can feed both.
This chapter is rule-heavy, and rules with numbers and conditions are easy to turn into MCQs and short case-style answers. Examples are the limit on identified persons in private placement, the sixty-day allotment period and the fifteen-day return of allotment. Once you learn the provision, the conditions and the consequence, you can write full answers in the provision-facts-conclusion format and earn step marks. The chapter is also compact, so the effort you put in gives a good return on marks.
Prospectus and Allotment of Securities: topics in the order to study them
- 1Prospectus: Meaning, Types and ContentsStart here because the prospectus is the base document for every public offer, and later topics refer to it.
- 2Misstatement in Prospectus and LiabilitiesStudy it next, while the contents are fresh, since liability arises from what the prospectus says or leaves out.
- 3Public Offer, Issue of Securities and Private PlacementNow compare the routes in section 23 and learn the section 42 rules for private placement against the public offer.
- 4Allotment of Securities and Return of AllotmentAllotment follows the offer, so learn the timelines, the use of application money and the filing of the return after the offer rules.
- 5Issue of Shares at Premium, Discount and Sweat EquityThese are pricing variations on an issue, and section 52 on the securities premium account fits here once the basic issue is clear.
- 6Preference Shares, Bonus Shares and Rights IssueFinish with these special kinds of issue, which reuse earlier ideas such as the securities premium account and the routes in section 23.
How to prepare Prospectus and Allotment of Securities
Treat this chapter as a set of rules with conditions. Learn each rule in plain words, attach its number or time limit, and practise writing it in the provision-facts-conclusion format.
- Read section 23 first and draw a small chart of which route (public offer, private placement, rights, bonus) a public company and a private company can use.
- Learn the prospectus contents and the types in your own words, then test yourself without notes.
- For misstatement, list who can be liable and for what, and practise applying it to a short fact pattern.
- Study section 42 line by line. Note the cap on identified persons, no cash for subscription, no right of renunciation, no public advertisement, the sixty-day and fifteen-day limits, and the return within fifteen days.
- Learn section 52: when premium goes to the securities premium account and the purposes for which it can be applied.
- Solve past questions and ICAI practice questions for each topic. Write the provision, the facts and the conclusion, even for short answers.
- Attempt MCQs on the chapter in timed sets. There is no negative marking, so always mark an answer.
Common mistakes in Prospectus and Allotment of Securities
Mixing up what a public company and a private company can do under section 23.
Fix: Remember that only a public company can make a public offer through a prospectus.
Treating the private placement limit as a fixed number without its conditions.
Fix: Write the limit with all its conditions: identified persons, per financial year, excluding qualified institutional buyers and ESOP employees.
Confusing the time limits for allotment, refund and return of allotment.
Fix: Draw a timeline: sixty days to allot, then fifteen days to repay, with interest from the sixtieth day. Keep the fifteen-day return of allotment separate.
Writing answers on liability without applying the facts.
Fix: Use provision, facts, conclusion. Quote the rule, pick out the key facts, then give a clear conclusion.
Saying the securities premium account can be used for any purpose.
Fix: Learn the list of permitted uses in section 52(2) and use only those in your answer.
Skipping the MCQs because the chapter looks theoretical.
Fix: Practise MCQs on numbers and conditions. They carry 30 marks across the paper with no negative marking, so attempt every one.
Last-day revision: Prospectus and Allotment of Securities
- 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.
Prospectus and Allotment of Securities practice questions
- Meridian Infra Ltd, an unlisted public company, makes a private placement offer. The offer is made to 210 persons in a financial year, exclu…
- Neelkanth Infra Ltd, a public company, issues a prospectus on 1 June. Before the issue closes, it discovers that a material fact in the offe…
- Meridian Textiles Ltd. issued a prospectus. Rakesh subscribed to shares relying on a statement in it that the company held a valid export li…
- Orchid Foods Ltd, an unlisted public company, allotted shares to 50 identified persons by private placement. The company received the applic…
- Lotus Retail Ltd. allotted shares to Vivek, whose application was made in a name that was fictitious, with the intention of obtaining shares…
- Orchid Beverages Ltd, a public company, issued a prospectus and made allotment. Mr. Dev, an applicant, wants to know the effect of the allot…
- Kaveri Textiles Ltd, a public company, opened its public issue and received applications. The prospectus stated that shares would be listed …
- Meridian Infra Ltd issued a prospectus inviting subscriptions. A statement in it about the company's order book was untrue, and Rohan subscr…
Prospectus and Allotment of Securities 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 Allotment of Securities: frequently asked questions
Is Prospectus and Allotment of Securities important for CA Intermediate Paper 2?
Yes. It is a core chapter in Part I (Company Law) and its rules suit both MCQs and written answers. Learn the conditions and time limits carefully.
What is the maximum number of persons in a private placement?
Under section 42(2), a private placement is made to identified persons whose number must not exceed fifty or such higher number as may be prescribed, in a financial year. Qualified institutional buyers and employees under an ESOP scheme are excluded from the count.
What happens if a company cannot allot securities within sixty days in a private placement?
It must repay the application money within fifteen days from the expiry of sixty days. If it fails to do so, it must repay with interest at twelve per cent per annum from the expiry of the sixtieth day.
Can a private company issue a prospectus to the public?
No. Under section 23, a private company can issue securities only by rights issue, bonus issue or private placement. The public offer route through a prospectus is for public companies.
How should I write a case-based answer in this chapter?
Use the provision-facts-conclusion format. State the rule and its condition, apply the facts from the question, and end with a clear conclusion on the outcome or liability.