Red – herring Prospectus – One Person Company Registration

Companies Act, 1956: Section 60B

Section 60B of the 1956 Act was essentially a provision relating to issuance of a red- herring prospectus which could be circulated to the public without containing particulars of pricing and the quantum of securities being offered to the public, to enable negotiation of the proposed eventual public offer of securities.

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Section 60B was inserted by the Companies (Amendment Act) 2000 and introduced the concepts of ‘information memorandum’ and ‘red-herring prospectus’. The Companies (Amendment) Act, 2000 also empowered SEBI to administer the provisions of section 60B of the 1956 Act in relation to listed companies and those which intended to get listed; however, the provisions relating to all other companies were to be administered by the Central Government. The Companies (Amendment) Act, 2000 also vested in SEBI the power to inspect books of account and other books and papers with respect to listed companies and the companies which intended to get listed.

The red-herring prospectus is an important instrument to enable price discovery for a public offer by book-building using the red-herring prospectus. Using such a document would enable the merchant bankers handling the public offer to test the demand for the securities proposed to be offered, the price that investors are willing to quote and thereby assess and finalize the terms, including size and price for the public offer. The term “red- herring prospectus” has been defined in the explanation to section 32 of the 2013 Act, to mean a prospectus that does not include complete particulars of the quantum or price of the securities included in such prospectus.

Under sub-section (1) of s. 32 of the 2013 Act any company proposing to make a public offer may issue a red-herring prospectus prior to the issue of the actual prospectus. Under sub-section (2) of section 32 of the 2013 Act, the red-herring prospectus is required to be filed with the Registrar of Companies at least three days before the offer is opened for subscription. Put differently, the offer should not open for subscription within three days of its filing with the Registrar of Companies. Sub-section (3) of s. 32 of the 2013 Act brings about complete coverage of the entire scope of all the requirements under the 2013 Act, including the rights and obligations connected with a prospectus, to the red-herring prospectus. In short, all implications for mis-statement, concealment and inaccuracies, and all the requirements to exercise a duty of care in drafting a prospectus would need to be brought to bear with a red-herring prospectus as well. When the final prospectus is actually issued, all the variations between the red-herring prospectus and the final prospectus are required to be highlighted.

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Under sub-section (4) of s. 32 of the 2013 Act, when the offer of securities is closed, the prospectus containing details of the total capital raised, the nature of the capital raised, the pricing of the securities offered and such other material particulars as were not included in the red-herring prospectus would need to be filed with the Registrar of Companies and SEBI.

Meaning of red herring or preliminary prospectus

A prospectus for a stock issue that has been filed but not yet approved by the SEC. The SEC requires such a prospectus to contain a notice printed in distinctive red lettering that the document is not complete or final. That notice, which is stamped or printed in red ink, typically reads as follows: “The information here given is subject to completion or amendment. A company registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities cannot be sold – and offers to buy cannot be accepted until the registration statement becomes effective. This prospectus does not constitute an offer to buy. And these securities cannot be sold in any state where the offer, solicitation, or sale would be unlawful before company registration or qualification under the securities laws of that state. Also termed red-herring prospectus; red herring.

Misrepresentation in red herring prospectus

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There was misrepresentation in draft red herring prospectus. It was held that SEBI was empowered to examine the draft red herring prospectus and insist on complete and truthful disclosure of all the relevant facts. The fact that the public issue has been closed, does not relieve SEBI of its statutory duty of inquiry into the veracity of statement made in the prospectus.

Filing of red-herring prospectus

Information memorandum can be circulated prior to the filing of prospectus The red-herring prospectus is to be filed with ROC by unlisted public company, and with SEBI by listed public company, at least 3 days prior to the opening of the offer. (Similar provisions are set out under s. 32(2) of the 2013 Act.) The final prospectus shall be similarly filed with ROC/SEBI on closure of the offer of securities indicating, inter alia, the total capital raised, closing price and other details as were not complete in the red-herring prospectus.

Red-herring prospectus

Under Regulation 57(2)(a) of SEBI (ICDR) Regulations, 2009, where a company proposes to issue capital to the public through book building process, the relevant red-herring prospectus shall contain the disclosures specified in Schedule II of the Companies Act, 1956 and the disclosures specified in Part A of Schedule VIII subject to the provisions of Parts B and C thereof.

Under Regulation 57(2)(a) of SEBI (ICDR) Regulations, 2009, where a company proposes to issue capital to the public through book building process, the relevant red-herring prospectus shall contain the disclosures specified in Schedule II of the Companies Act, 1956 and the disclosures specified in Part A of Schedule VIII subject to the provisions of Parts B and C thereof.

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According to paragraph (7) of Schedule XI of the said ICDR Regulations price is not to be disclosed in red herring prospectus. Where the issue size is specified the red herring prospectus may not contain the price and the number of specified securities. The draft reds herring prospectus containing all the disclosures including total issue size, if applicable, as specified in Schedule VIII, except that of price and the number of specified securities to be offered through it shall be filed with the Board by the lead merchant banker. In case of a fast track issue the draft red herring prospectus shall not be filed with SEBI.

Green shoe Option

Regulation 2(1)(o) of the said ICDR Regulations, 2009 provides that “green shoe option” means an option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilizing mechanism. Regulation 45 lays down the process of price stabilization through green shoe option. For more details about one person company registration in Coimbatore, kindly visit our site and feel free to contact us.. We are here to help you. Thanks for reading!!!

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