What a Prospectus Is, and What It Must Say

Four things follow, and they are what the definition is for.

A document need not call itself a prospectus. The words "any notice, circular, advertisement or other document" catch a document by what it does, not by its title. A glossy pamphlet inviting the public to apply for debentures is a prospectus whatever it is headed.

It must invite offers from the public. A document circulated to four named investors is not a prospectus; it is a private placement offer letter under section 42.

It must relate to securities of a body corporate, not merely of a company, which is wider.

Two named documents are inside the definition: the red herring prospectus and the shelf prospectus. Both are dealt with in the next chapter.

And two more are deemed to be prospectuses by other sections: an offer for sale document under section 25, and the offer document in a section 28 offer for sale by members. Deeming was necessary precisely because those documents are issued by shareholders, not by the company.

What must be stated: section 26(1), as it now stands

Every prospectus issued by or on behalf of a public company, either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall:

state such information and set out such reports on financial information as may be specified by the Securities and Exchange Board in consultation with the Central Government

with a proviso: until SEBI specifies that information and those reports, the regulations already made by SEBI under the Securities and Exchange Board of India Act 1992 in respect of such financial information or reports shall apply.

And clause (c), which survives, requires the prospectus to:

make a declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act 1956 and the Securities and Exchange Board of India Act 1992 and the rules and regulations made thereunder.

What happened to the rest. Clauses (a), (b) and (d) of section 26(1), which contained the long catalogue of names, addresses, objects, capital structure, minimum subscription, underwriting particulars, auditors' reports and the rest, were omitted by the Companies (Amendment) Act 2017 (Act 1 of 2018), with effect from 7 May 2018.

How to answer MU's label honestly. Say that the Act no longer prescribes the contents; that section 26(1) as amended requires the prospectus to state such information and financial reports as SEBI may specify in consultation with the Central Government, with SEBI's existing regulations applying in the meantime; and that the only content requirement left in the section itself is the declaration of compliance in clause (c). Then give the machinery in sub-sections (2) to (9), which is what section 26 now mostly consists of.

When section 26(1) does not apply: section 26(2) and (3)

Section 26(2). Nothing in sub-section (1) applies:

• (a) to the issue to existing members or debenture holders of a prospectus or form of application relating to shares in or debentures of the company, whether or not the applicant has a right to renounce under section 62(1)(a)(ii) in favour of any other person; or
• (b) to the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange.

Clause (a) is the rights issue exemption and clause (b) is the further issue of an identical, already quoted security. Both rest on the same idea: the recipient already has the information.

Section 26(3). Subject to sub-section (2), sub-section (1) applies to a prospectus or form of application whether issued on or with reference to the formation of a company or subsequently.

The Explanation is a small point that gets asked: the date indicated in the prospectus shall be deemed to be the date of its publication.

Filing, experts and validity: section 26(4) to (8)

Section 26(4): delivery before publication. No prospectus shall be issued by or on behalf of a company, or in relation to an intended company, unless on or before the date of its publication there has been delivered to the Registrar for filing a copy signed by every person named in it as a director or proposed director, or by his duly authorised attorney.

Section 26(5): the expert. A prospectus shall not include a statement purporting to be made by an expert unless the expert:

• is a person who is not, and has not been, engaged or interested in the formation or promotion or management of the company; and
• has given his written consent to the issue of the prospectus; and
• has not withdrawn that consent before the delivery of a copy of the prospectus to the Registrar for filing,

and a statement to that effect shall be included in the prospectus.

That triple condition is the reason an expert's report carries weight, and it is the reason section 35(2)(c) gives a defence to a person who reasonably relied on such a report.

Section 26(6): what must appear on the face of it. Every prospectus shall, on the face of it, (a) state that a copy has been delivered for filing to the Registrar as required by sub-section (4); and (b) specify any documents required to be attached to the copy so delivered, or refer to statements in the prospectus which specify those documents.

Sub-section (7) was omitted by the Companies (Amendment) Act 2019 with effect from 15 August 2019.

Section 26(8): the ninety day rule. No prospectus shall be valid if it is issued more than ninety days after the date on which a copy thereof is delivered to the Registrar under sub-section (4).

The penalty: section 26(9)

If a prospectus is issued in contravention of the section:

• the company shall be punishable with fine not less than fifty thousand rupees and up to three lakh rupees; and
• every person who is knowingly a party to the issue of such prospectus shall be punishable with fine not less than fifty thousand rupees and up to three lakh rupees.

Note what has gone. The words "with imprisonment for a term which may extend to three years or" were omitted by the Companies (Amendment) Act 2020 with effect from 21 December 2020, and "three lakh rupees, or with both" was substituted at the same time. So a contravention of section 26 is now punishable by fine only. That is part of the wider decriminalisation of the Act, and it is a good example to give if asked about recent reform.

Advertisement of a prospectus: section 30

Where an advertisement of any prospectus of a company is published in any manner, it shall be necessary to specify therein the contents of its memorandum as regards the objects, the liability of members and the amount of share capital of the company, and the names of the signatories to the memorandum and the number of shares subscribed for by them, and its capital structure.

Six things, and they are worth listing because this is a favourite short note: objects, liability of members, amount of share capital, names of the signatories to the memorandum, the number of shares each subscribed for, and the capital structure.

Application forms and the abridged prospectus: section 33

Section 33(1). No form of application for the purchase of any securities of a company shall be issued unless it is accompanied by an abridged prospectus.

Two exceptions in the proviso, where it is shown that the form was issued:

• (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement in respect of the securities; or
• (b) in relation to securities which were not offered to the public.

Section 33(2). A copy of the full prospectus shall, on request by any person before the closing of the subscription list and the offer, be furnished to him. So the abridged version is a convenience, not a substitute: anybody who wants the whole thing can have it.

Section 33(3). On default, the company shall be liable to a penalty of fifty thousand rupees for each default.

A worked example

Aravalli Cements Limited, an unlisted public company, decides to go to the market.

The document. Its offer document is a prospectus under section 2(70), whatever it is headed, because it invites offers from the public for the subscription of its securities.

Contents. Its advisers do not go to section 26 for a list, because clauses (a), (b) and (d) were omitted in 2018. They go to SEBI's regulations, because section 26(1) as amended requires the prospectus to state such information and financial reports as SEBI specifies, and the proviso applies SEBI's existing regulations in the meantime. Into the document goes the clause (c) declaration that nothing in it is contrary to this Act, the Securities Contracts (Regulation) Act 1956 or the SEBI Act 1992.

Signature and filing. It is dated, and by the Explanation to section 26(3) that date is deemed to be the date of publication. It is signed by every director and proposed director, and a signed copy is delivered to the Registrar for filing on or before the date of publication, under section 26(4). On its face it states that a copy has been so delivered, under section 26(6)(a).

The valuer's report. The prospectus quotes a valuation of the limestone reserves. The valuer must be a person not and never engaged or interested in the formation, promotion or management of the company, must have given written consent, and must not have withdrawn it before delivery to the Registrar, and the prospectus must say so: section 26(5).

The clock. The copy is delivered on 1 September 2026. The prospectus is not valid if issued after 30 November 2026, ninety days later, under section 26(8).

The advertisement. The newspaper advertisement must specify the memorandum's objects, the liability of members, the amount of share capital, the names of the signatories to the memorandum, the number of shares each subscribed for, and the capital structure: section 30.

The application form. Every form must be accompanied by an abridged prospectus, section 33(1), unless it goes with a bona fide underwriting invitation or relates to securities not offered to the public. Any person asking before the subscription list closes must be given the full prospectus, section 33(2). A default costs fifty thousand rupees each time, section 33(3).

And if the prospectus is issued in breach of section 26? The company and every person knowingly a party to the issue face a fine of fifty thousand to three lakh rupees. There is no imprisonment, those words having been omitted with effect from 21 December 2020.

What this does NOT mean

It does not mean the Act still lists what a prospectus must contain. Clauses (a), (b) and (d) of section 26(1) were omitted on 7 May 2018. Reciting them is reciting repealed law.

It does not mean a prospectus must be called one. Section 2(70) catches any notice, circular, advertisement or other document that invites offers from the public.

It does not mean an abridged prospectus is enough. Section 33(2) gives any person the right to the full document before the subscription list closes.

It does not mean a prospectus lasts as long as the offer. Ninety days from delivery to the Registrar, under section 26(8).

Quick revision

• Section 2(70): any document described or issued as a prospectus, and any notice, circular, advertisement or other document inviting offers from the public for securities of a body corporate. Includes red herring and shelf prospectuses.
• Section 26(1): dated and signed; contents as SEBI may specify in consultation with the Central Government, SEBI's existing regulations applying meanwhile; clause (c) declaration of compliance. Clauses (a), (b) and (d) OMITTED w.e.f. 7 May 2018.
• 26(2): does not apply to a rights issue to existing members or debenture holders, or to securities uniform with those already quoted.
• 26(3) Explanation: the date in the prospectus is deemed to be the date of publication.
• 26(4): signed copy delivered to the Registrar for filing on or before publication.
• 26(5): an expert must be independent, must consent in writing, must not have withdrawn before delivery, and the prospectus must say so.
• 26(6): on the face of it, state the delivery and specify the attached documents. 26(7) omitted w.e.f. 15 August 2019.
• 26(8): invalid if issued more than ninety days after delivery.
• 26(9): fine fifty thousand to three lakh rupees on the company and on every person knowingly a party. Imprisonment removed w.e.f. 21 December 2020.
• Section 30: an advertisement must specify objects, liability of members, share capital, signatories, shares subscribed by them, and capital structure.
• Section 33: application form must carry an abridged prospectus; exceptions for a bona fide underwriting invitation and for securities not offered to the public; full prospectus on request before closing; fifty thousand rupees per default.

Test yourself

1. Define a prospectus. Section 2(70): any document described or issued as a prospectus, including a red herring prospectus under section 32 or a shelf prospectus under section 31, or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

2. What matters must be stated in a prospectus? Since 7 May 2018 the Act no longer lists them. Section 26(1) requires the prospectus to be dated and signed and to state such information and set out such reports on financial information as may be specified by SEBI in consultation with the Central Government, with SEBI's existing regulations applying until it does; and clause (c) requires a declaration that nothing in it is contrary to this Act, the Securities Contracts (Regulation) Act 1956 or the SEBI Act 1992.

3. When must a copy be delivered to the Registrar, and by whom must it be signed? On or before the date of publication, signed by every person named in it as a director or proposed director, or by his duly authorised attorney: section 26(4).

4. What are the conditions for including an expert's statement? The expert must not be, and must never have been, engaged or interested in the formation, promotion or management of the company; must have given written consent to the issue of the prospectus; and must not have withdrawn that consent before delivery of a copy to the Registrar. A statement to that effect must appear in the prospectus: section 26(5).

5. For how long is a prospectus valid? It is not valid if issued more than ninety days after the date on which a copy was delivered to the Registrar: section 26(8).

6. Must an application form carry an abridged prospectus? Yes, unless the form was issued in connection with a bona fide invitation to enter into an underwriting agreement, or in relation to securities not offered to the public: section 33(1) and its proviso. A copy of the full prospectus must be furnished to any person who asks before the subscription list closes.