Financial market has paramount importance in economic development. A company decides to issue its shares and securities for various reasons; the main reason being raising capital to meet its financial requirements may be for starting a venture, expansion, diversification and repaying debts, etc. This actually satisfies the number of investors wealth for the sublime reason of economic development. This economic dependence of the corporates regulated environment that boosts investor confidence and assures conformity with prescribed norms. It helps in creating conducive ownership base and wide capacities to create an impact on the national economy. Every company must comply with all the provisions for a valid issue of prospectus.

In India a company planning to issue securities shall abide by relevant provisions of

  1. Securities Contracts (Regulation) Act, 1956.
  2. Securities Contracts (Regulation) Rules, 1957.
  3. Companies Act, 2013 and The Companies (Prospectus and Allotment of securities) Rules, 2014.
  4. Securities and Exchange Board of India Act, 1992 and the rules and regulations made there under.


Generally speaking, prospectus refers to an information booklet or offer document on the basis of which an investor invests in the securities of an issuer company. Section 2 (70) defines Prospectus as to mean any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus refereed to in 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.

Red herring prospectus under explanation to section 32 has been referred to mean a prospectus in respect of which does not include complete particulars of the quantum or price of the securities included therein.

Shelf prospectus under explanation to section 31 has been referred to mean a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of further prospectus.

The definition clarifies that any notice, circular, advertisement or any other document inviting offers from public for the subscription or purchase of securities shall be included in the definition of prospectus.


  1. There must be invitation for subscription of shares, debenture or deposits through the document.
  2. It must be made to general public.
  3. Such offer must be made by the company.
  4. Such offer for subscription must be invited either for shares or debentures or any other instrument.


 As per the provisions of section 26 of the companies act 2013, The prospectus must have following details:

  1. Details of the corporate including CIN number and the object of the company.
  2. Details about the subscribers to the memorandum and there shareholding.
  3. Information regarding the Directors of the company.
  4. The subscription amount which has been invited from the public through issuing shares or debentures.
  5. Details regarding the shares offered.
  6. Bifurcation of amount to be paid at the various stages of the allotment.
  7. Information regarding the Underwriter to the issue.
  8. Details of the Auditors of the company, Audit reports along with Profit and Losses beard by the company.
  9. Procedure and timeline for allotment and issue of securities.
  10. Information regarding capital structure of the company.
  11. Risk factors specific to the present issue.
  12. Information regarding the litigations pending or action taken by the government department.
  13. Disclosures pertaining to the sources of promoter’s contribution.
  14. Any other disclosure as may be prescribed in the statute.


If in case company issues Prospectus which violates the provisions made under this act then,

Company would be liable to pay a fine not less than fifty thousand rupees which may extend to Three lakh rupees.

Imprisonment for a maximum term of three years or with years or with a fine which not less than fifty thousand rupees and maximum of rupees three lakh or with both can be imposed to every person of the company who is a party of the company who is a party to the issue of the prospectus.


General Information: In this section of the prospectus the information related to the name, address of the company’s head office, officers company secretary, directors, bankers, legal advisers. It also contains the information regarding primary objectives and business operated by the corporation. It enumerates the capital structure of the company. It also states information about the issue timelines procedure and terms of the allotment. It also describes the objectives of the public offer and terms and conditions for the issue and the consent of the all the officers of the company.

Financial Information: This includes all the information regarding the financial position of the company provided by the Auditor of the company in connection with the liquidity, Profitability and the assets and liabilities, etc. accompanied by the reports regarding the business and its capital raised and utilized.

Statutory Information: It should include a declaration concerning the compliance of the companies Act and all the other applicable laws made thereunder stating that the prospectus does not contain anything ultra vires to the provisions of the Companies Act 2013.


Every public listed company who wants to raise money from public in exchange of issue of shares or debentures or other instruments the company must issue prospectus for such offer.

Every private company who converted itself into the [public company shall first issue prospectus prior to any public issue.


The prospectus is the very first impression of the company to the general public, subscribers trust on the prospectus for investing in the company so it is of paramount importance to get it regulate and have penalizing provisions for the same. Misstatement is something untrue or misleading included and issued in the prospectus. According to section 34 of the companies act 2013 any inclusion or deletion which mislead the reader is also the misstatement. A prospectus is said to be untrue or misleading in following circumstances:

  1. A statement contend in a prospectus shall be deemed to be untrue, if it is misleading in the form and context in which it is included.
  2. Any material information intentionally omitted to mislead the investor.
  3. Any statement implicating false impression.
  4. Including any wrong facts or data pretending to be original.


Civil Liability Makes the actual person responsible to pay every single individual who has contributed for any kind of investment believing in the prospectus.

Criminal Liability

Section 34 of the Act state that where a prospectus issued includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be liable under section 447 of the Act.


  • The Company
  • Every Director
  • Person whose name appeared in the prospectus as a proposed director
  • Promoter of the company
  • Every person who authorized the issue of prospectus
  • Any expert on whose advise company issued the prospectus


  1. Person has to prove that statement or omission was immaterial.
  2. If a person has reasonable ground to believe that statement was true.
  3. Person has a reasonable ground to believe and believed that thew inclusion or omission was necessary.


Remedies for civil liability

  1. Revocation of the Contract- The person who purchased the securities can cancel the contract. The money will be refunded to him, which he paid to the company.
  2. Damages for Fraud- After revocation, the shareholders can claim damages from the company by filing a case in the court.

Remedies against the Directors, promoters and the authorized persons who issued the prospectus:

  • Damages for misstatement- Compensation will be given to the shareholders for the loss by the directors, promoters and the authorized persons.
  • Damages for non-disclosure- Fine of Rs. 50000 ad recovering the damages must be given by the people who mislead the purchasers from the one that is chargeable for the damages.

Remedies for criminal liability

  • Imprisonment up to 2 years or Rs. 50000 fine must beard by the people that mislead.
  • Person who knowingly issued a misstatement is punishable for imprisonment up to 5 years or with a fine Rs. 100000 or both.


New Brunswick Canada Railway V. Muggeridge

In this case, Justice Kindersley laid down the ‘golden rule’ for framing of a prospectus of a company.  In this case it was laid that, those who issue a prospectus withstand to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. On the faith of the details given in the prospectus, the people are invited to take shares. Everything should be accurate and at its best knowledge in the prospectus. Nothing should be stated in the prospectus which is not true in nature or is non- existing. In simpler words, the true nature of the company’s venture must be disclosed in the prospectus

Rex v. Kylsant (1932)

The prospectus stated that dividends of 5 to 8 per cent had been regularly paid over a long period. The truth was that the company had been incurring substantial losses during the seven years preceding the date of the Prospectus and dividends had been paid out of the realized capital profit. Held, the prospectus was false and misleading. The statement though true in itself was rendered false in the context in which it was stated.

Thus, the persons issuing the prospectus must not include in the prospectus all the relevant particulars specified in Parts I & II of Schedule II of the Act, which are required to be stated compulsorily but should also voluntarily disclose any other information within their knowledge with might in any way affect the decision of the prospective investor to invest in the company.


[1] Company Law study material icsi executive programme

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