RED HERRING PROSPECTUS

A red-herring prospectus is a document distributed by a company planning to sell shares for the first time that contains information about the company but not the price of the shares or other pertinent information. It is distributed to those who might be considering purchasing shares. A corporation will often release a red herring prospectus throughout the book-building process. It is crucial to realize that the corporation uses the building process to determine the best price when making the initial offer in order to gauge the market. Before the start of the offer, the offering business will publish a “red herring prospectus.”

The “red herring prospectus” should include all information that must be included in the prospectus, with the exception that the minimum price or band may be mentioned rather than the specific issue size or price. The “Red herring prospectus” needs to be signed by the company’s directors. The company will then allocate shares based on the price and issue size that have been decided, and upon the close of the offer, it will submit the final prospectus to ROC and SEBI. The total amount of money obtained, whether in the form of debt or share capital, as well as the final price of the securities and other information not included in the “Red Herring Prospectus,” are therefore stated in the final prospectus.

Filing of red-herring prospectus

The red-herring prospectus should be submitted to ROC by the unlisted public firm. When it comes to a listed firm, the red herring prospectus needs to be submitted to SEBI at least three days before the offer is set to begin. After the closing of the offering of securities, the final prospectus for the unlisted and listed firm, respectively, must be submitted with ROC/SEBI and include the total amount raised, the closing price, and other information that is not included in RHP. Later, the duties to employ reasonable care and diligence at the time of creating a prospectus should be taken as a duty by every company into mind, even at the time of drafting a RHP, together with any ramifications that may arise owing to concealment, misrepresentation, and inaccuracy.

As a result, employing the red-herring prospectus (RHP) is a popular approach to find out the pricing for a public offering. As was already established, this document would aid merchant bankers in gauging the demand for securities and the price at which they would be offered in a public offering. A prospectus that “does not disclose comprehensive particulars about the amount or price of the securities included in such prospectus” is referred to as a “red-herring prospectus” in the explanation to Section 32 of the Companies Act, 2013.

Laws involved

  • The Companies Act, 2013

Under Companies Act, 2013, the Section 32 of the Companies Act deal with Red Herring Prospectus. The said provision reads as follows

“S. 32. Red herring prospectus. —

(1) A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.

(2) A company proposing to issue a red herring prospectus under sub-section (i) shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer.

(3) A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

(4) Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.

Explanation. —For the purposes of this section, the expression “red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.”

(B) Corresponding Provisions:

Section 60B of the Companies Act of 1956, which was added in 2000 as a result of an amendment to the Companies Act of 1956, is connected to this clause. The Companies (Amendment Act) 2000[18] added the terms Red Herring Prospectus and Information Memorandum to Section 60B. Additionally, it gave SEBI permission to enforce S. 60B of the 1956 Act’s rules governing listed businesses as well as those that want to list. However, the Central Government must exercise authority over all other businesses. Additionally, the SEBI was given the authority to examine the account books and other documents and papers related to listed firms and companies that want to be listed. The SEBI was also given authority to record complaints for offences connected to the issuing and transfer of securities and non-payment of dividends under Section 62(1) of the Companies Act, 1956.

(c) SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009 

These laws specify certain disclosures that must be included in the red-herring prospectus that every corporation must use. Before submitting to the registrar, companies must file a draught red herring prospectus (RHP) with SEBI. This allows SEBI to evaluate the company’s paperwork, verify the disclosures, suggest changes, and provide advice before a final RHP is filed. The revised version of the document is submitted to SEBI, the registrar, and the stock exchanges, where it is examined and approved before becoming a red herring prospectus.

Contents

“Red-herring prospectus” means a prospectus that does not have complete particulars on the price of the securities offered and quantum of securities offered. The red herring statement contains:

  1. purpose of the issue;
  2. disclosure of any option agreement;
  3. underwriter‘s commissions and discounts;
  4. promotion expenses;
  5. net proceeds to the issuing company (issuer);
  6. balance sheet;
  7. earnings statements for last 3 years, if available;
  8. names and address of all officers, directors, underwriters and stockholders owning 10% or more of the current outstanding stock;
  9. copy of the underwriting agreement;
  10. legal opinion on the issue;
  11. copies of the articles of incorporation of the issuer.

Conclusion

This part is crucial because any business that wants to sell its securities to the public must abide by rules requiring it to give investors some essential pertinent information. A red herring prospectus is one such means of distributing the information. It is a crucial prerequisite that businesses must adhere to. For making false claims and giving inaccurate information in a red herring prospectus, the member and the corporation would incur significant losses and fines. The main goal of having such a document is to protect investor interests and rights while also assuring investor welfare and preventing the theft of funds obtained by businesses via the sale of securities. There hasn’t been a significant change in the standards established for the issuing of a RHP, other than the addition of provisos and harsher penalties, according to a review of the statutes and judicial precedents on RHP. The main goal of having such a document is to protect investors’ interests and prevent theft of money that businesses raise via the sale of securities.

Suggestions

The author has learned from the preceding explanation and examination of several cases involving various Red Herring Prospectus (RHP) concerns and the applicable law that Red Herring Prospectus (RHP) is of utmost importance in the securities market. As a result, the author advises that directors of a firm must carefully supervise the Red Herring Prospectus’ drafting to avoid any misrepresentations that might subsequently have a detrimental impact on an investor’s choice.

Case laws-

·       In Indowind Energy Limited v. Wescare (India) Ltd. & Ors. Subuthi Pvt. Ltd, Civil Appeal no.3874. of 2010 the second respondent in this matter is a promoter of the appellant's company. In an agreement of sale, Subhuthi and Respondent 1 agreed to sell some company assets for a total of Rs. 98.19 crores, of which Rs. 24.19 crores were paid in cash and Rs. 74 crores were issued as stock. If a dispute developed, the agreement provided arbitration as a method of resolving it. But all three corporations had to ratify the agreement before it could be put into effect, and the appellant never did. The businesses continued to carry out the terms of the deal. A dispute emerged in the interim, prompting the respondent to petition for arbitration and request a preliminary injunction to stop the appellants from moving forward with an IPO by producing a "Red Herring Prospectus." The appellant's release of the "Red Herring Prospectus" for the issuing of equity shares, according to the court, clearly reveals their desire to be bound by the sale agreement. According to the red herring prospectus published by the applicant, the appellant and respondent engaged into a purchase agreement.
  • In the matter of S.V. Khandekar v. SEBI, Appeal no. 1206 of 2011 an appeal was filed against the agency’s decision. In this case, the appellant submitted a request under the right to information act for a copy of a company’s red herring prospectus regarding their acquisition of another company. This example demonstrates how one can submit an RTI application to request the prospectus from the issuing firm if it is not readily available on any public platform. In addition, this case clarifies the differences between a red herring prospectus and an IPO prospectus when it comes to the purchase of a private company by a public corporation.
  • In the case of Palco Recycle Industries Limited vs SEBI,Misc. Application No. 81 of 2012 and Appeal No. 143 of 2012 as required by regulation 6 of the SEBI (Issuance of capital and Disclosure obligations) Regulation, 2009, the firm in question submitted a draught red herring prospectus with the SEBI. The corporation cooperated with all of the SEBI’s inquiries, but did not win clearance, leading to the filing of this complaint. The board took a very long time to approve the request. This instance shows how the board is aware of circumstances that can lead to delays in receiving approvals. The respondents were given a two-week deadline by the board to act.

REFERENCES-

  1. Indowind Energy Limited v. Wescare (India) Ltd. & Ors. Subuthi Pvt. Ltd, Civil Appeal no.3874. of 2010
  2. S.V. Khandekar v. SEBI, Appeal no. 1206 of 2011
  3. Palco Recycle Industries Limited vs SEBI, Misc. Application No. 81 of 2012 and Appeal No. 143 of 2012
  4. https://en.wikipedia.org/wiki/Red_herring_prospectus
  5. https://www.ijlmh.com/paper/red-herring-prospectus/
  6. Companies act 2013
  7. Dr. Avtar Singh, “Company Law”, 7 th Edition (2016), Eastern Book Company Publications.
  8. N. D. Kapoor, “Elements of Company Law”, 30 th Edition (2016), Sultan Chand & Sons. Publications

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