Prospectus and Allotment of Securities
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In 30 seconds
- Chapter III (Sections 23–42) plus the Companies (Prospectus and Allotment of Securities) Rules, 2014 splits into two worlds: public offer (Secs 23–41, mass) and private placement (Sec 42, select group of at most 200).
- A public company can issue via public offer, private placement or rights/bonus; a private company only via rights/bonus or private placement — never a public offer.
- The prospectus family: definition 2(70), deemed (25), contents (26), variation (27), offer for sale (28), demat (29), advertisement (30), shelf (31), red herring (32), abridged (33).
- Mis-statements trigger criminal liability (Sec 34, strict), civil compensation (Sec 35, five defences), fraudulent-inducement and personation charges (36, 38) — all riding on Section 447's three-tier fraud punishment.
- Private placement runs on PAS forms: PAS-4 offer within 30 days of recording the name, allotment within 60 days of application money, PAS-3 return within 15 days — and crossing 200 persons makes it a deemed public offer.
Companies Act, 2013 — Chapter III (Sections 23–42) read with the Companies (Prospectus and Allotment of Securities) Rules, 2014, per the May 2026 syllabus. Section numbers are Companies Act, 2013 unless stated.
How the chapter fits together
The chapter has two themes: a public offer addressed to the mass of investors through a prospectus, and a private placement addressed to a select group of not more than 200. Uberrimae fides — utmost good faith — governs prospectus disclosure. Learn the flow as one pipeline:
- 23–24 modes of issue and regulatory jurisdiction →
- 2(70), 25–33 prospectus and its types (deemed, shelf, red herring, abridged) →
- 34–38 + 447 mis-statement, fraudulent inducement, personation, fraud →
- 39–40 allotment and stock exchange discipline, 41 GDRs →
- 42 private placement — the parallel track with its own forms and penalties.
| Company | Permitted modes of issue (Sec 23) |
|---|---|
| Public company | Public offer · Private placement · Rights/Bonus |
| Private company | Rights/Bonus · Private placement only — no public offer, ever |
Securities [Sec 2(81)]
As per Sec 2(h) of the SCRA, 1956: shares, bonds, debentures, derivatives, government securities and the like — including mortgage-debt certificates and NARCL securities, but excluding ULIPs and combined risk-benefit life-insurance instruments issued by an insurer [Sec 2(9), Insurance Act, 1938] — a classic MCQ trap.
Vocabulary from Section 23: IPO/FPO = the company itself issuing; OFS (offer for sale) = an existing shareholder offering shares, treated as a deemed public offer. Sections 23(3)–(4) add Overseas Direct Listing: notified classes of public companies may list on permitted foreign exchanges (Central Government may exempt them from parts of the Act by notification laid before Parliament).
Section 24 divides jurisdiction: SEBI administers issue and transfer of securities and non-payment of dividend for listed and to-be-listed companies; everything else stays with the Central Government, Tribunal or Registrar. Redemption of preference shares is not SEBI’s domain — a favourite MCQ.
The prospectus family — Sections 2(70), 25–33
Prospectus [Sec 2(70)]
Any document described or issued as a prospectus, and includes a red herring prospectus (Sec 32), a shelf prospectus (Sec 31), and any notice, circular, advertisement or other document inviting offers from the public. Two limbs (means + includes), four constituents — with the deemed prospectus of Sec 25 completing the set.
Deemed prospectus [Sec 25(1)]
A document by which allotted securities are offered for sale to the public. Presumed under 25(2) if (a) the offer to the public comes within 6 months of allotment OR (b) the company had not received full consideration at the date of the offer — either condition suffices, not both. The list is not exhaustive: rights-issue renunciation to more than 50 persons also qualifies (SEBI v Kunnamkulam Paper Mills).
For a deemed prospectus, Section 25(3) demands additional matters (net consideration, place and time for inspection of the contract, directors named) — in addition to, not in substitution of, the Section 26 contents — and 25(4) lets two directors sign it.
Contents and discipline of Section 26:
- 26(1): the prospectus must be dated, signed, carry SEBI-specified information and a declaration of compliance.
- 26(2) exemptions: issue to existing members/debenture holders, and securities uniform with previously issued and quoted securities.
- 26(4) filing: a signed copy goes to the Registrar before issue, signed by every director and proposed director (a duly authorised attorney may sign for one).
- 26(5) expert’s statement: an expert [Sec 2(38): engineer, valuer, CA, CS, Cost Accountant, any certifying authority] may be quoted only if he is not interested in the formation, promotion or management, has given written consent, and has not withdrawn it before the copy is filed.
- 26(8) validity: the prospectus is valid for 90 days from delivery of the copy to the Registrar.
- 26(9) penalty: ₹50,000 to ₹3,00,000 on the company and every person knowingly party to the issue.
Variation of terms (Sec 27): terms of a contract or objects in the prospectus can be varied only by special resolution plus notice in two newspapers (one English, one vernacular). Funds so raised can never be used to buy shares of another listed company — this bar has no exception. Dissenting shareholders get an exit offer per SEBI regulations (27(2)).
Offer of sale by members (Sec 28): the members’ offer document is a deemed prospectus and the company must be reimbursed its expenses. Rule 8 relaxes four requirements: minimum subscription, minimum application value, the Board’s utilisation statement, and information the offeror cannot compile (with justification).
Demat and advertisement: Section 29 makes dematerialised form mandatory for public offers (Depositories Act, 1996), and 29(1A) extends demat holding/transfer to prescribed unlisted companies (2019 insertion). Section 30 requires any advertisement of a prospectus to state the memorandum contents — objects, liability of members, share capital, names of signatories and shares subscribed by them.
| Type | What it is | Key rules and timelines |
|---|---|---|
| Deemed [25] | Allotment document offered for sale to the public | Presumed if offered to public within 6 months of allotment OR full consideration not received — either condition |
| Shelf [31] | One prospectus, multiple issues over a period, no fresh prospectus (SEBI-notified class) | Validity ≤1 year from date of first offer; Information Memorandum (Form PAS-2) filed 1 month before each later offer (Rule 10); applicant withdrawing after an IM change is refunded in 15 days |
| Red herring [32] | Prospectus without complete particulars of price or quantum — the book-building document | Filed at least 3 days before the subscription opens; on closing, final prospectus with total capital and closing price filed with both Registrar and SEBI |
| Abridged [2(1), 33] | Memorandum of salient features (SEBI-specified) | Must accompany every application form; 3 exceptions (bona fide underwriting invitation · securities not offered to the public · offer only to existing members); penalty ₹50,000 per default |
Book building, tied to the red herring prospectus, is price discovery: a price range rather than a fixed price, with the underwriter building the order book.
Mis-statements, fraud and personation — Sections 34–38 and 447
Section 34 — criminal liability. An untrue or misleading statement (or a misleading inclusion/omission) makes every person who authorised the issue punishable under Section 447. Liability is strict — intentional or unintentional is immaterial, and no loss need be shown. The proviso saves a person who proves (a) the statement/omission was immaterial, or (b) he had reasonable ground to believe it true up to the time of issue.
Section 35 — civil liability. The company and specified persons (director, promoter, expert, and those who authorised the issue) must compensate every person who suffers loss. Under 35(3), if intent to defraud is shown, liability is personal and unlimited. The five statutory defences:
- Withdrew consent — became director-designate but withdrew before issue, and the prospectus was issued without his authority/consent.
- Public notice — issue happened without his knowledge or consent, and he gave reasonable public notice of that on becoming aware.
- Expert reliance — statement was an expert’s, made with consent not withdrawn.
- Reasonable belief — reasonable ground to believe, and did believe, the statement true up to allotment.
- Official extract — statement was a correct and fair copy/extract of an official document.
Sections 36–38 complete the criminal net: Section 36 punishes fraudulently inducing persons to invest money or give credit by false, deceptive or misleading statements (u/s 447). Section 37 permits a suit under 34/35/36 by any person, group of persons or association affected. Section 38 punishes personation — applying in a fictitious name or making multiple applications (u/s 447) — and 38(3)–(4) let the court order disgorgement of the gain to the IEPF.
Fraud [Sec 447, Explanation (i)]
Any act, omission, concealment of fact or abuse of position, with intent to deceive, gain undue advantage or injure the interests of the company, its shareholders, creditors or any other person. Wrongful gain or wrongful loss is NOT an essential ingredient — intent is enough. Wrongful gain = unlawful gain of property the gainer is not legally entitled to; wrongful loss is the mirror image.
| Fraud under Sec 447 | Fine | Imprisonment |
|---|---|---|
| Under ₹10 lakh or 1% of turnover, no public interest | Up to ₹50 lakh | Up to 5 years |
| ₹10 lakh / 1% of turnover or more, no public interest | Amount involved up to 3× the amount | 6 months to 10 years |
| Involving public interest | Amount involved up to 3× the amount | 3 to 10 years |
Remedies are alternative, not cumulative: rescission, damages and deceit under the Contract Act on one side, and statutory liability under Sections 34/35 on the other — an allottee picks a lane. Rescission is not available to subsequent purchasers from the market or to subscribers to the Memorandum. Case-law anchors: Nash v Lynde (private communication is not a public issue), Re South of England Natural Gas (an offer to a limited class can still be “public”), Henderson v Lacon / Rex v Kylsant / Smith v Chadwick (the three shades of misleading statement — false, truth hidden, ambiguous), Peek v Gurney (deceit needs a purchase on the basis of the prospectus).
M subscribed for shares on the faith of a misleading prospectus, then sold them on the stock exchange to N. The mis-statement comes to light. Who can sue the company — M, N, or both?
Section 37 allows a class-action suit only by the original affected person, group or association — never a subsequent transferee. Peek v Gurney makes the same point for deceit: the purchase must be made on the basis of the prospectus, and a later stock-exchange purchase does not qualify. Rescission is equally barred for market purchasers.
Answer: Only M. Section 37 relief and the deceit/rescission remedies belong to the original allottee; a subsequent transferee like N has no claim.
Allotment, stock exchange and GDR — Sections 39–41
Allotment is the company’s acceptance of the offer to take shares — an appropriation of previously unappropriated capital. Re-issue of forfeited shares is not allotment. Section 39 disciplines public-offer allotment:
- 39(1) minimum subscription: the amount stated in the prospectus must be received before any allotment (SEBI ICDR Reg 45(1) pegs it at 90% of the issue — extra reading, not core).
- 39(2) application money: at least 5% of the nominal amount (SEBI ICDR: 25% — extra reading).
- 39(3) failure: minimum subscription not received within 30 days of issue of the prospectus → refund; Rule 11 requires the refund within 15 days from closure of the issue, failing which directors/officers repay with 15% p.a. interest.
- 39(4) return of allotment: Form PAS-3 within 30 days (Rule 12).
- 39(5) penalty: ₹1,000 per day of default or ₹1,00,000, whichever is less.
Section 40 adds stock-exchange discipline: every public offer needs a prior application to a recognised stock exchange (40(1)) whose name the prospectus must state (40(2)); application money stays in a separate account with a scheduled bank, usable only for adjustment against allotment or refund (40(3), the source of Rule 11(2)); any condition waiving these requirements is void (40(4)). Default: company ₹5,00,000–₹50,00,000; officer ₹50,000–₹3,00,000 (40(5)). Underwriting commission (40(6), Rule 13) needs authority in the Articles and is capped at 5% of issue price for shares and 2.5% for debentures — or the lower rate the AOA fixes; no commission on securities not offered to the public.
GDR (Sec 41, 2(44)): a depository receipt created by a foreign depository outside India, issued on a special resolution. The holder votes only on conversion into shares; until then the overseas depository votes. Contrast with Overseas Direct Listing under 23(3): GDR routes through a foreign depository bank as intermediary; ODL is direct, with no intermediary.
Private placement — Section 42
Private placement [Explanation I to Sec 42(3)]
An offer or invitation to a select group of identified persons (not a public offer) through Form PAS-4. The statute says 50 persons, but Rule 14(2) governs at 200 per financial year — QIBs and ESOP employees excluded, and the cap reckoned separately for each kind of security (equity, preference, debenture).
The procedure is a strict pipeline — every step has a form and a clock:
- Special resolution first (Rule 14(1)) →
- PAS-4 offer letter to identified persons within 30 days of recording the name (Rule 14(4)) →
- Subscription only by cheque / DD / banking channel — never cash (42(4)); joint holders count as the first-named person (Rule 14(5)) →
- Allotment within 60 days of receiving application money; failing that, refund within 15 days, then 12% p.a. interest (42(6)) →
- PAS-3 return within 15 days of allotment (42(8)) →
- No public advertisement (42(7)), and no fresh offer until the earlier one is completed or withdrawn (42(5); proviso permits simultaneous issues to prescribed classes).
Relaxations and add-ons to remember:
- Rule 14(1) special-resolution relief: for NCDs within the Sec 180(1)(c) borrowing limit, a Board resolution u/s 179(3)(c) suffices (above the limit, one special resolution a year); for QIB allotments, one special resolution a year suffices.
- NBFC/HFC exemption: RBI-registered NBFCs and NHB-registered HFCs complying with their regulators’ norms need not follow the Rule 14(2) 200-cap.
- Land-border restriction (2022 amendment, proviso to Rule 14(1)): no offer to a body corporate or national of China, Bhutan, Nepal, Pakistan, Bangladesh or Myanmar without government approval under the FEMA (Non-Debt Instruments) Rules, 2019.
- 42(11) the nuclear consequence: offer to more than 200 persons → deemed public offer, and Sections 23–41 plus the SCRA and SEBI Act all apply.
Defaults are expensive: late PAS-3 costs ₹1,000 per day up to ₹25,00,000 (42(9)); contravening Section 42 costs promoters/directors a fine equal to the amount raised or ₹2 crore, whichever is lower, and the company must refund all monies with interest within 30 days of the order (42(10)).
Key timelines and penalties
| Period | Event / action | Where |
|---|---|---|
| 90 days | Validity of prospectus from delivery to Registrar | 26(8) |
| ≤1 year | Validity of shelf prospectus from first offer | 31(1) |
| 1 month prior | Information Memorandum filed before each subsequent offer | Rule 10 |
| 15 days | Refund if applicant withdraws after IM change | 31(2) proviso |
| ≥3 days prior | Red herring prospectus filed before subscription opens | 32(2) |
| 6 months | Offer to public within this of allotment → deemed prospectus presumed | 25(2)(a) |
| 30 days | Refund trigger if minimum subscription not received (from prospectus issue) | 39(3) |
| 15 days | Actual refund from closure of the issue | Rule 11(1) |
| 30 days | Return of allotment (PAS-3) — public offer | Rule 12(1) |
| 30 days | PAS-4 offer letter sent from recording of name | Rule 14(4) |
| 60 days | Private-placement allotment from receipt of application money | 42(6) |
| 15 days | Refund after 60-day allotment failure | 42(6) |
| 15 days | Return of allotment (PAS-3) — private placement | 42(8) |
| 30 days | Company refund with interest after contravention order | 42(10) |
| Over 50 renouncees | Rights-issue renunciation → deemed prospectus (case law) | Kunnamkulam |
| Default | Liable | Exact penalty | Section |
|---|---|---|---|
| Prospectus contents (Sec 26) | Company & knowing party | ₹50,000 – ₹3,00,000 | 26(9) |
| Abridged prospectus missing | Company | ₹50,000 for each default | 33(3) |
| Criminal mis-statement | Person authorising issue | Punishable u/s 447 | 34 |
| Civil mis-statement | Company + specified persons | Compensation to every loss-sufferer | 35 |
| Intent to defraud | Person u/s 35(1) | Personal, unlimited liability | 35(3) |
| Fraudulent inducement | Any inducing person | Punishable u/s 447 | 36 |
| Personation | Person | Punishable u/s 447 | 38(1) |
| Minimum subscription / return of allotment | Company & officer in default | ₹1,000/day/default or ₹1,00,000, whichever less | 39(5) |
| Stock-exchange compliance | Company / officer in default | ₹5,00,000 – ₹50,00,000 / ₹50,000 – ₹3,00,000 | 40(5) |
| Refund default (Rule 11) | Directors/officers | Repay with interest 15% p.a. | Rule 11(1) |
| Private-placement allotment beyond 60 days | Company | Interest 12% p.a. from the 60th day | 42(6) |
| Late PAS-3 (private placement) | Company, promoters, directors | ₹1,000/day, max ₹25,00,000 | 42(9) |
| Private-placement contravention | Promoters/directors · Company | Fine = amount raised or ₹2 crore, whichever lower · refund all monies + interest in 30 days | 42(10) |
- Answering 50 for the private-placement cap — the statute says 50, but Rule 14(2) governs at 200; always answer 200 in MCQs, exclude QIBs + ESOP employees, and count each security type separately.
- One PAS-3 deadline for both routes — public offer files in 30 days (Rule 12), private placement in 15 days (42(8)). Classic mix-up.
- Swapping validities — the ordinary prospectus lives 90 days from delivery to the Registrar (26(8)); the shelf prospectus up to 1 year from the first offer (31(1)).
- Writing “15 days” for the Information Memorandum — it is filed 1 month before the next offer (Rule 10); 15 days is the refund window after an IM change.
- Saying a “majority of directors” signs the Registrar’s copy — Sec 26(4) requires every director and proposed director (an attorney may sign for one).
- Treating the deemed-prospectus conditions as cumulative — 6-months offer OR consideration not fully received, either suffices, and the list is not exhaustive (Kunnamkulam).
- Merging Sections 34 and 35 — 34 is criminal, strict, hits only issue-authorisers, punishable u/s 447; 35 is civil, hits a wider class, pays compensation, and has five defences.
- Letting a market purchaser rescind or sue — only the original allottee can (Peek v Gurney, Sec 37); and remember re-issue of forfeited shares is not allotment.
Quick revision cards
Private-placement headcount limit?
Deemed-prospectus presumption under Sec 25(2)?
Prospectus validity?
Shelf-prospectus paperwork?
Red-herring filings?
Minimum application money?
Minimum subscription not received?
PAS-3 deadlines?
Private-placement allotment clock?
Sec 447 fraud tiers?
Underwriting commission cap?
Who votes on a GDR?