Prospectus and Allotment of Securities - Public Offer
Section 23. Public offer and private placement.
23(1).
A public company can issue securities in the following ways:
Public Offer through a Prospectus
A public company may offer its shares or debentures to the public by issuing a prospectus.
This process is called a public offer, which includes:
Initial Public Offer (IPO): When shares are offered to the public for the first time.
Further Public Offer (FPO): When a listed company issues new shares after its IPO.
The company must comply with all requirements under the Companies Act, 2013 and the SEBI Act, 1992.
The company should comply with the detailed disclosure and investor protection norms.
Private Placement
A company may also raise funds through a private placement, which means offering securities to a select group of identified persons.
The funds are not raised through General Public.
Such an issue must follow the specific rules under Part II of this Chapter, including filing, approval, and disclosure requirements.
Rights Issue or Bonus Issue:
A company can also issue securities to its existing shareholders.
A Rights Issue gives current members the option to buy more shares in proportion to their holdings.
A Bonus Issue gives free shares to shareholders, generally from accumulated profits or reserves.
If the company is listed or plans to be listed, it must also follow the SEBI Act, 1992 and the relevant SEBI regulations in addition to the Companies Act.
23(2).
A private company can issue securities only in limited ways:
(a). By making a rights issue or bonus issue to its existing members, as per the Companies Act.
(b). Through private placement.
Private companies are not allowed to invite the general public to subscribe to their shares or debentures.
23(3).
Certain classes of public companies may be permitted to issue specific types of securities for listing on stock exchanges in foreign or permitted jurisdictions.
This enables Indian companies to raise funds from foreign investors, subject to conditions prescribed by the Central Government.
23(4).
The Central Government may grant exemptions to such public companies from certain provisions of:
This Chapter (on the issue of securities).
Chapter IV (share capital and debentures).
Sections 89, 90, and 127 of the Act.
Every such exemption notification must be placed before both Houses of Parliament.
Explanation:
For this Chapter, the term Public offer includes:
Initial Public Offer (IPO) - First public issue of shares.
Further Public Offer (FPO) - Additional issue of shares after the IPO.
Offer for Sale (OFS) - Sale of existing shareholders’ shares to the public through a prospectus.
Section 24. Power of Securities and Exchange Board (SEBI) to regulate issue and transfer of securities.
24(1).
(a).
For the following companies:
Listed companies (Companies whose shares are traded on a recognised stock exchange)
Companies that intend to get their securities listed.
The powers relating to: (i) Issue and transfer of securities & (ii). Non-payment of dividends will be regulated and administered by the SEBI.
SEBI has the authority to make regulations for these matters to ensure investor protection, fair trading, and compliance with securities laws.
Therefore, once a company is listed or preparing to be listed, SEBI becomes the main regulator for all its securities-related activities.
These activities include issuing new shares, transferring them, or handling dividend-related issues.
(b).
For all other companies (companies that are not listed and do not plan to list their shares, these matters will be administered by the Central Government.
To clarify any confusion, the Act specifies that other powers related to matters such as:
Issue of prospectus.
Return of allotment.
Redemption of preference shares.
Any other issue specifically mentioned in the Act
Will continue to be exercised by the Central Government, the Tribunal, or the Registrar of Companies (ROC), depending on the law in each case.
So, SEBI’s role is limited to listed or to-be-listed companies for securities matters, while the Central Government and other authorities handle all other areas.
24(2).
SEBI will exercise its powers under the SEBI Act, 1992, for the matters assigned to it above and those delegated to it under the proviso to section 458(1).
Section 11 of the SEBI Act, 1992 defines the main powers and responsibilities of SEBI to regulate the securities market, protect investors, and ensure fair practices.
Section 11: General powers to regulate the securities market, protect investors, and prevent fraud.
Section 11A: Power to regulate issue of capital and disclosure requirements.
Section 11B : Power to issue directions to companies or intermediaries.
Section 11D: Power to restrain persons from accessing the securities market.
Section 25. Document containing offer of securities for sale to be deemed prospectus.
25(1).
When a company allots or agrees to allot any of its securities with the intention that those securities will later be offered for sale to the public:
The document through which that offer is made is treated as a prospectus issued by the company itself.
All the legal requirements and liabilities that apply to a prospectus, such as:
The need for truthful statements, full disclosure of material facts, and accountability for any misstatements or omissions, apply to that document as well.
Even if the offer is made by another person or entity, the law treats it as if the company itself issued the prospectus.
Both the company and the offeror are responsible for any false or misleading information contained in it.
25(2).
If a company allots or agrees to allot securities, it’s usually assumed to be for a public offer unless stated otherwise.
This presumption applies if either of these happens:
An offer for sale of those securities is made within six months after the allotment or agreement.
At the time of the public offer, the company had not yet received full payment for those securities.
Example:
ABC Pvt. Ltd., a private company, allotted 10,000 shares to a small group of investors in January 2025.
Later, in March 2025, within six months of the allotment, those investors offered the same shares for sale to the public through advertisements and brokers.
In such a case, even if ABC Pvt. Ltd. claims that it did not intend to offer these shares to the public:
The law will presume that the original allotment was actually made with the intention of a public offer, since the shares were offered for sale to the public within six months of being allotted.
25(3).
When Section 26 (which governs the contents of a prospectus) is applied to such a document, it must also include additional details:
(a). The net amount of consideration received or to be received by the company for the securities being sold.
(b). The time and place where the contract under which the securities were allotted can be inspected.
The persons making the offer are treated as if they were named in the prospectus as directors of the company.
So the persons making the offer are responsible and liable for the information provided.
25(4).
When a company or a partnership firm makes an offer for sale, the official document for that offer doesn’t need to be signed by everyone in the company or firm.
If it’s a company, the document just needs to be signed by any two directors.
If it’s a partnership firm, it needs to be signed by at least half of the partners.
Section 26. Matters to be stated in Prospectus.
26(1).
Every public company that issues a prospectus, whether at the time of its formation or later, must ensure it is dated and signed before it is issued.
The prospectus must include all information and financial reports as may be specified by SEBI in consultation with the Central Government.
It must also include a declaration confirming that the company has complied with the provisions of:
The Companies Act, 2013,
The Securities Contracts (Regulation) Act, 1956, and
The SEBI Act, 1992, along with all the rules and regulations made under these Acts.
26(2).
The above requirement does not apply in certain cases, namely:
(a).
When a company issues a prospectus or application form only to its existing shareholders or debenture-holders.
This is done in order to invite them to buy additional shares or debentures (rights issue), whether or not they can transfer their rights to others.
When a company gives its existing shareholders or debenture-holders the right to buy more shares or debentures, they may be allowed to pass on that right.
So these existing shareholders or debenture-holders to are permitted to pass on (transfer) that right to another person.
If the offer allows this transfer, it’s called a renounceable offer.
If it doesn’t allow the transfer, it’s a non-renounceable offer.
(b).
When a company issues a prospectus or application form for shares or debentures identical to those already listed or traded on a recognised stock exchange.
These exceptions exist because the investors in such cases already have access to key information, and the securities are already regulated by the stock exchange.
26(3).
Only the above-stated exceptions are exempted from complying with the provisions in (1).
All other prospectuses or application forms, whether they are issued at the time of incorporation or later, must follow the requirements of (1).
Explanation:
The date written on the prospectus will be treated as the date of publication, which determines compliance and time limits.
26(4).
Before a prospectus is issued, a signed copy of it must be filed with the Registrar of Companies (ROC).
The copy must be signed by every person named as a director or proposed director, or by their duly authorised attorney.
ROC will then have an official record and can verify compliance before the document is circulated to the public.
26(5).
If the prospectus contains any statement made by an expert (for example, a valuer, engineer, or auditor), certain conditions must be met:
The expert must be a person not involved in the company’s formation, promotion, or management.
The expert must give written consent to include their opinion in the prospectus.
The expert must not withdraw that consent before the copy is filed with the ROC.
The prospectus must also clearly state that such consent has been given.
26(6).
Every prospectus, on its face, must clearly:
(a). State that a copy has been delivered to the Registrar for filing.
(b). List or refer to all the documents attached or referred to in the filed copy.
26(7). Omitted
26(8).
A prospectus becomes invalid if it is released more than 90 days after the date it was submitted to the Registrar.
26(9).
If a prospectus is issued in violation of any of these requirements, then:
The company can be fined not less than ₹50,000 and up to ₹3,00,000.
Every person knowingly involved in issuing such a prospectus will face the same fine range.
Section 27 . Variation in terms of contract or objects in prospectus.
27(1).
A company cannot change the terms of a contract mentioned in its prospectus.
It also cannot change the objects (purposes) for which the money was raised through the prospectus.
It can do so only if it gets the approval of the shareholders through a special resolution passed in a general meeting.
Whenever the company proposes such a change, it must:
Publish the details of the proposed variation in at least two newspapers.
One in English and one in the vernacular language of the city where the company’s registered office is located.
The publication must clearly explain the reasons and justification for the proposed change.
A company is strictly prohibited from using the funds raised through a prospectus to buy, trade, or deal in equity shares of any other listed company.
27(2).
If some shareholders disagree with the proposed variation, that is, they are dissenting shareholders, then they must be provided with an exit opportunity.
In such cases, the promoters or controlling shareholders must offer to buy the shares of those dissenting shareholders at an exit price.
The Exit Price and and the manner to exit will be prescribed by SEBI through its regulations.
Section 28. Offer of sale of shares by certain members of the company
28(1).
Sometimes, certain existing members (shareholders) of a company may wish to sell their shares to the public instead of the company issuing new shares.
When they plan to do this, they must do so in consultation with the company’s Board of Directors and follow the procedure prescribed under law.
During an Offer for Sale (OFS), which is a process where existing shareholders, such as promoters or large investors, sell part or all of their holdings to the public.
This is done through a recognised mechanism. (Via a stock exchange or a public offer).
28(2).
The document used to make such an offer to the public will be treated as a prospectus, just like one issued by the company for a public offer.
Therefore, All legal provisions and rules related to:
The contents of a prospectus.
Liability for misstatements or omissions.
Other requirements of disclosure and accuracy will apply equally to this document.
So, even though the company itself is not issuing new shares, the law treats the offer document as if it were a company-issued prospectus.
This is done in order to ensure full investor protection and accountability.
28(3).
When shareholders want to sell their shares to the public, they must first give the company permission to manage the entire process for them.
These shareholders can be companies , individuals or both.
By giving this authorisation, the shareholders allow the company to take care of everything involved in the sale, such as:
(a). Preparing and submitting the offer document.
(b). Getting required approvals.
(c). Dealing with regulators such as SEBI and managing all other formalities and arrangements needed for the offer.
However, since the offer is being made for the benefit of those members, they are required to reimburse the company for all the expenses it incurs.
Expenses only in connection with the offer such as legal, administrative, and marketing costs will be reimbursed,
Section 29. Public offer of securities to be in dematerialised form.
29(1).
Companies must issue, hold, and transfer their securities, such as shares and debentures, in dematerialised form, instead of physical paper certificates.
Dematerialised form means Electronic Form.
It applies to two categories of companies:
1. Every company making a public offer.
2. Any other class or classes of companies that the Central Government may prescribe.
A public offer refers to an invitation made by a company to the general public to purchase its shares or other securities.
When a company is going public through an IPO or follow-on issue, then the company should offer its securities only in dematerialised form.
The Central Government can include other types of companies apart from those making public offers within the scope of this rule.
Every company covered by this provision must comply with the Depositories Act, 1996, and the regulations made under it.
These Regulations lay down the legal framework and operational process for issuing and managing securities in electronic form.
29(1A).
If a company is an unlisted company (not listed on a stock exchange) but falls within the category prescribed by the government, then:
Its shares and securities must exist only in demat (electronic) form.
Any transfer or holding of those securities must follow the legal process under the Depositories Act, 1996.
29(2).
For companies not legally required to use demat form, the law gives flexibility:
They can choose to continue with physical certificates or switch to electronic (demat) ones.
This has to be done in accordance to the relevant provisions of the Companies Act, 2013 and the Depositories Act, 1996.
Section 30. Advertisement of prospectus.
When a company publishes an advertisement of its prospectus, it must include key details to ensure transparency for potential investors.
The advertisement should clearly state:
The main objects of the company as mentioned in its Memorandum of Association (MOA).
The liability of its members, whether limited or unlimited.
The amount of its share capital.
The names of the subscribers to the MOA and the number of shares taken by each of them.
The company’s overall capital structure.
Section 31 . Shelf prospectus.
31(1).
Certain classes of companies, as specified by the SEBI may issue a shelf prospectus at the time of their first offer of securities.
A shelf prospectus is a single prospectus that remains valid for a maximum period of one year/
The one-year period starts from the opening date of the first offer.
During this validity period, for any subsequent offers of the same securities, the company does not need to issue a new prospectus each time.
31(2)
Before making any second or later offer under the same shelf prospectus, the company must file an information memorandum with the ROC.
This memorandum must include all material changes that have occurred since the previous offer such as:
New charges created on company assets.
Changes in the company’s financial position.
Any other prescribed updates.
If investors have already applied for securities and paid advance money before such changes occurred then:
The company must inform them of these changes.
If those investors choose to withdraw their applications, the company must refund the entire subscription amount within 15 days.
31(3)
Every time a company files such an information memorandum, it is read together with the shelf prospectus.
Both these documents together are treated as a full prospectus for that specific offer.
Explanation:
A shelf prospectus is a single prospectus that allows a company to make multiple public issues of the same securities over a fixed period.
This is usually up to one year and the company can make the issue without issuing a new prospectus each time.
Section 32. Red herring prospectus.
32(1)
A company that plans to make a public offer of securities may issue a Red Herring Prospectus (RHP) before issuing the final prospectus.
This document is used mainly during book-building or price discovery processes, where the exact price or quantity of securities is not yet finalized.
Book Building
Book building is a process used during an IPO (Initial Public Offering) to decide the issue price of shares.
Instead of fixing one price in advance, the company collects bids from investors at different prices and quantities to find the most appropriate price.
Price Discovery Process
Price discovery is the outcome of book building.
It means finding the price at which investor demand matches the number of shares offered.
32(2)
The company must file the Red Herring Prospectus with the ROC at least three days before the opening of the subscription list and offer.
32 (3)
A Red Herring Prospectus carries the same legal obligations and liabilities as a regular prospectus.
Any changes or variations between the red herring version and the final prospectus must be clearly highlighted in the final document.
This is done so the investors can easily identify them.
32(4)
After the public offer closes, the company must file the final prospectus with the Registrar and SEBI.
This final version must state:
The total capital raised (equity or debt).
The final issue price of the securities.
Any additional details not included earlier in the Red Herring Prospectus.
Explanation:
A Red Herring Prospectus is a preliminary prospectus that does not include complete details of the price or number of securities being offered.
It gives investors an overview of the issue and company information, while the final terms are added once the pricing and allotment are finalized.
Section 33. Issue of application forms for securities.
33(1)
A company cannot issue an application form for purchasing its securities (like shares or debentures) unless it is accompanied by an abridged prospectus.
An abridged prospectus is a short summary of the main prospectus.
It contains key information about the company and the offer, so that investors can make informed decisions quickly.
However, there are two exceptions to this rule:
(a). Bona fide invitation for underwriting
If the application form is issued only to invite a person to enter into an underwriting agreement, and the invitation is genuine and made in good faith,
And the person is being asked to guarantee the subscription or sale of securities, then the requirement to attach an abridged prospectus does not apply.
(b). Securities not offered to the public
If the securities are not being offered to the public, such as in the case of a private placement, where offers are made to selected persons only, then:
The requirement of issuing an abridged prospectus does not apply.
33(2)
If any person requests a full prospectus before the closing of the subscription list or offer, the company is obliged to provide it upon request.
33(3)
If the company fails to comply with these provisions , then the company will be liable to a penalty of ₹50,000 for each default.
Section 34. Criminal liability for mis-statements in prospectus.
If a prospectus issued, circulated, or distributed by a company contains any statement that is untrue or misleading, either by how it is written or by leaving out important information that could mislead investors, then:
Every person who authorised its issue will be held criminally liable under Section 447 of the Companies Act, 2013.
This liability does not apply to a person if they can prove either of the following:
(a). That the false statement or omission was immaterial, i.e., it was too minor to affect an investor’s decision.
(b). That they had reasonable grounds to believe and actually did believe until the time of issue that the statement was true or that the inclusion or omission was necessary.
Section 35 . Civil - Liability for Misstatement in Prospectus.
35(1)
If a person buys securities of a company based on a misleading statement, inclusion, or omission in the prospectus and suffers a loss, then the following persons are liable to pay compensation:
(a). Every director of the company at the time the prospectus was issued.
(b). Any person named or authorised to be named as a director, or who has agreed to become a director.
(c). Every promoter of the company.
(d). Every person who authorised the issue of the prospectus.
(e). Every expert whose report or opinion was included in the prospectus under Section 26(5).
This liability is in addition to any criminal punishment under Section 36 (fraudulent inducement to invest).
35(2)
A person can avoid liability if they can prove any of the following:
(a).
They withdrew consent to become a director before the prospectus was issued, and it was issued without their approval.
(b).
The prospectus was issued without their knowledge or consent.
Soon as they learned of it, they publicly notified that it was issued without their authority.
(c).
The case relates to a statement or report made by an expert in a prospectus.
The expert can defend themselves by proving that:
The statement or report was a true and fair representation.
The expert was competent to make such a statement or report.
The expert had reasonable grounds to believe that the statement was true and fair.
This belief must have continued up to the time the prospectus was filed with the Registrar or up to the time of allotment, whichever is relevant.
35(3).
If it is proven that the prospectus was issued with intent to defraud investors or for any fraudulent purpose, then:
Every person listed such as directors, promoters, experts will be personally liable, with no limit on the amount of compensation.
Section 36. Punishment for fraudulently inducing persons to invest money
If any person knowingly or recklessly makes a false, deceptive, or misleading statement, promise, or forecast, or deliberately hides important facts, in order:
To induce someone to enter into or offer to enter into any of the following types of agreements, then:
That person is guilty of fraud and will be punishable under Section 447 of the Companies Act, 2013.
There are 3 types of fraudulent inducements:
(a). Investment-related agreements
Trying to make someone buy, sell, subscribe for, or underwrite securities through false or misleading claims.
(b).Profit-based agreements
Creating or promoting an agreement whose purpose is to make profits from fluctuations in the value or yield of securities, whether genuine or pretended.
(c). Credit facility agreements
Misleading someone into entering an agreement to obtain loans / credit from a bank or financial institution through false promises/concealment of facts.
Section 37. Actions by affected persons
If a prospectus contains a misleading statement, or if any material information is included or omitted in a manner that misleads investors, then:
Any person, group of persons, or association of persons affected by it may File a suit, or take other legal action.
Such action may be taken under Section 34, Section 35, or Section 36 of the Companies Act..
Section 38. Punishment for personation for acquisition of securities.
38(1)
Any person who :
(a). Applies in a fake or fictitious name to buy or subscribe for a company’s securities.
(b). Applies multiple times using different names or combinations of their own name to get extra allotments.
(c). Tricks or induces a company to allot or transfer securities to themselves or someone else under a false identity.
Then they shall be punished under Section 447 (which deals with fraud and carries severe penalties, including imprisonment and fines).
38(2)
Every prospectus and application form for securities must clearly display this rule so that investors are warned against applying fraudulently.
38(3)
If a person is convicted under this section, the Court can also:
Take away any gains (disgorgement) made through such fraud.
Seize and sell the securities obtained through the fraudulent act.
Disgorgement means giving up money or profits that were earned through illegal or unethical means.
It is a legal remedy used to make sure that no one benefits from wrongdoing.
38(4)
The money recovered from such seizure or sale is to be credited to the Investor Education and Protection Fund (IEPF).
IPEF is a fund used to safeguard and educate investors.
Section 39. Allotment of Securities by Company.
39(1).
A company cannot allot securities unless:
The minimum subscription amount stated in the prospectus has been fully subscribed, and
The application money for that amount has been paid and received by the company through cheque or other valid instruments.
39(2).
Every applicant must pay at least 5% of the nominal (face) value of each security applied for.
SEBI may change this percentage or amount by regulations.
39(3).
If the minimum subscription is not achieved and the application money is not received within 30 days from the date of issue of the prospectus.
The company must refund the money to applicants within the prescribed time and manner.
Failure to do so attracts penalties.
The 30 day period can be a different period provided the SEBI prescribes the same.
39(4)
After allotment of securities, the company must file a return of allotment with the Registrar of Companies (ROC) in the manner prescribed.
This filing officially records who has been allotted shares.
39(5)
If the company or its officers:
Fail to refund the money
Fail to file the return of allotment then;
They are liable to a penalty of ₹1,000 per day for the period of default or ₹1 lakh, whichever is lower.
Section 40. Securities to be dealt within Stock Exchanges.
40(1)
Before offering securities to the public, the company must apply to one or more recognised stock exchanges.
The company must seek permission for its securities to be listed and traded on those exchanges.
The company must obtain this permission before making a public offer.
Without such permission, the company cannot proceed with the public offer.
40(2)
If the company’s prospectus states that an application has been made for listing, then the prospectus must also mention the name or names of the stock exchanges where the securities are proposed to be listed and traded.
40(3)
All money received from the public as part of the subscription process must be kept in a separate bank account in a scheduled bank.
This money cannot be used for any other purpose except:
(a). Adjusting against the allotment of securities once the listing permission is received.
(b). Refunding the money to applicants within the time specified by SEBI, if the company cannot allot securities for any reason.
40(4)
Any clause or condition trying to make an investor waive these protections (like agreeing to let the company use the money early) is void and unenforceable.
If a company violates any provision of this section:
The company faces a fine between ₹5 lakh and ₹50 lakh.
Every officer in default faces a fine between ₹50,000 and ₹3 lakh.
40(6)
A company may pay commission to a person (such as brokers or underwriters) for assisting in getting subscriptions to its securities/
This can be done only under conditions prescribed by law.
Section 41 . Global Depository Receipt.
A company can issue depository receipts (such as GDRs or ADRs) in a foreign country, but only after:
(a). Passing a special resolution in a general meeting.
(b). Complying with the manner and conditions prescribed by the Central Government and SEBI.
Explanation:
GDR - Global Depository Receipt
A GDR represents shares of an Indian company.
It is issued in a foreign country and traded on international stock exchanges (such as London or Luxembourg).
One GDR usually represents multiple equity shares of the company.
It helps the company raise capital from foreign investors without directly listing shares abroad.
ADR - American Depository Receipt
An ADR represents shares of a foreign (e.g., Indian) company.
It is issued and traded only in the United States on U.S. stock exchanges (like NYSE or NASDAQ).
ADRs are denominated in US dollars.
They allow U.S. investors to invest in foreign companies easily under U.S. market rules.
