Prospectus and Capital Raising Documents under the Companies Act 2013

Understand Prospectus and Capital Raising Documents

Key rules to remember

Deemed prospectus on allotment for sale (Section 25)

Allotment or agreement to allot with a view to offer for sale to the public → the offer document is a deemed prospectus

Unless the contrary is proved, it is evidence of such a view if the offer for sale is made within six months of the allotment or agreement, or if the whole consideration had not been received by the company when the offer was made.

Extra contents of a deemed prospectus (Section 25(3))

Usual contents + net amount of consideration received or to be received + time and place where the allotment contract may be inspected

Section 26 applies as if the persons making the offer were persons named in a prospectus as directors of a company.

Signing of a deemed prospectus (Section 25(4))

Company or firm making the offer: signed by two directors, or by not less than one-half of the partners

Applies where the person making the offer is a company or a firm.

Offer for sale by members (Section 28)

Members offer shares in consultation with the Board → the offer document is deemed a prospectus issued by the company

The members must collectively authorise the company to act for them and must reimburse its expenses.

Red herring prospectus (Section 32)

File with Registrar at least three days before the subscription list and offer open

It has the same obligations as a prospectus. Variations must be highlighted in the final prospectus. On closing, the prospectus stating total capital raised, closing price and other missing details is filed with the Registrar and SEBI.

Shelf prospectus (Section 31)

Validity: period not exceeding one year, starting from the opening of the first offer

Filed with the Registrar at the first offer. No further prospectus is needed for second or later offers within the validity period.

Information memorandum (Section 31(2))

File before each second or later offer: new charges, changes in financial position and other prescribed changes

The memorandum with the shelf prospectus is deemed a prospectus. If applicants paid before a change, tell them. If they want to withdraw, refund within fifteen days.

Advertisement of prospectus (Section 30)

Advertisement must specify objects, liability of members, share capital, signatories with shares subscribed, and capital structure

Applies whenever an advertisement of a prospectus is published in any manner.

Inspection of prospectus documents (Section 399(1) proviso)

Documents delivered to the Registrar with a prospectus under Section 26: open to inspection only during the fourteen days beginning with the date of publication of the prospectus

At other times, only with the permission of the Central Government.

How to solve Prospectus and Capital Raising Documents questions

1. 1Identify the document type: ordinary prospectus, red herring, shelf, or deemed prospectus.
2. 2Write a one-line definition using the Act's own words, for example 'does not include complete particulars of the quantum or price'.
3. 3State the filing or timing rule with the exact period: three days, one year, fifteen days, six months or fourteen days.
4. 4List the extra duties: information memorandum for a shelf prospectus, highlighting variations for a red herring, extra contents for a deemed prospectus.
5. 5For deemed prospectus problems, test the facts: was there an allotment or agreement to allot, and was the offer within six months, or was the consideration unpaid?
6. 6Apply the rule to the facts in the question, naming the people and amounts given.
7. 7Conclude with a clear one-line answer, and cite the section number only where you are sure of it.

Quickest way: Match the trigger to the document

Common mistakes in Prospectus and Capital Raising Documents

• Saying a shelf prospectus is valid for one year from the date it is filed.

  Students assume validity starts at filing.

  Fix: Validity is a period not exceeding one year, counted from the date of opening of the first offer under it.

• Mixing up the red herring and shelf prospectus.

  Both are 'special' prospectuses and the names sound alike.

  Fix: Red herring is about missing price or quantum, in a single offer. Shelf is about repeated offers without a new prospectus.

• Forgetting the information memorandum for later offers under a shelf prospectus.

  Students stop at 'no further prospectus is required'.

  Fix: Always add that an information memorandum is filed before each second or later offer, and that it is read with the shelf prospectus as a prospectus.

• Treating the six-month rule in Section 25 as a fixed conclusion.

  The word 'evidence' is overlooked.

  Fix: Write that it is evidence of a view to sell to the public 'unless the contrary is proved'. The presumption can be rebutted.

• Writing that red herring prospectus is filed three days after the offer opens.

  Direction of the time period is misread.

  Fix: It is filed at least three days before the opening of the subscription list and the offer.

• Treating a deemed prospectus as a different document with lighter liability.

  The word 'deemed' suggests something less than a prospectus.

  Fix: The offer document is a prospectus for all purposes. Contents and misstatement liability rules apply fully, with the Section 25 modifications.

Worked examples