Page 101 - DCOM106_COMPANY_LAW

Company Law

Notes 7.4 Red Herring Prospectus

The ‘red-herring’ prospectus means “a prospectus which does not have the complete particulars
on the price of the securities offered and the quantum of securities offered”.

Task X and Co., Ltd., intended to buy a rubber estate in Peru. Its prospectus contained
extracts from an expert’s report giving the number of rubber trees in the estate. The report
was inaccurate. Will any shareholder buying the shares of the company on the basis of the
above representation have any remedy against the company? Can the person authorizing
the issue of the prospectus escape from the liability?

7.5 Abridged Prospectus

Section 56(3) requires that no one shall issue any form of application for shares or debentures of
a company unless, the same is accompanied by a memorandum, (known as ‘Abridged Prospectus’)
containing such salient features of prospectus as may be prescribed. Thus, instead of appending
full prospectus, an ‘abridged prospectus’ need only be appended to the application form.
In order to provide for greater disclosure of information to prospective investors so as to enable
them to take an informed decision regarding investment in shares and debentures, Form 2-A
has been prescribed as a format of abridged prospectus. It is further required that the abridged
prospectus and the share application form should bear the same printed number and the two
should be separated by a perforated line. Accordingly, the investor may detach the application
form before submitting the same to the company or the designated bankers.

7.5.1 When ‘Abridged Prospectus’ is not Necessary

In the following circumstances, an ‘abridged prospectus’ containing the prescribed particulars
as per Form 2A, need not accompany the application forms:
In the case of a bona fide invitation to a person, to enter into an underwriting agreement
with respect to the shares or debentures.
When shares or debentures are not offered to the public.
Where offer is made only to existing members/debenture holders of the company by way
of rights, whether with or without the right of renunciation.
In the case of issue of shares or debentures which are, in all respects similar to those
previously issued and dealt in, and quoted on a recognised stock exchange.
Penalty: Non-compliance of the aforesaid provisions by any person shall attract punishment in
terms of fine which may extend to 5,000.
Besides, the omission from a prospectus of a matter required to be included by s.56, may give
rise to an action for damages, at the instance of a subscriber for share or debentures who has
suffered loss thereby. It should be noted that the Act does not say that directors shall be liable,
but this seems to be implied from s.56 (4).

Self Assessment

11. When there is a untrue statement in a prospectus who can sue
(a) Subscribed in primary market (b) Subscribed in secondary market
(c) Rights issue (d) None of the above

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