Statement in Lieu of Prospectus under the Companies Act, 2013

In this blog, we discuss the definition, intention, legal structure, elements, and importance of the statement in lieu of prospectus, particularly in relation to the Companies Act, 2013. We also analyse pertinent case laws, comparisons with the prospectus, and its practical significance in today's corporate environment.

1. Understanding Prospectus in Company Law

Before examining the statement instead of a prospectus, it's important to grasp what a prospectus entail. A prospectus refers to any document defined or presented as a prospectus, encompassing any notice, circular, advertisement, or

other material that invites the public to make offers to subscribe to a company's securities

Legal Definition:

According to Section 2(70) of the Companies Act, 2013:

“Prospectus” means any document described or issued as a prospectus and includes a red herring prospectus or shelf prospectus or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.

Purpose: The main role of a prospectus is to deliver crucial details about the company, including its operations, leadership, financial situation, and reasons for seeking funds, which helps investors make well-informed choices.

2. What is a Statement in Lieu of Prospectus?

A Statement in Lieu of Prospectus is a document that public companies must file with the Registrar of Companies (RoC) when they do not issue a prospectus but still intend to allot shares.

Applicability:

According to the Companies Act, 2013, this provision typically pertains to public companies that do not seek public participation in share subscriptions, meaning they obtain ca pital through private placements or offer it to specific individuals, without the need for a formal prospectus.

3. Legal Provision: Companies Act, 2013

Although the 1956 Act (in Section 70) specifically addressed the statement in place of a prospectus, the Companies Act,

2013 incorporates this idea within multiple sections about public offerings and disclosures Key Sections:

• Section 26: Matters to be stated in the prospectus.

• Section 33(1): Deals with the allotment of shares.

• Rule 3 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Lays down further procedures.

although the phrase “Statement in Lieu of Prospectus” is not expressly mentioned in the 2013 Act, its essence is preserved in sections concerning private placements and information disclosures.

4. Purpose and Importance

The statement in place of a prospectus functions as a disclosure tool for public companies that skip issuing a prospectus but still require transparency and compliance prior to allocating shares

Why is it important?

• Guarantees adherence to disclosure regulations.

• Delivers essential details regarding the company to stakeholders.

• Averts dishonest activities in the distribution of shares.

• Guarantees the Registrar of Companies is updated

5. Contents of the Statement in Lieu of Prospectus

Historically, according to Part I of Schedule III of the Companies Act, 1956, the statement in place of a prospectus comprises:

1. Name and address of the business

2. Share capital details Directors' names, residences, and professions

3. The bare minimum for a subscription

4. Information on any underwriting 5. Initial costs

6. Agreements the business has made

7. The report of auditors

8. Projected earnings and losses

9. Asset and liability statement

Although the 2013 Act does not explicitly restate this list, numerous disclosures are mandated in the Private Placement Offer Letter (Form PAS-4) and Return of Allotment (Form PAS-3).

6. Statement in Lieu of Prospectus vs. Prospectus

Feature Prospectus Statement in Lieu of Prospectus

Open proposal to the general No

Applicability populace public offering; shares available privately

Document Filing Submitted to RoC prior to issuance Submitted to RoC prior to allocation

Disclosure Broad and regulated by Section 26 Comparable, yet customized for exclusive deals

Requirements To encourage the public o adhere to disclosure prior

Objective to buy shares to private offering

Form Used Prospectus (no fixed form) PAS-4 / interna format

7. Filing and Compliance Procedures

Steps Involved:

1. The statement was approved by the board resolution.

2. Creating a statement in the format specified.

3. Submitting the Private Placement Offer Letter, or PAS-4.

4. Following share allocation, PAS-3 (Return of Allotment) must be filed.

5. Keep offer records in Form PAS-5. Section 42 of the Companies Act of 2013 stipulates that noncompliance may result in fines.

8. Judicial Interpretations and Case Laws

Key Case Law:

The House of Lords ruled in Rex v. Kylsant (1932) that concealing important information, even where the assertions were accurate, might be considered fraud.

•The significance of complete disclosure, whether in a prospectus or a statement in lieu, is highlighted by this case.

v. SEBI (2012) Sahara India Real Estate Corp. Ltd.

• The case stressed that any offer made to more over fifty individuals is considered a public offer and necessitates a prospectus, even if it was not specifically about the statement in lieu.

• Stresses how crucial it is to follow disclosure guidelines, especially for private placements.

9. Practical Relevance in Today’s Context

The 2013 Act has reduced the use of the phrase "statement in lieu of prospectus," but its spirit endures through the need that private placements be filed.

Realistic Situations:

• New businesses and early-stage publicly traded firms that are seeking funding from a small group of investors.

• Businesses evading the cost and scrutiny of an initial public offering. Restrictions:

• Exclusively applicable to publicly traded corporations; • Section 42 governs private enterprises differently.

10. Conclusion

Fundamental component of corporate law's openness is the statement in place of prospectus, particularly when a publicly traded firm chooses to issue shares in a non-public manner. The core and goals of the phrase are still maintained under contemporary private placement regulations, despite the fact that the Companies Act of 2013 does not specifically use it. Knowing this idea enables us to better grasp the notion at the core of company law: the difficult balance between investor protection and business independence. Whether through a prospectus or its replacement, the concept of public disclosures remains extremely valuable in a legal and commercial context that is becoming more and more focused on compliance and responsibility.