The golden rule regarding prospectus of the company is going to be discussed here. Keep an eye on this to capture some more interesting information. 

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Golden Rule:

It is the duty of those who issue the prospectus to be truthful in all respects. This golden rule was enunciated by Kinderseley, V.C. And has come to be known as the “golden legacy”. Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Public is invited to take shares on the faith of the representation contained in the prospectus.

Original information needs to be disclosed:

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Everything should be stated with scrupulous accuracy. Original things need to be mentioned without any omission, the existence of which might in any degree affect the nature or quality of the privileges and advantages which the prospectus hold out as an inducement to take shares. In short, the true nature of the company’s venture should be disclosed. If concealment of any material fact has prevented an adequate appreciation of what was stated, it would amount to misrepresentation. Thus, even if every specific statement is literally true, the prospectus may be false it by reason of the suppression of other material facts, it conveys a false impression.

For example:

All statements in the prospectus were literally true, but it failed to disclose that the dividends stated in it as paid, were not paid out of trading profits, but out of realized capital profits.  The statement which is about the dividends for a number of years was true, but in addition the company has incurred some losses in all those years and no disclosure was made for that. The prospectus was with false in material aspects. The managing director and the chairperson who knew that it was false were held guilty of fraud.

Deemed prospectus – offer for sale of existing shares:

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In general, the provisions of the companies act are restricted to cases where the invitation is made by or on behalf of the company for subscription of its shares. As such, it was possible at one time for a company to evade the statutory provisions relating to prospectus by allotting shares or debentures to the public by issuing a document inviting the public to purchase shares or debentures from them; but no document or prospectus as such, was issued by the company.

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Section 64 now covers such a document also and it is treated as a prospectus issued by the company. Accordingly, an offer for sale is a prospectus, within the meaning of the act, and it is deemed to have been issued by the company. Section 64 (1) provides that where a company allots or agrees to allot any existing shares or debentures with a view to their being offered for sale to the public, the document which offers the sale to the public regards to the prospectus which is issued by the particular company. It’s also to be noted that, the existing shareholder do the offer of sale in order to disinvest their shareholding either wholly or partly.

Rules and provisions:

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Under section 64(2) it will be presumed, unless the contrary is proved, that an allotment of shares or debentures was made with a view to their being offered for sale to the public if:

  • The offer to the public by the issue house was made within 6 months of allotment or agreement to allot (to the issue house); or
  • The whole consideration was not received by the company at the time when the offer was made by the issue house.

The offer for sale must set out all the details required to be inserted in a prospectus. It should also state the net amount of consideration received by the company on the shares or debentures to which the offer relates; and state the place and time at which the relevant contracts may be inspected.

Since all the provisions which apply to the prospectus issued by a company apply to such a document, it must disclose everything truthfully. A person who makes the offer will be liable for any misstatement in that document in the same manner as persons who authorize the issue of a false prospectus. The persons who accept the offer in respect of those shares or debentures are deemed to be subscribers. The persons making the offer will be deemed to be persons named in the prospectus of a company for fulfilling the requirements relating to registration of prospectus under section 60.

Hence, we have seen the golden legacy of the prospectus. For further information to know -> Go here

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