Prospectus and Allotment of Securities – CA Inter Law Notes

Prospectus and Allotment of Securities – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Prospectus and Allotment of Securities – CA Inter Law Notes

Prospectus
Definition – Pro-spectus Section 2(70)

• ‘Prospectus’ means any document issued as prospectus.
• It includes any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.
• It also includes Shelf Prospectus and Red Herring Prospectus.

Conditions

• A document shall be called a prospectus, if it satisfies two conditions:
  • It invites subscriptions to securities; and
  • The aforesaid invitation is made to public.
• A document is deemed to be issued to public when invitation is open to anyone who brings money and gets shares whether prospectus was addressed to him or not.

When Prospectus not Required?
Prospectus is not required to be issued in following cases:

• Issue of shares by private company.
• Issue of shares or debentures by public company through private placement.
• Bona fide invitation to a person to enter in an underwriting agreement.
• Issue of FCCB (Foreign Currency Convertible Bond) or FCB exclusively to residents out of India.

Role of Prospectus

• The prospectus is main document on the basis of which prospective investors decide whether or not they should subscribe to securities offered by company.
• For any material mis-statement or concealment of facts in prospectus, applicant may suffer any loss and it attracts civil and criminal liability.

Method Of Issue Of Securities – Section 23
Public Company
Public company may issue securities:

• To public through prospectus (known as public offer)
• Through private placement
• Through rights issue or bonus issue

Private Company
Private company may issue securities:

• Through private placement
• Through rights issue or bonus issue

Private Placement – Section 42
What is Private Placement?

• ‘Private Placement’ means any offer of securities or invitation to subscribe securities to a selected group of persons by a company through issue of a private placement offer letter.
• Private Placement is made as per section 42.

Private Placement Offer Letter

• Private Placement is made through private placement offer letter.
• It is prepared in Form PAS-4.
• Private placement offer letter shall be sent to those persons whose names are recorded by company prior to invitation to subscribe.
• Private Placement Offer is made in personal name of every individual.
• It shall be accompanied with application form containing serial number.
• Company shall file records of Private Placement Offer made to ROC within 30 days from circulation of letter. It is maintained in Form PAS-5. If securities are offered through private placement offer by public company, such records shall be filed with SEBI.

Conditions for Private Placement
Maximum Number of persons

• The offer of securities or invitation to subscribe securities shall not be to more than 50 persons or such higher persons as prescribed in one financial year. Rule 14 of Companies (Prospectus and Allotment) Rules, 2014, prescribes the limit of 200 persons in financial year.
• If it is more than above number, it is considered as public offer.
• Following offer or invitation are not counted to calculate 50 numbers:
  • Offer made to Qualified Institutional Buyers (QIB)
  • Offer made to employees under ESOS

Important Note:
Above limit of 50 or 200 arc considered separately for every different kind of securities (ie. equity, preference etc.)

Offer size to in-dividual
Value of such offer per person shall be with an investment size of not less than ₹ 20,000 of face value of the securities.

Payment and de-posit of money

• All money payable for subscribing securities offered under private placement should be paid bv way of either Cheque or Demand Draft.
• It cannot be paid in cash.
• Money received on application should be kept in separate account in a scheduled bank. It can be utilised for:
  • Adjustment against allotment of securities; or
  • Repayment (in case of company does not allot securities)

No further offer pending the earlier offer

• No fresh offer shall be made, unless:
  • Allotment with respect to earlier offer is made; or
  • Earlier offer has been withdrawn; or
  • Earlier offer is abandoned by the company.
• This provision is not applicable to specified IFSC public and IFSC private company.

Time limit for

• Company offering securities under this method should allot them within 60 days from receipt of application money. This period of allotment is 90 days for specified IFSC public and IFSC private company.
  allotment
• If allotment is not made within 60 days as above, company shall repay application money within 15 days from expiry of 60 days.
• If company fails to repay application money within 15 days, it shall be liable to pay interest @ 12% p.a. from expiry of 60 days.

Prohibition of advertisement
The company shall not use:

• Any public advertisement
• Any media marketing or distribution channels
• Any agents,

Return of Allotment
On allotment of securities, company shall file Return of Allotment within 30 days with ROC.

Procedure or Requirement

• Prior approval of shareholders by way of Special Resolution is required to offer securities through private placement method.
• In case of offer or invitation for non-convertible debentures, the company can pass previous Special Resolution only once in year for all offers or invitation for such debentures during year.
• Explanatory statement included in notice for General Meeting shall contain specified matter and justification of price.

Contravention or Penalty

• If offer or invitation is not as per provisions of the Act, it is treated as public offer.
• Company, its promoters and directors are liable to pay penalty of amount involved in offer or ₹ 2 Crore, whichever is higher.
• Company shall refund all application money within period of 60 days of the order imposing penalty.

Distinguish between Public Offer and Private Placement
Public offer

• It can be made by public company.
• Public offer is made to public at large to purchase securities of company.
• When public offer is made prospectus is required to be prepared.

Private Placement

• It can be made by private company or public company.
• Private placement is made to limited number of persons.
• When securities are offered through private placement, private placement offer letter is prepared.

Deemed Prospectus Or Prospectus Byimplication – Section 25
Meaning
Where a company allots or agrees to allot any shares or debentures with a view to these being offered for sale to the public, any document by which the offer of sale to the public is made, shall for all purposes be deemed to be a prospectus issued by the company.

Presumption as to Deemed Prospectus

• A company is deemed (presumed) to have allotted or agreed to allot securities to Issue House for further sale if:
• Such Issue House makes an offer for sale of securities within 6 months after the securities were allotted to them or agreed to be allotted to them; or
• On the date of offer of Issue House, whole consideration in respect of securities had not received by the company.

Applicability of Provisions of Prospectus

• All rules, provisions and liabilities in case of mis-statement which are applicable to prospectus are similarly applicable to deemed prospectus.
• In addition, Issue House incurs its own liability regarding disclosures. They incur the same civil and criminal liability as the directors of the company will incur.

Additional Disclosures
In addition to section 26, deemed prospectus shall contain following information:

• The net amount of consideration received by company in respect of securities; and
• The time and place where contract entered into between company and Issue House may be inspected.

Signature
Deemed prospectus shall be signed by:

• Two directors, if offer is made by company; or
• Not less than Vi of the partners, if offer is made by firm.

Matters To Be Stated In Prospectus Or Contents Of Prospectus – Section 26
Disclosures as per

• Names and addresses of the registered office of the company Cothpanies Act and such other places/persons as prescribed by SEBI.
• Dates of opening and closing of issue.
• Declaration by Board that allotment letters and refund will be sent in statutory time.
• Details of underwriters and shares underwritten by them.
• Consent of directors, auditors and other intermediaries in writing.
• An authority for the issue and resolution passed therefor.
• Procedure and time schedule for allotment and issue of securities.
• Capital structure of company.
• Main object of issue.
• Terms of issue.
• Main object of business
• Present business of company, its location, schedule of implementation of the project.
• Minimum subscription.
• Premium payable, if any.
• Details of directors including their appointment, remuneration and particulars about their interest in company.
• Disclosures of the sources of promoter’s contribution.
• Declaration by Board that application money shall be kept in separate bank account.
• Particulars relating to:
  • management perception of risk factors specific to the project
  • gestation period of the project
  • extent of progress made in the project
  • deadlines for completion of the project
  • any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company.

Reports to be Included in Prospectus
Following reports shall be set out in prospectus:

• Reports by the auditors of the company with respect to its profits and losses, assets and liabilities and such other matters as may be prescribed.
• Reports relating to profits and losses for each of the five financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries and in such manner as may be prescribed,
  • the reports relating to profits and losses for each of the financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries
  • the reports made by the auditors upon the profits and losses of the business of the company for all financial years from the date of its incorporation, and
  • the reports of assets and liabilities of its business on the last date before the issue of prospectus; and
• Reports about the business or transaction to which the proceeds of the securities are to be applied directly or indirectly.

Declaration About Compliance
The prospectus should contain declaration about compliance of provisions of:

• Companies Act, 2013
• Securities Contracts (Regulation) Act, 1956
• SEBIAct, 1992

Statutory Requirements Of Prospectus – Section 27
A prospectus is required to meet the following statutory requirements:
Issue

• A prospectus is generally issued after incorporation of the company.
• It is prepared in consultation with Merchant Banker.

Filing

• Before issue of prospectus to the public it must be delivered to the Registrar for registration.
• The Registrar shall not register prospectus unless:
  • Requirements of the Act are complied with, and
  • Consent in writing is obtained from all persons whose name are included in it.
• It is also filed with Stock Exchanges where securities of company is listed or proposed to be listed. It should be approved by concerned Stock Exchange(s).
• Where a prospectus is issued in more than one language, a copy of it as issued in each language should be delivered to R.O.C. -Emperor vs. Bengal Salt Co.

Dated
A prospectus must be dated and that date, unless the contrary is proved, be taken as the date of publication of the prospectus.

Consent of all Persons

• The copy of prospectus filed with ROC must be accompanied with consent in writing of persons named in the prospectus.
• Thus, consent in writing of persons named as director, auditor, legal advisor, attorney, solicitor, banker, broker, underwriter and expert is required.

Signed
It must be signed by every person who is named therein as a director or proposed director of the company.

Validity of Prospectus
The prospectus must be issued within 90 days after the date on which a copy thereof has been delivered for registration to ROC.

Statement by Expert
Who is an expert?

• ‘Expert’ includes an engineer, valuer, Chartered Accountant, Company Secretary, Cost Accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force. – Section 2(38)
• Expert should be unconnected with the incorporation or management of the company.
• If prospectus is issued by company includes expert’s statement, it shall include following statement that:
  • He is not, and has not been engaged or interested in the formation or promotion or management of company, and
  • He has given his consent to issue prospectus and not withdrawn such consent.

Variation In Terms Of Prospectus – Section 27
Following steps should be taken by company to vary terms of prospectus:
Special Resolution
Company shall pass Special Resolution to vary terms of prospectus or object for which prospectus is issued.

Publish Notice

• Notice in respect of such resolution shall be published in one English newspaper and one vernacular language newspaper where the registered office of company is situated.
• It shall also indicate justification for variation.

Restriction on Use of Money
Company cannot use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company.

Exit Offer to Dissenting Share-holders

• Dissenting shareholders who have not agreed to the proposal to vary the terms of contract or object of prospectus shall be given exit offer.
• Exit offer is given by:
  • Promoters; or
  • Controlling shareholders
• Exit offer shall be given as per manner and conditions specified by Securities and Exchange Board of India (SEBI).

Shelf Prospectus An Din Formation Memorandum – Section 31
Meaning of Shelf Prospectus
‘Shelf Prospectus’ means a prospectus issued by company for one or more issues of the securities over period of one year through single offer document.

Issue and Filing of Shelf Prospectus & Information Memorandum

• Class of companies as prescribed by SEBI may file Shelf Prospectus with ROC at the time of first offer of securities.
• Shelf Prospectus is valid for period of 1 Year.
• A company filing a shelf prospectus with the Registrar shall not be required to hie prospectus afresh at every stage of offer of securities by it within a period of validity of such shelf prospectus.
• A company filing a shelf prospectus shall be required to file an Information Memorandum on all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities.
• An Information Memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus.
• Where an update of Information Memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus.
• Information Memorandum shall be prepared in Form PAS-2 and filed with ROC within one month prior to issue of second or subsequent offer of securities under the Shelf Prospectus.

Liability
Shelf Prospectus and Information Memorandum shall carry same liability as prospectus carries in case of mis-statement.

Red Herring Prospectus (Rhp)- Section 32
Meaning
It means a prospectus which does not have complete particulars on the price of securities offered and the quantum of securities offered.

Provisions

• RHP may be issued by company before issue of prospectus.
• It may give a band or minimum figure of issue size and issue price.
• It should be filed with ROC at least 3 days before opening of subscription list and offer.
• On closing of public offer of securities, the details of information which are not included in RHP are required to be filled with ROC and SEBI.
• RHP carries same obligation as are applicable to a prospectus.

Use of RHP
Generally, RHP is used in case of public issue by way of Book-Building method.

Abridged Prospectus – Section 33
What is Abridged Prospectus?

• Abridged prospectus means a memorandum containing salient features of prospectus.- Section 2(1)
• It is prepared as per format specified by SEBI.

Requirements

• Every application form issued to subscribe security shall be accompanied with abridged prospectus.
• Abridged prospectus and the share application form should bear the same printed number and the two should be separated by a perforated line.
• Company is duty bound to furnish prospectus on demand.

When is Abridged Prospectus not Required?
Abridged prospectus is not required to be accompanied with application form when :

• Application form is issued to invite person to enter into underwriting agreement; or
• In relation to securities which are not offered to public.

Golden Rule For Drafting Prospectus
Golden Rule

• Golden rule says that since the public is invited to take shares on the faith of the representations made in the prospectus, everything must be stated with strict and scrupulous accuracy.
• The public is at the mercy of the company promoters, hence nothing should be stated as fact which is not so, and no fact should be omitted, the existence of which might in any degree affect the nature or quality of the privileges and advantages which acted as an inducement to take shares.
• Thus, the true nature of the company’s venture should be disclosed.
• Golden rule was evolved first time in the case of New Brunswick & Canada Rly. & Land Co. vs. Muggeridge.

Case on Golden Rule
Rex vs. Kylsant

• Prospectus issued by company was containing all statements literally true but it fails to disclose that company had paid dividend during last 5 years out of capital profit.
• The prospectus mentioned that company had been paying dividend during last 5 years regularly.
• Prospectus was held to be false in material particulars and the Managing Director and Chairman, who knew that it was false were held guilty of fraud.

Untrue Statement or misstatement in Prospectus
Meaning

• A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included; and
• Where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included.
• Misleading statement means a statement made by a person who does not care whether the statement is true or false.
• It includes following:
  • the deliberate suggestion of an untrue fact by someone,
  • the active concealment of a fact by one having knowledge of the fact,
  • a promise made without any intention of performing it, or
  • any other act with an intent to deceive

Examples of Mis-statement in Prospectus

• Statement in prospectus that share capital has been subscribed when it has only been allotted in fully paid shares to company’s contractor.
• Statement that two leading businessmen of repute have agreed to become directors of company when they had only expressed their willingness to help the company.
• Statement that the proceeds of issue of debentures were to be utilized for improving and developing the business whereas real object of issuing w’as to pay off past liabilities.
• Statement that directors and their friends have subscribed a large portion of capital of company and that they now offer the remaining shares to public whereas the fact was that they had only subscribed ten shares each.
• Prospectus represents that shares will be issued at half of their nominal value. (Companies Act, 2013 prohibits issue of shares at discount)

Liability for Mis-statement
Mis-statement or untrue statement in prospectus attracts:

• Civil Liability
• Criminal Liability

Civil Liability For Mis-Statement In Prospectus – Section 35
When is the Civil Liability Attracted?

• Civil liability is attracted, if any person has subscribed for security of company acting on statement which is untrue, misleading or wrong statement included in prospectus and suffered a loss.
• Untrue statement may be included without any intention to cheat or without any knowledge.

Who are Liable to Compensate?
Following persons are liable to compensate loss suffered due to wrong statement or mis-statement in prospectus:

• Company
• Director of the company at the time of issue of prospectus
• Person who has agreed to become director of company at the time of issue of prospectus
• Promoters of company
• Person who has authorised to issue prospectus
• Expert whose statement is included.

Exceptions or When can Civil Liability be Avoided?
Person is not liable, if he proves that:

• He withdrew his consent to act as director before issue of prospectus and it was issued without his authority or consent; or
• Prospectus was issued without his knowledge or consent and on becoming aware of its issue, he forthwith gave public notice.
• His statement is based on expert opinion or report
  • He had reasonable ground to believe in truthfulness of statement of expert or valuer;
  • He had reasonable ground to believe that person making statement (Le. expert) was competent to make it; and
  • He (Le., expert) has given consent and not withdrawn consent

Original Allottee
Loss or damage can be demanded by original allottee and not by person who has purchased securities from open market.

Criminal Liability For Mis-Statement In Prospectus – Section 34
When is Criminal Liability Attract-ed?

• If prospectus includes any statement which is untrue or misleading with intention to mislead person, it attract criminal liability.
• Omission of any matter or information which is likely to mislead also attracts criminal liability.
  Edington vs. Fitzmaurice
• A company issued a prospectus inviting subscriptions for debentures. The prospectus contained a statement that the objects of the issue of debentures are:
  • to complete alterations in the buildings of the company
  • to purchase horses and vans, and
  • to develop the trade of the company
• However, the real object for raising money by debenture was to pay off the liabilities.
• Relying upon the statement in the prospectus, a person advanced money to the company and purchased its debentures.
• The company became insolvent, and that person filed a suit against the directors for fraud.
• The object of the debentures mentioned in the prospectus is totally contradictory to the actual purpose. It was held that the directors were liable for fraud.
• Statement made in the prospectus was material to the contract of purchasing debentures.

Who is Liable to be Punished?
Every person who authorises issue of prospectus with misstatement intentionally is liable for fraud under section 447.

Exceptions or When can Criminal Liability be Avoided?
Person is not liable, if he proves that:

• Such statement or omission was immaterial; or
• He had reasonable grounds to believe and did up to the time of issue of the prospectus believe, that the statement was true.

Miscellaneous Provisions
Offer for Sale by Members – Section 28

• Where members propose to offer their holding of shares to public in consultation with BOD, they should follow prescribed procedure (ie., to make an offer for sale)
• Document of offer for sale is prospectus and all provisions of prospectus are equally applicable to it.

Issue of Securities in Dematerialisation form – Section 29

• Following companies should issue securities in dematerialisation form:
  • Every company making public offer; and
  • Such other class of companies as may be prescribed.
• Pre-holding of securities by promoters of every public company making public offer shall be converted in dematerialisation if it is in physical holding.
• Other company may convert its securities in dematerialisation form.

Advertisement of Prospectus – Section 30
Where an advertisement of any prospectus of a company is published, it shall specify therein contents of its memorandum as regards to:

• objects
• liability of members
• amount of share capital of the company
• names of the signatories to the memorandum and the number of shares subscribed for by them
• capital structure

Punishment for Fraudulently Inducing Persons to Invest Money – Section 36

• Any person who fraudulently induces any person to invest money by false or misleading statement is punishable for fraud.
• It means any person is liable for fraud who knowingly makes any statement, promise or forecast which is false, misleading or conceals material facts, to induce another person to enter into:
  • Any agreement for acquiring or subscription of securities
  • Any agreement for underwriting securities
  • Any agreement for obtaining credit facilities from bank of financial institution.
• He is punishable with:
  • imprisonment of not less than 6 months but not more than 10 years; and
  • fine not less than amount of fraud but which may extend 3 times amount involved
• If public interest is invok ed, minimum jail term of 3 years.
• Class action under section 37 of the Companies Act, 2013 can be taken.

Class Action – Section 37
Group of persons who are affected by misleading prospectus can file suit together. It is known as class action.

Punishment for Personation for Acquisition etc., of Securities – Section 38

• Any person who applies for securities:
  • In fictitious name; or
  • Make multiple applications; or
  • Induce company to allot or transfer securities in fictitious name, is liable for fraud.
• Any amount so received through disgorgement of gain or disposal of such securities should be credited to Investor Education and Protection Fund (IEPF).

Practice Questions

Question 1.
‘Red-herring prospectus’ means a prospectus which has complete particulars on the price of the securities offered and the quantum of securities offered.
Answer:
Statement is false. Red-herring prospectus does not have complete particulars on the price of securities offered and the quantum of securities. It contains details regarding issue size and price band.

Question 3.
Shortcut Ltd. has allotted shares to investors of the company without filing prospectus with the Registrar of Companies, Mumbai. Explain the remedies available to the investors in this regard.
Answer:
Company cannot allot any shares without filing prospectus with ROC. Any allotment of shares by company without filing prospectus will become irregular allotment. Here, allotment of shares can be avoided by allottee within reasonable time. Further, directors are liable to pay loss to allottee.

Question 4.
An advertisement in a newspaper read as ‘Some shares are still available for sale according to the terms of the prospectus of the company which can be obtained on application.’ Is advertisement published in newspaper prospectus?
Answer:
Please refer definition of prospectus from paragraph no. 1. In Pramatha Nath Sanya! vs. Kali Kumar Dutt, it was held that an advertisement in a newspaper read as ‘some shares are still available for sale according to the terms of the prospectus of the company which can be obtained on application.’ It was held to be a prospectus as it invited public to purchase shares.

Past Examination Questions

Question 1.
Explain the concept of ‘Deemed Prospectus’ under the Companies Act, 2013. Point out the circumstances where under issuing the prospectus / is not mandatory. (CA May 2004, November 2015)
Answer:

Question 2.
A Company issued a prospectus. All the statements contained therein were literally true. It is also stated that the company had paid dividends for a number of years, but did not disclose the fact that dividends were not paid out of trading profits, but out of capital profits. An allottee of shares wants to avoid the contract on the ground that the prospectus was false in material particulars. Decide. (CA May 2004)
Or
XYZ Ltd. issued a prospectus inviting the public for subscription of its equity shares stating in it that company possesses good financial health and paying dividends to it’s equity shareholders consistently and regularly @20 per cent over the last five years. The fact was company was running in loss since last three years and it was paying dividends to its shareholder out of accumulated profits. Mr. Amit read the prospectus and bought 500 shares from the company. Discovering the mis-statement made by the company in the company prospectus, he wants to rescind the contract and claim the damages from the company.
Referring the provisions of the Companies Act, 2013, decide. Whether Mr. Amit will succeed. (CA May 2013)
Answer:
Any person who takes shares on the faith of statement of facts contained in a prospectus can cancel the contract if those statements are false or untrue. A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included. Again, prospectus is considered to be false and misleading if it does not include statutory information.
In this case, the fact that dividends were paid out of capital profit and not out of trading profits was not disclosed in the prospectus. This fact gives a false impression that the company was a profitable one. Hence, Y can avoid the contract of allotment of shares. (Rex vs. Kylsant).

Question 3.
What is meant by ‘Abridged Prospectus’? Is it necessary to furnish abridged form of prospectus along with the application form for shares? Under what circumstances an abridged prospectus need not accompany the detailed information regarding prospectus along with the application form? (CA November 2004, June 2009)
Answer:

Question 4.
With a view to issue shares to the general public a prospectus containing some false information was issued by a company. Mr. X received a copy of the prospectus from the company, but did not apply for allotment of ‘ any shares. The allotment of shares to the general public was completed by the company within the stipulated period. A few months later, Mr. X bought 2000 shares through the stock exchange at a higher price which later on fell sharply, X sold these shares at a heavy loss. Mr. X claims damages from the company contained a false statement. Referring to the provisions of the Companies Act, 2013 examine whether X’s claim for damages is justified. (CA November 2006)
Or
With a view to issue shares to the general public a prospectus containing some false information was issued by a company. Mr. Damu received copy of the prospectus from the company, but did not apply for allotment of any shares. The allotment of shares to the general public was completed by the company within the stipulated period. A few months later, Mr. Damu bought 4000 shares through the stock exchange at a higher price which later on fell sharply. Damu sold these shares at a heavy loss. Mr. Damu claims damages from the company for the loss suffered on the ground that the prospectus issued by the company contained a false statement. Referring to the provision of the Companies Act, 2013 examine whether Damu’s Claims for damages is justified? (CA May 2017)
Answer:
The right to claim compensation for loss or damage sustained by reason of any untrue statement in a prospectus is available only to a person who has subscribed securities based on the faith of the prospectus containing untrue statement. Person who has purchased securities from open market has no remedy against the company or its directors or promoters. – Peek vs. Gurney. Mr. X will not succeed in this case.

Question 5.
When is an expert not liable for untrue statements in the prospectus issued by a company? State the liability of an ‘Expert’ in case of misrepresentation in the prospectus. When will an expert not be liable for his untrue statements made in the prospectus? (CA November 2006)
Or
State the liability of an ‘Expert’ in case of misrepresentation in the prospectus. When an expert will not be liable for his untrue statements make in the prospectus? (CA November 2012)
Answer:

Question 6.
What is meant by ‘Red-herring prospectus’? State the circumstances under which such prospectus is required to be filled with the registrar of Companies. What is the requirement relating to filing of final prospectus in such cases? (CA May 2008)
Answer:

Question 7.
P Ltd. issued and published its prospectus to invite the investors to purchase its shares. The said prospectus contained a false statement. Mr. X purchased some partly paid shares of the company in good faith on ‘ the stock exchange. Subsequently, the company was wound up and the name of Mr. X was in the list of contributors. Decide:
(I) Whether Mr. X is liable to pay the unpaid amount?
(II) Can Mr. X sue the directors of the company to recover damages? (CA May 2008, 2016)
Answer:
Mr. X is not the original allottee of shares, since he purchased shares from the secondary market, viz stock exchange.
I. Mr. X is liable to pay the unpaid calls, since he holds partly paid shares and he is liable as a contributory
II. Mr. X cannot sue the directors to recover damages, since Mr. X has no cause of action against the company or the directors as he did not subscribe for the shares on the faith of a misleading prospectus.

Question 8.
M applies for share on the basis of a prospectus which contains misstatement. The shares are allotted to him, who afterwards transfers them to N. Can N bring an action for a rescission on the ground of misstatement?
Decide under the provisions of the Companies Act, 2013. (CA November 2008)
Answer:
No, N cannot bring an action for rescission on the ground of misstatement as N had not contracted with the company on the basis of prospectus containing misstatement. The right to rescind the contract is available only to original allottee. (Peek vs. Gurney)

Question 9.
Modern Furniture Limited was willing to purchase teakwood estate in Chhattisgarh State. Its prospectus contained some important extracts from an expert report giving the number of teakwood trees and other relevant information in the estate in Chhattisgarh State. The report was found inaccurate. Mr. X, purchased the shares of Modern Furniture Limited on the basis of the above statement in the prospectus. Will Mr. X have any remedy against the company? When an expert will not be liable? State the provisions of the Companies Act, 2013 in this respect. (CA November 2009)
Answer:
Mr. X Purchased the shares of .Modern Furniture Ltd. on the basis of prospectus containing inaccurate expert report. Therefore, Mr. X has remedy against the expert.
The expert will not be liable if he proves that the prospectus was issued without his knowledge or consent and on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

Question 10.
Explain the meaning of ‘Shelf Prospectus’. State the law relating to Shelf Prospectus contained in Companies (Amendment) Act, 2000. (CA y November 2013)
Or
When is a company required to issue a ‘Shelf Prospectus’ under the pro-visions of the Companies Act, 2013? Explain the law relating to issuing and filling of such prospectus. (CA November 2016)
Answer:

Question 11.
State whether the following statements are correct or incorrect: Television advertisements and visual clips giving required details can be treated as prospectus. (CA May 2017)
Answer:
Statement is correct.