Why does the Act bother with a deemed prospectus at all?

Because without it the whole prospectus regime could be avoided by one intermediate step. A company could allot its entire issue to an issue house, which would then sell to the public, and since the company never made an offer to the public it would never issue a prospectus and nobody would be liable for what the public was told. Section 25 closes that by deeming the offer-for-sale document to be a prospectus issued by the company itself, so the contents requirements and the liability provisions apply as if the company had gone to the public directly. The two presumption triggers — an offer within six months, or consideration not fully received — are evidentiary shortcuts identifying the arrangements most likely to be doing exactly this.

What happens if a private placement is made to 250 people by mistake?

It ceases to be a private placement and is treated as a public offer, with all the consequences that follow. The company must comply with the provisions applicable to a public issue, including registration of a prospectus with the Registrar and the contents requirements, and the persons responsible become exposed to liability under sections 34, 35 and 36 for anything untrue in the documents actually issued, which will not have been prepared to prospectus standards. The rule applies regardless of whether the securities are listed and regardless of the company's intention, which is what makes the offeree count something to be tracked carefully rather than estimated.

Can a company ever issue shares below face value?

Only in two situations, and the general rule is a flat prohibition with any share issued at a discount being void. The first exception is sweat equity, where shares are issued to directors or employees at a discount or for non-cash consideration in return for know-how or intellectual property rights or value additions, and this requires a special resolution specifying the number of shares, the current market price, the consideration and the class of recipients. The second is the conversion of debt into shares under a statutory resolution plan or debt restructuring scheme, where shares may be issued to creditors at a discount. Both are narrow, and neither permits an ordinary cash issue below par.

Why can't bonus shares come out of a revaluation reserve?

Because a revaluation reserve represents an unrealised gain. It arises from a valuer's opinion that assets are worth more than their carrying amount, not from any transaction, and it can reverse if values fall. Capitalising it would convert that opinion into share capital, which a reader of the balance sheet takes as capital actually contributed to the company, and would permanently entrench in the capital figure something that was never received. Section 63 therefore permits only free reserves, the securities premium account and the capital redemption reserve, each of which represents either realised profit or amounts actually received.

How much detail on SEBI regulations is examinable here?

Very little at Intermediate level. The Companies Act repeatedly refers to matters being as specified by SEBI — the contents of a prospectus, the salient features of an abridged prospectus, the classes of company that may file a shelf prospectus — and the examinable knowledge is that SEBI specifies them, not what the specifications say. Questions are set on the Act's own provisions: the time limits, the liability structure, the private placement conditions, the section 62 routes. If you find yourself learning SEBI regulation detail for this paper, you are studying Final Paper 3 material a level early.

Chapter 3 of 7

43%

CS Executive Company Law and Practice★ Chapters 3 and 4 of ICAI Paper 2 — together roughly 14 marks. The heaviest block in Part I and among the most consistently examined, with liability for misstatements and the private placement conditions appearing most often.

Prospectus, Share Capital and Debentures

How a company raises money from the public and from its members — the prospectus and liability for misstatements, private placement, kinds of share capital, further issues, bonus and buyback, and the issue and redemption of debentures.

⏱ 32 min readModerate difficulty✓ Free · exam-pattern aligned

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Timed practiceMCQs from this chapter with instant scoring

FlashcardsFormulas & traps on spaced repetition

CS Executive PYQsSolved previous-year questions

By the end of this chapter you'll be able to…

1Identify what constitutes a prospectus and distinguish the shelf, red herring, abridged and deemed variants
2Apply the deemed prospectus provision and the two circumstances raising the statutory presumption
3Set out civil liability under section 35, criminal liability under section 34 and the offence under section 36, with the defences available under each
4Explain when a statement is untrue, including misleading half-truths and omissions calculated to mislead
5Apply the private placement conditions and state the consequence of exceeding the offeree limit
6State the voting rights of preference shareholders and when they extend to all resolutions
7Apply section 62 to a further issue, including the rights issue notice period and the right of renunciation
8State the sources from which bonus shares may be issued and the prohibition on capitalising a revaluation reserve
9Set out the requirements for secured debentures, debenture trustees and the Debenture Redemption Reserve

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Why this chapter matters in CS Executive

A company raising money is doing one of two things, and the Act treats them very differently. Raising from the public means inviting people who cannot inspect the company and can only read what they are told, so the law responds with disclosure backed by liability. Raising privately means approaching identified persons who can make their own inquiries, so the law's concern shifts to preventing a private placement from becoming a public issue in disguise. Almost every rule in this chapter follows from that division, and seeing it makes the deemed prospectus provision, the two-hundred person cap and the advertising prohibition intelligible rather than arbitrary.

Before you start — revise these

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Preliminary and Incorporation of Companies

The public and private company classification determines which of these provisions apply.

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CA Foundation: Company Accounts — Shares and Debentures

The accounting side of share issue, forfeiture and debentures is assumed; this chapter supplies the law.

Prospectus, Share Capital and Debentures

Weightage: Chapters 3 and 4 of ICAI's Paper 2 syllabus, together roughly 14 marks. The heaviest block in Part I and among the most consistently examined.

The two ways a company raises money

A company raising money is doing one of two things, and the Act treats them very differently.

Raising from the public means inviting people the company does not know to subscribe. Those people cannot inspect the company or negotiate terms; they can only read what the company tells them. So the law's response is disclosure backed by liability: a prospectus with prescribed contents, and severe consequences for what is left out or misstated.

Raising privately means approaching identified persons who can make their own inquiries. Here the law's concern is different — that a private placement should not become a public issue by another name — so the rules cap the number of offerees and prohibit advertisement.

Everything in the prospectus chapter follows from that division.

Public offer and the prospectus

A prospectus is any document described or issued as a prospectus, and includes a red herring prospectus, a shelf prospectus, or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities.

Two elements matter: an invitation to the public, and for subscription or purchase of securities. A document that does neither is not a prospectus however it is titled.

Matters to be stated

Section 26 requires the prospectus to state the information and set out the reports specified by the Act and by regulations made by the Securities and Exchange Board of India, and to make a declaration about compliance with the Act and that nothing in it is contrary to the Act, the Securities Contracts (Regulation) Act, 1956 or the SEBI Act, 1992.

A prospectus must be dated, and that date is taken as the date of publication. It must be delivered to the Registrar for registration on or before publication, signed by every person named as a director or proposed director or by their authorised attorney.

A prospectus may not be issued more than ninety days after the date on which a copy was delivered to the Registrar; issued thereafter, it is deemed not to have been registered.

Variants

Shelf prospectus. Classes of companies prescribed by SEBI may file a shelf prospectus for one or more issues of securities. Its validity is not more than one year from the date of opening of the first offer, and no further prospectus is required for a second or subsequent offer within that period. An information memorandum must be filed with the Registrar within the prescribed time before a second or subsequent offer, stating new charges created, changes in the financial position and other prescribed changes.

Red herring prospectus. A prospectus which does not include complete particulars of the quantum or price of the securities. It must be filed with the Registrar at least three days before the opening of the subscription list and offer. On closing the offer, a prospectus stating the total capital raised, the closing price and other details not included in the red herring prospectus must be filed with the Registrar and SEBI.

Abridged prospectus. A memorandum containing such salient features of a prospectus as may be specified by SEBI. No application form for securities may be issued unless accompanied by an abridged prospectus, subject to exceptions.

Deemed prospectus. Where a company allots or agrees to allot securities with a view to their being offered for sale to the public, any document by which the offer for sale is made is deemed to be a prospectus issued by the company. Two circumstances give rise to the presumption that the allotment was made with that view: that the offer for sale was made within six months of the allotment, or that at the date of the offer the whole consideration had not been received by the company.

The provision exists to close an obvious avoidance route — issuing to an intermediary who then sells to the public, so that no prospectus is ever issued by the company itself.

Liability for misstatements

This is the most examined part of the chapter, and the structure is what matters.

Civil liability — section 35

Where a person has subscribed for securities on the faith of a prospectus containing an untrue statement, and has sustained loss or damage, the following are liable to pay compensation: every person who is a director at the time of issue; every person named in the prospectus as a director or proposed director with consent; every promoter; every person who has authorised the issue; and every person who is an expert referred to in section 26.

Defences available: that having consented to become a director, he withdrew his consent before issue and it was issued without his authority or consent; that the prospectus was issued without his knowledge or consent and on becoming aware he gave reasonable public notice; and that as regards a statement purporting to be made by an expert, he had reasonable ground to believe and did believe up to the time of issue that the expert was competent, had given the required consent, and had not withdrawn it.

Criminal liability — section 34

Where a prospectus includes any statement which is untrue or misleading in form or context, or where any inclusion or omission is likely to mislead, every person who authorises the issue is liable under section 447 for fraud.

Defence: that the statement or omission was immaterial, or that he had reasonable grounds to believe and did up to the time of issue of the prospectus believe that the statement was true or the inclusion or omission was necessary.

Fraudulently inducing persons to invest — section 36

Any person who knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals material facts, to induce another to enter into an agreement for acquiring, disposing of, subscribing for or underwriting securities, or to obtain credit facilities, is liable under section 447.

When a statement is untrue

A statement is untrue where it is misleading in the form and context in which it is included. An omission from a prospectus of any matter is deemed to be an untrue statement where it is calculated to mislead.

So a literally accurate statement that creates a false impression is untrue for these purposes, and a half-truth is treated as a lie. Candidates who answer only on literal falsity miss the point of the provision.

Private placement

Private placement means any offer or invitation to subscribe or issue of securities to a selected group of persons by a company, other than by way of public offer, through a private placement offer-cum-application letter, and which satisfies the prescribed conditions.

The conditions exist to prevent a private placement being a public issue in disguise:

the offer may be made to not more than two hundred persons in the aggregate in a financial year, excluding qualified institutional buyers and employees receiving securities under a scheme of employees stock option;
the two-hundred limit applies separately for each kind of security;
no fresh offer may be made unless allotments with respect to any earlier offer have been completed, withdrawn or abandoned;
the application money must be received by cheque, demand draft or other banking channel and not by cash;
allotment must be made within sixty days of receipt of application money, failing which the money must be repaid within fifteen days thereafter, and beyond that with interest at twelve per cent per annum from the expiry of the sixtieth day;
money received must be kept in a separate bank account and not utilised except for allotment or repayment;
no advertisement of the offer to the public, and no use of media, marketing or distribution channels.

The consequence of exceeding the limits is decisive: an offer to more than the prescribed number is treated as a public offer, and the company must comply with all the provisions applicable to a public issue, including the prospectus requirements — regardless of whether the securities are listed.

Share capital is of two kinds only: equity share capital, and preference share capital.

Equity share capital may be with voting rights, or with differential rights as to dividend, voting or otherwise in accordance with prescribed rules.

Preference share capital carries a preferential right to payment of dividend at a fixed rate, and a preferential right to repayment of capital on winding up.

A company limited by shares cannot issue irredeemable preference shares. Preference shares must be redeemable within twenty years of issue, except that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to redemption of a specified percentage annually at the option of the shareholder.

Voting rights

Equity shareholders vote on every resolution placed before the company, in proportion to their share in the paid-up equity capital.

Preference shareholders vote only on resolutions placed before the company which directly affect the rights attached to their preference shares, on any resolution for the winding up of the company, and on the repayment or reduction of its equity or preference share capital.

Where dividend on preference shares has not been paid for a period of two years or more, the preference shareholders acquire the right to vote on all resolutions placed before the company.

Variation of shareholders' rights

Rights attached to a class of shares may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class, or by a special resolution passed at a separate meeting of the holders of that class.

Where the variation affects the rights of any other class, the consent of three-fourths of that other class is also required.

Holders of not less than ten per cent of the issued shares of a class who did not consent to or vote for the resolution may apply to the Tribunal to have the variation cancelled, within twenty-one days after the consent or resolution.

Where a company having a share capital proposes to increase its subscribed capital by issuing further shares, they must be offered:

To existing equity shareholders in proportion to the paid-up capital on their shares — a rights issue. The offer must be by notice specifying the number of shares offered and giving a period of not less than fifteen days and not exceeding thirty days from the date of the offer, within which the offer, if not accepted, is deemed to have been declined. The offer includes a right of renunciation unless the articles otherwise provide.

To employees under a scheme of employees stock option, subject to a special resolution and prescribed conditions.

To any persons, if authorised by a special resolution, either for cash or for a consideration other than cash, if the price is determined by the valuation report of a registered valuer.

Section 62 does not apply to the increase of subscribed capital caused by the exercise of an option attached to debentures issued or loans raised by the company to convert them into shares, provided the terms were approved before the issue by a special resolution.

Issue of shares at a discount

Prohibited. A company may not issue shares at a discount, except sweat equity shares. Any share issued at a discount is void.

There is one narrow exception: a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme.

Sweat equity shares

Shares issued by a company to its directors or employees at a discount or for consideration other than cash, for providing know-how or making available rights in the nature of intellectual property rights or value additions. Issue requires a special resolution specifying the number of shares, current market price, consideration if any, and the class of directors or employees.

Bonus shares — section 63

A company may issue fully paid-up bonus shares out of its free reserves, the securities premium account, or the capital redemption reserve account.

No issue of bonus shares may be made by capitalising reserves created by the revaluation of assets. This prohibition is examined constantly, and the reason is that a revaluation reserve represents an unrealised gain; capitalising it would convert an unrealised gain into share capital, which the reader would take as capital actually contributed.

Conditions: authorised by the articles; recommended by the board and authorised in general meeting; the company has not defaulted in payment of interest or principal on fixed deposits or debt securities; the company has not defaulted in payment of statutory dues of employees such as contribution to provident fund, gratuity and bonus; and partly paid-up shares are fully paid-up at the date of allotment.

A bonus issue once announced cannot be withdrawn.

A company limited by shares or limited by guarantee and having a share capital may, by special resolution, reduce its share capital, subject to confirmation by the Tribunal, in any manner and in particular:

by extinguishing or reducing the liability on any of its shares in respect of share capital not paid up;
by cancelling any paid-up share capital which is lost or is unrepresented by available assets, with or without extinguishing or reducing liability on shares;
by paying off any paid-up share capital which is in excess of the wants of the company.

No reduction may be made if the company is in arrears in the repayment of any deposits accepted by it or the interest payable thereon.

Debentures

A debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

A debenture holder is a creditor, not a member. The consequences follow directly: debenture interest is a charge against profits payable whether or not the company profits, whereas dividend is an appropriation payable only out of profits; a debenture holder has no voting rights; and on winding up debenture holders rank ahead of shareholders.

No company may issue debentures carrying voting rights.

Secured debentures

Secured debentures may be issued subject to prescribed terms and conditions, including that the redemption date shall not exceed ten years from the date of issue, though certain classes of companies — infrastructure companies, infrastructure finance companies, infrastructure debt fund non-banking financial companies and companies permitted by a Ministry or the Reserve Bank — may issue secured debentures for a period exceeding ten years but not exceeding thirty years.

The issue must be secured by a charge on the properties or assets of the company or its subsidiaries, holding or associate companies, having a value sufficient for the due repayment of the amount and interest, and a debenture trust deed must be executed within the prescribed period.

Debenture trustees

A company must appoint a debenture trustee before issuing a prospectus or making an offer to the public or to more than five hundred members for the subscription of its debentures.

The trustee protects the interests of debenture holders and may approach the Tribunal where the company defaults or where the trustee is of the opinion that the assets are insufficient or likely to become insufficient to discharge the principal amount as and when it becomes due.

A person cannot be appointed a debenture trustee if he beneficially holds shares in the company, is a promoter, director, key managerial personnel or employee of the company or its holding, subsidiary or associate company, is beneficially entitled to moneys owed by the company other than remuneration payable as trustee, is indebted to the company, has furnished a guarantee in respect of the principal debts or interest, has any pecuniary relationship with the company amounting to prescribed limits, or is a relative of any promoter or of any person in the employment of the company as a director or key managerial personnel.

Debenture Redemption Reserve

Where a company issues debentures, it must create a Debenture Redemption Reserve out of the profits available for payment of dividend, and the amount credited to it may not be used except for the redemption of debentures. The requirement and the prescribed percentage vary by class of company under the rules.

Default in redemption

Where a company fails to redeem debentures on maturity or to pay interest when due, the Tribunal may, on the application of any or all debenture holders or the debenture trustee, direct the company to redeem the debentures forthwith on payment of principal and interest due.

Key formulas & results

Everything to memorise for the exam hall, in one card. Screenshot this for revision.

Prospectus must be registered with the Registrar on or before publication and may not be issued more than 90 days after delivery

Shelf prospectus validity: not more than one year from the opening of the first offer

Red herring prospectus: filed with the Registrar at least three days before the subscription list opens

Deemed prospectus presumption: offer for sale within six months of allotment, OR whole consideration not received at the date of the offer

Private placement: not more than 200 persons in the aggregate in a financial year per kind of security, excluding QIBs and ESOP employees

Private placement allotment within 60 days; repayment within 15 days thereafter; interest at 12% per annum from expiry of the 60th day

Preference shares redeemable within 20 years; infrastructure projects may exceed this with annual redemption at holder's option

Preference shareholders vote on all resolutions where dividend is unpaid for two years or more

Variation of class rights: three-fourths consent in writing or special resolution at a class meeting; 10% dissentients may apply to the Tribunal within 21 days

Rights issue notice: not less than 15 days and not exceeding 30 days from the date of the offer

Secured debentures: redemption within 10 years, extended to 30 years for specified infrastructure classes

CS Executive test series

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Prospectus, Share Capital and Debentures shows up in every CS Executive paper — sit a timed one and find out where you actually stand.

~16Marks

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Traps CS Executive sets — and how to dodge them

These are the exact option-traps and misreads that cost marks under negative marking.

WATCH OUT

✗ Answering a misstatement question only on literal falsity, when a misleading half-truth and an omission calculated to mislead are both untrue statements

✓

WATCH OUT

✗ Applying the two-hundred person private placement limit across all securities together, when it applies separately for each kind of security

✓

WATCH OUT

✗ Counting qualified institutional buyers and ESOP employees within the two-hundred limit, when both are excluded

✓

WATCH OUT

✗ Failing to state that exceeding the private placement limit converts the offer into a public offer with full prospectus compliance

✓

WATCH OUT

✗ Saying preference shareholders never vote, when they vote on resolutions directly affecting their rights, on winding up, on capital reduction, and on everything once dividend is two years in arrears

✓

WATCH OUT

✗ Issuing bonus shares out of a revaluation reserve, which is expressly prohibited because the gain is unrealised

✓

WATCH OUT

✗ Forgetting that partly paid shares must be made fully paid before a bonus issue

✓

WATCH OUT

✗ Treating a bonus issue as withdrawable once announced

✓

WATCH OUT

✗ Overlooking that section 62 does not apply to conversion of debentures or loans where the terms were approved by special resolution before issue

✓

WATCH OUT

✗ Saying shares may never be issued at a discount, when sweat equity and statutory debt-to-equity conversion are exceptions

✓

Exam-pattern practice

PYQ-style questions with full solutions. Work through them as a readiness check — mark yourself honestly and get your gap report at the end.

Readiness check

Are you exam-ready for Prospectus, Share Capital and Debentures?

15 problems from this chapter. Try each one, reveal the worked solution, mark yourself honestly — get your gap report at the end.

15 questions~11 min

5-minute revision

The whole chapter, distilled. Read this the night before the exam.

•Public issue is governed by disclosure backed by liability; private placement is governed by caps and a no-advertisement rule
•Prospectus registered on or before publication, not issued more than 90 days after delivery to the Registrar
•Shelf prospectus valid one year with an information memorandum; red herring filed three days before opening
•Deemed prospectus arises on an offer for sale within six months of allotment, or where the whole consideration was not received
•Section 35 civil liability: directors, named proposed directors, promoters, those authorising issue, and experts
•Section 34 criminal liability on every person who authorises the issue; section 36 covers fraudulent inducement
•A misleading half-truth is untrue; an omission calculated to mislead is an untrue statement
•Private placement: 200 persons per kind of security per financial year, excluding QIBs and ESOP employees; breach makes it a public offer
•Allot within 60 days, repay within 15 more, then 12% interest running from the 60th day
•Preference shareholders vote on rights-affecting resolutions, winding up and capital reduction, and on everything after two years of unpaid dividend
•Class rights varied by three-fourths consent or class special resolution; 10% dissentients may apply to the Tribunal within 21 days
•Rights issue notice: 15 to 30 days, with a right of renunciation unless the articles exclude it
•Bonus shares from free reserves, securities premium or capital redemption reserve — never from a revaluation reserve
•No discount issues except sweat equity and statutory debt-to-equity conversion
•Secured debentures redeemable within 10 years, 30 for specified infrastructure classes; no debentures with voting rights

CS Executive question blueprint

How this topic is asked, tier by tier — so you can prep to the pattern.

Typical weightage: 14

Exam-hall strategy

Battle-tested tips from mentors and toppers for this topic under the sectional clock.

For a misstatement question, deal with civil liability, criminal liability and the defences as separate labelled parts
State expressly that an omission calculated to mislead is an untrue statement, because that sentence is often the whole point of the question
In private placement questions, count each kind of security separately and say that you are doing so
Always state the consequence of breach — that the offer becomes a public offer — even where the facts comply
Quote the numerical limits precisely: 200 persons, 60 days, 15 days, 12 per cent, 15 to 30 days, 90 days, 21 days
In bonus share questions, run through every condition in turn rather than answering only on the source of funds
For section 62, name all three routes before applying the one the facts require

Beyond the exam

Where this skill shows up in the job you're competing for — and in life.

Every public issue in India runs on this framework

Every public issue in India runs on this framework, and the red herring prospectus is what an investor actually reads during a book-built IPO

Private placement compliance is a routine and high-risk a…

Private placement compliance is a routine and high-risk area for growing companies, where an inadvertent breach of the offeree count converts a placement into an unregistered public issue

Section 62's third route with a registered valuer's repor…

Section 62's third route with a registered valuer's report is how most strategic and private equity investments into Indian companies are structured

Debenture trustee independence rules are what a lender's …

Debenture trustee independence rules are what a lender's counsel checks before a bond issue closes