Q.What is a prospectus? State the matters a prospectus must disclose and the liability attached to a misleading prospectus.
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Start your 14-day free trial to unlock the full solution →Section 2(70) of the Companies Act, 2013 defines a prospectus broadly, as any document described or issued as a prospectus, and it expressly extends to any notice, circular, advertisement, or other document inviting offers from the public for the subscription or purchase of any securities of a company. The breadth of this definition is deliberate — it prevents a company from evading the disclosure and liability regime attached to a "prospectus" merely by calling its invitation to the public something else.
Because a prospectus is addressed to members of the public who have no other source of information about the company, Section 26 requires it to contain extensive, specific disclosures. Among the matters it must state are: particulars of the company's share capital, including the different classes of shares and the rights attached to each; the objects for which the funds raised are to be applied and the main terms of the present issue, including the price, the minimum subscription, and the opening and closing dates; the company's financial performance and position over the preceding financial years, generally supported by an auditor's report; particulars of the directors, their remuneration, and their interest, if any, in the promotion of the company; the main risk factors specific to the company's business and the proposed issue; and the manner in which the money received on application is to be dealt with, including details of the separate bank account into which it will be deposited. The underlying principle is full and fair disclosure — an investor reading the prospectus should have the material facts needed to make an informed decision to subscribe or not, without having to rely on the company's oral assurances or reputation alone. …
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