PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS

ABSTRACT

A public company must first and foremost issue a prospectus in order to raise funds from the general public. A prospectus is a disclosure document used to invite the general public to subscribe the shares. It comprises all of the relevant information and facts about the company, which assists investors in making effective decisions. The prospectus and the statement in lieu of prospectus are sometimes used interchangeably, yet they are not the same thing. Basically, the statement in lieu of prospectus is published when the company is unwilling to accept public subscription. Although the information in both documents is identical, there is a distinction between a prospectus and a statement in lieu of a prospectus, which will be discussed in this article along with certain procedures.

Keywords: Capital, Company, Invitation to public, Prospectus, Statement in lieu of prospectus, Subscription, Shares.

INTRODUCTION

A company’s prospectus serves as the cornerstone of its foundation. It is the document that should include all relevant information about the company and how it operates so that a potential investor may decide for themselves whether an investment is worthwhile. It is typically provided right away following the company’s incorporation, before to the start of business. In actuality, a prospectus is an invitation to the public to subscribe for company share capital.[1]

The prospectus and the statement in lieu of prospectus is sometimes used interchangeably, yet they are not the same thing. Basically, the statement in lieu of prospectus is published when the business is unwilling to accept public subscription. Although the information in both documents is similar, a prospectus and a statement in lieu of a prospectus are not identical.

OBJECTIVES

The objectives of the research article are,

To provide an overview of the concept of prospectus and statement in lieu of prospectus
To assess the regulatory requirements and implications for non-compliance
To compare prospectus and statement in lieu of prospectus

HYPOTHESIS

This paper is based on the assumption that, Companies that issue a statement in lieu of prospectus, as opposed to a traditional prospectus, tend to face fewer regulatory obstacles and achieve faster capital raising.

RESEARCH METHODOLOGY

The research methodology adopted in this research paper is analytical and doctrinal mixed framework, where qualitative approach is adopted. And Reliance is placed on books, journals, research papers as well as articles and judicial decisions on the topic “PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS”.

PROSPECTUS & STATEMENT IN LIEU OF PROSPECTUS

Prospectus is a document containing detailed information about the company and an invitation to the public for subscribing the share capital and debentures issued. A prospectus, as per Section 2(70), means

“Any document described or issued as a prospectus and includes a red herring prospectus or shelf prospectus 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.”

Therefore, a prospectus can be even more than an advertisement; it can also be a notice or a circular. A document will be referred to as a prospectus if it meets both requirements:

1. It invites the subscription or purchase of any kind of company securities, including shares, debentures, or other;

2. The aforementioned invitation is extended to the public.[2]

After obtaining the certificate of incorporation, the promoters of a public company must take steps to raise the capital required for the company. The public may be invited to subscribe for shares or debentures of a public company. A document known as a prospectus must be issued for this purpose.

KINDS OF PROSPECTUS

This, Prospectus is divided into following categories:

Deemed Prospectus [Section 25]
A deemed prospectus is a document that is assumed to be a company’s prospectus.
Shelf prospectus [Section 31]
A shelf prospectus provides securities to be subscribed for in one or more issues over a specific period of time without requiring the issuance of a new prospectus.
Red Herring Prospectus [Section 32]
A red herring prospectus lacks specific information regarding the quantity, price, and quantum of the securities being offered for purchase.
A company proposing to issue a red herring prospectus should file it with registrar of companies, 3 days prior to the opening of the subscription.
Abridged prospectus [Section 2(1) & Section 33]
It refers to a memorandum that, in accordance with the guidelines provided by the Securities and Exchange Board, contains the key elements of a prospectus.
An Abridged Prospectus provides a concise overview of the company and its securities.

STATEMENT IN LIEU OF PROSPECTUS

The Statement in Lieu of Prospectus is a document submitted with the Registrar of Companies (ROC) when a company has not provided a prospectus to the public in order to invite them to subscribe for shares.
The statement must include the written signatures of all directors or their authorized agents. It is comparable to a prospectus but offers only a brief description of information’s.
The Statement in Lieu of Prospectus must be filed with the registrar if the company does not issue prospectus or if the company issued prospectus but did not proceed with the allotment of shares because the minimum subscription was not received.
A public company does not need to issue a prospectus if it can privately manage its own capital. However, in such a situation, “a statement in lieu of a prospectus” has to be filed with the Registrar. Since a private company cannot invite the general public to subscribe for its shares or debentures, it is not permitted to issue a prospectus.

CONTENTS OF PROSPECTUS

In accordance with Section 26 of the Companies Act of 2013, a prospectus’s contents must include the following:

Information to be provided in a Prospectus
Reports to be stated in the Prospectus
Declaration to be made
Other matters

Information to be set out in a prospectus

According to Section 26 of the Companies Act, 2013, which was modified by the Companies (Amendment) Act, 2017, a prospectus must be signed, dated, and contain any information and financial report as required by the Securities and Exchange Board, along with the Central Government, as may specify. However, until the SEBI specifies the information and reports on financial information under sub-section (1) of Section 26, the information to be stated shall be as per the Securities and Exchange Board of India Act, 1992.

declaration

The prospectus should include a declaration about compliance with the provisions of this Act, as well as a statement 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.

other matters

The prospectus must also include any additional information and other reports that may be prescribed.

Statement of an expert

A prospectus may include a statement supposedly given by an expert. Engineers, valuers, chartered accountants, company secretaries, cost accountants, and anybody else with the authority to grant a certificate under any legal authority are all considered as “experts”. Inclusion of expert reports in a prospectus is prohibited unless:

The aforementioned sort of specialist is someone who has never been involved in the creation, advancement, or administration of the company in question,
He gave his written approval to the prospectus’s release and has not withdrawn his consent until the prospectus is presented to the Registrar for registration,
The prospectus contains a statement indicating that he has granted and has not revoked his approval thereto.

PENALTY

If a prospectus is issued in violation of the provisions of this section, the company shall be punished with a fine of ₹ 50,000- ₹ 3,00,000 and every person who is knowingly a party to the issue of such prospectus shall be punished with imprisonment for a term not less than three years or with a fine ₹ 50,000- ₹ 3,00,000 or with both.

EXEMPTIONS: The requirements outlined in Section 26 do not apply to the following,

Rights Issue
Shares/Debentures Uniform in all respects

WHAT CONSTITUTES AN OFFER TO PUBLIC?

If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons(i.e., 200 persons), whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall be governed by the provisions of Part I of this Chapter.[3]

The prescribed number of persons for public and private company could be understood from section 2(71) & section 2(68) of companies act, 2013 respectively.

Private company- Minimum 2 and maximum 200 members
Public Company- Minimum 200 and there is no limitation for maximum number of members.

Therefore, we may state that a company will be considered to have made a public offer if it invites subscription or allots any security to 200 or more people in a fiscal year. Nevertheless, the following will not be included when calculating the aforementioned 200 persons:

Qualified institutional buyers;
Employees, who are offered securities under a scheme of employees’ stock option as per provisions of section 62(1)(b).

MIS-STATEMENT IN PROSPECTUS

Where a prospectus, issued, circulated or distributed under the Chapter III of Companies Act, 2013, includes any statement which is untrue, false 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 responsible will be liable u/s 34&35 of companies act,2013.

[ every person- director, promoter, an expert referred under section 26(5), etc…]

Civil liability- section 35

Every person responsible be liable to pay compensation to every person who has sustained such loss or damage. The exceptions[4]

It was issued without the consent of the authority; or
That the prospectus was issued without the authority’s’ knowledge or consent, and that on becoming aware of prospectus issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
He had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it

Criminal liability- section 34

Every person who authorises the issue of such misleading prospectus will be liable under section 447[5]

Exceptions:

If the person proves that such statement or omission was immaterial or
That he had reasonable grounds to believe, and
Did up to the time of the prospectus issue believed, that the statement was true or the inclusion or omission was necessary.

GOLDEN RULE / GOLDEN LEGACY

It is the duty of those persons who issue the prospectus to be truthful in all respects. This Golden Rule or golden legacy was pronounced by Kinderseley, V.C. in New Brunswick, etc., Co. v. Muggeridge[6], and has come to be known as the “golden legacy”. “Those that produce a prospectus promise the public significant benefits that will accrue to those who invest in the planned venture of the company. The public is solicited to purchase shares on the basis of the prospectus’ statements. The general public is at the mercy of company promoters. Everything must consequently be explained precisely and accurately. Nothing should be stated as an information that is not true, and nothing should be omitted that could in any way change the type or quality of the privileges and advantages that the prospectus offers as an invitation to buy shares. In short, the full nature of the company’s venture should be ‘disclosed’. If concealment of any material fact in the prospectus has prevented any adequate appreciation of what was stated, it would amount to misrepresentation. Therefore, even if all of the statements in the prospectus are accurate, it could still be fraudulent if it gives the appearance that certain important information have been withheld”.

Thus, the persons issuing the prospectus must not only 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 which might in any way affect the decision of the prospective investor to invest in the company.[7]

DIFFERENCE BETWEEN PROSPECTUS AND STATEMENT IN LIEU OF PROSPECTUS[8]

SI NO	BASIS FOR COMPARISON	PROSPECTUS	STATEMENT IN LIEU OF PROSPECTUS
01	Meaning	Prospectus refers to a legal-document published by the company to invite general public for subscribing its shares and debentures	Statement in lieu of prospectus is a document issued by the company when it does not offer its securities, debentures, etc… for public subscription
02	Objective	To encourage public subscription.	To be filed with the registrar
03	Used when	Capital is raised from general public.	Capital is raised from known sources
04	Content	It contains details prescribed by the Indian Companies Act.	It contains information similar to a prospectus but concisely.
05	Minimum subscription	Minimum subscription is Required to be stated	Minimum subscription is Not required to be stated
06	Availability	Available to the public and can be found on the SEC’s EDGAR database.	Statement in lieu of prospectus is Not necessarily available to the public and may only be distributed to a limited number of investors
07	Approval	A prospectus must be approved by the securities commission before it can be used	while a statement in lieu of prospectus may not require such approval.
08	Issue	Typically issued by a newly going public company or one offering new securities	Issued by a company already trading in the market

CASE LAWS

The prominent cases on prospectus and statement in lieu of prospectus is discussed here;

In Pramatha Nath Sanyal v. Kali Kumar Dutt[9], A newspaper advertisement was placed with the following text: “Some shares are still available for sale according to the terms of the company’s prospectus, which can be obtained upon application.” Given that the prospectus solicited the general public to purchase shares of the company, and hence this was considered as a prospectus. As a result, the directors were penalized for failing to file a copy of the document with the Registrar of Companies.
In re M.K. Sreenivasan,[10]In this case it’s observed that in regard to considering a prospectus as fraudulent, it is not necessary that there should be false representation in it; even if every word included in the prospectus is true, the suppression of material facts may render it fraudulent. To judge its effect, it should be read as a whole.
Government stock & others Securities Investment Co. Ltd v. Chistopher[11], a circular was issued by the company to the shareholders of other companies to acquire their shares in those companies and issue its own shares in exchange of those shares. It was held that there was no public issue in this case, and hence it did not amount to a prospectus.
Nash v. Lynde[12], in this case, several copies of a document marked “strictly confidential” and containing particulars of a proposed issue of shares, were sent accompanied with application form by the managing director who, gave it to a client and the client passed it on to a relation. Thus, this document was passed privately through a small circle of friends of the directors. The House of Lords held that there had been no issue to the public and any action for compensation by the allottee for loss sustained by reason of an omission in the document, failed.

CONCLUSION

A Statement in Lieu of Prospectus is a statement produced by a public company that offers important information about the company’s securities without the considerable detail included in a conventional prospectus. It is used in some circumstances where a traditional prospectus cannot be utilized, such as when an already-trading company wants to offer more securities.

A statement in lieu of prospectus is not extensively disseminated and does not need prior clearance from securities commissions like a prospectus requires. It fulfils a less formal function by enabling companies to reach the public for raising capital without having to invest the time and money as in a traditional prospectus.

REFERENCES

DR. G.K. KAPOOR & DR. SANJAY DHAMIJA, COMPANY LAW AND PRACTICE: A COMPREHENSIVE TEXT BOOK ON COMPANIES ACT, 2013, 186-187 (24^th ed. 2019)
ICSI, https://www.icsi.edu/media/webmodules/publications/FinalCLStudy.pdf (last visited Nov. 9, 2023).
Law Bhoomi, https://lawbhoomi.com/statement-in-lieu-of-prospectus/ (last visited Nov. 9, 2023) &
Key Differences, https://keydifferences.com/difference-between-prospectus-and-statement-in-lieu-of-prospectus.html (last visited Nov. 9, 2023).
Zahoor Ud Din, Contents of Prospectus or Statement in Lieu of Prospectus, Course Hero (2020), https://www.coursehero.com/file/64680634/Contents-of-Prospectus-or-Statement-in-Lieu-of-Prospectusdocx/
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (last visited Nov. 9, 2023).
https://thelegalquotient.com/corporate-laws/companies-act/types-of-prospectus/2463/ (last visited Nov. 9, 2023).
New Brunswick, etc., Co. v. Muggeridge (1860) 3 LT 651
Nash v. Lynde (1929) A.C. 158
Pramatha Nath Sanyal v. Kali Kumar Dutt AIR 1925 Cal. 714
Government stock & others Securities Investment Co. Ltd v. Chistopher (1956) 1 WLR 237

[1] Zahoor Ud Din, Contents of Prospectus or Statement in Lieu of Prospectus, Course Hero (2020), https://www.coursehero.com/file/64680634/Contents-of-Prospectus-or-Statement-in-Lieu-of-Prospectusdocx/

[2] DR. G.K. KAPOOR & DR. SANJAY DHAMIJA, COMPANY LAW AND PRACTICE: A COMPREHENSIVE TEXT BOOK ON COMPANIES ACT, 2013, 186-187 (24^th ed. 2019)

[3] Companies act, 2013, § 42(2) Explanation I, No. 18, Acts of Parliament, 1949 (India).

[4] Companies act, 2013, § 35, No. 18, Acts of Parliament, 1949 (India).

[5] Companies act, 2013, § 34, No. 18, Acts of Parliament, 1949 (India).

[6] (1860) 3 LT 651

[7] ICSI, https://www.icsi.edu/media/webmodules/publications/FinalCLStudy.pdf (last visited Nov. 9, 2023).

[8] Law Bhoomi, https://lawbhoomi.com/statement-in-lieu-of-prospectus/ (last visited Nov. 9, 2023) &

Key Differences, https://keydifferences.com/difference-between-prospectus-and-statement-in-lieu-of-prospectus.html (last visited Nov. 9, 2023).

[9] AIR 1925 Cal. 714

[10] [1944] 14 Comp. Cas. 193 (Mad.)

[11] (1956) 1 WLR 237

[12] (1929) A.C. 158

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