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Companies Act, 2013 (Chapter III, Sections 23–42): Prospectus (Shelf, Red Herring, Abridged) & Private Placement

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PFRDA Grade A • SEBI Grade A • UPSC EPFO APFC • RBI Grade B
⚡ Quick Answer & AI Exam Snapshot (TL;DR)

Section 5 of the PFRDA Grade A and SEBI Grade A Paper-2 syllabus explicitly specifies Chapter III (Sections 23 to 42: Prospectus and Allotment of Securities) of the Companies Act, 2013. Every candidate must memorize the exact Section numbers, validity periods, and numerical limits: Public Offer vs Private Placement (Sec 23), Shelf Prospectus (Sec 31 — valid up to 1 year + Information Memorandum in Form PAS-2), Red Herring Prospectus (Sec 32 — filed at least 3 days before opening of list), Abridged Prospectus (Sec 33), Minimum Subscription (Sec 39 — 5% application money; refund if not received within 30 days), Underwriting Commission caps (Sec 40(6) — 5% for Shares, 2.5% for Debentures), and Private Placement (Sec 42 — maximum 200 persons in a financial year; allotment within 60 days).

1. Complete Section Map of Chapter III (Sections 23 to 42 of Companies Act, 2013)

Section Statutory Heading Exact Exam Rule, Timeline & Form
Section 23 Public Offer and Private Placement • Public Company: May issue securities via (a) Public Offer (IPO/FPO through Prospectus), (b) Private Placement (Part II, Sec 42), or (c) Rights Issue / Bonus Issue.
• Private Company: Strictly prohibited from issuing a Prospectus to the public; can raise capital ONLY via Rights Issue, Bonus Issue, or Private Placement! (2023 amendment also permits direct listing of certain public companies in permissible foreign jurisdictions like GIFT IFSC).
Section 24 Power of SEBI to Regulate Issue & Transfer SEBI administers matters relating to issue and transfer of securities and non-payment of dividend by Listed Companies (or companies intending to list); Central Govt/RoC/NCLT administers all other matters.
Section 25 Deemed Prospectus (Offer for Sale) Where a company allots shares to an Issue House/Merchant Banker with a view to their being offered for sale to the public, the document by which the offer is made to the public is a Deemed Prospectus. Presumption triggered if offer to public is made within 6 MONTHS after allotment (or before whole consideration is received)!
Section 26 Matters to be Stated in Prospectus Must be dated and signed by all Directors; registered with RoC before publication. Validity of Prospectus after delivery to RoC (Sec 26(8)): Must be issued to the public within 90 DAYS from the date on which a copy is delivered to the RoC (becomes invalid after 90 days!).
Section 27 Variation in Terms of Contract or Objects Requires Special Resolution through Postal Ballot + newspaper notice in Form PAS-1 + Exit Offer to dissenting shareholders!
Section 28 Offer of Sale of Shares by Certain Members Existing members (in consultation with Board) may offer whole or part of their shareholding to the public in an Offer for Sale (OFS).
Section 29 Public Offer of Securities to be in Dematerialised Form Mandatory Demat form for all public offers AND for all unlisted public companies (Rule 9A) and non-small private companies (Rule 9B).
Section 31 Shelf Prospectus Issued by class of companies prescribed by SEBI (PFIs, Scheduled Banks, NBFCs) for multiple issues of debt/bonds without issuing a fresh prospectus each time.
• Max Validity: Not exceeding ONE YEAR (1 Year) from the date of opening of the first offer!
• Prior to 2nd/subsequent offers, company files an Information Memorandum (Form PAS-2) within 1 MONTH prior to issue.
Section 32 Red Herring Prospectus (RHP — Book Building) A prospectus which does NOT include complete particulars of the quantum OR price of the securities included therein.
• Must be filed with the RoC at least 3 DAYS prior to the opening of the subscription list and the offer!
• Upon closing of offer, a final Prospectus stating total capital raised and closing price is filed with RoC and SEBI.
Section 33 Abridged Prospectus No application form for purchase of any securities of a company shall be issued unless accompanied by an Abridged Prospectus (salient features of prospectus as specified by SEBI; exception: underwriting agreement or non-public offer). Penalty for default: ₹50,000 for each default.
Sections 34–37 Civil & Criminal Liability for Misstatements + Class Action • Sec 34: Criminal Liability for untrue/misleading statements (Punishable under Section 447 — Fraud!).
• Sec 35: Civil Liability to pay compensation for loss/damage.
• Sec 36: Fraudulently inducing persons to invest money (Sec 447).
• Sec 37: Suit may be filed by any affected person, group of persons, or association of persons (Class Action).
Section 38 Personation for Acquisition of Securities Applying in a fictitious name or making multiple applications in different names/combinations is punishable under Section 447 (Fraud) + disgorgement of gains to IEPF.
Section 39 Allotment of Securities & Minimum Subscription • Minimum Application Money (Sec 39(2)): Shall NOT be less than 5% of the nominal amount of the security (or such other % specified by SEBI — 25% of issue price under SEBI ICDR).
• Minimum Subscription Timeline (Sec 39(3)): Within 30 DAYS from date of issue of prospectus (or SEBI timeline); if not received, refund within 15 DAYS from closure of issue with 15% p.a. interest! Return of Allotment filed with RoC in Form PAS-3 within 30 days.
Section 40 Securities to be Dealt with in Stock Exchanges & Underwriting Commission Before issuing prospectus, company must apply to one or more recognized Stock Exchanges for permission to deal in securities.
• Maximum Underwriting Commission (Sec 40(6) & Rule 13):
— For Shares: Max 5% of the price at which shares are issued (or rate authorized by Articles, whichever is less!).
— For Debentures: Max 2.5% (2½%) of the price at which debentures are issued (or rate in Articles, whichever is less!).
Section 41 Global Depository Receipt (GDR) A company may, after passing a Special Resolution in its General Meeting, issue depository receipts in any foreign country.

2. Section 42 (Part II of Chapter III): Private Placement — The 8 Golden Rules

Section 42 (Offer or Invitation for Subscription of Securities on Private Placement) is one of the most heavily tested sections in SEBI Grade A and PFRDA Grade A:

  1. Maximum Number of Persons (50 / 200 Limit — Section 42(2) & Rule 14): A Private Placement offer (made via a Private Placement Offer-cum-Application Letter in Form PAS-4) shall be made to not more than 50 persons (prescribed higher limit under Rule 14: 200 PERSONS in the aggregate in a Financial Year)!
    • Who is EXCLUDED from the 200-person limit? (i) Qualified Institutional Buyers (QIBs), and (ii) Employees of the company being offered securities under an Employees’ Stock Option Scheme (ESOP under Sec 62(1)(b))!
    • Note: This 200-person limit is calculated separately for each kind of security (i.e., 200 for Equity Shares, 200 for Preference Shares, and 200 for Debentures in a financial year).
  2. Deemed Public Offer (Section 42(11)): Any offer made to more than 200 persons in a financial year (or using public advertisements/media) is automatically deemed to be a Public Offer regardless of whether the company calls it a private placement!
  3. Special Resolution Required: Requires prior approval of shareholders by a Special Resolution for each offer/invitation (for Non-Convertible Debentures [NCDs] exceeding Section 180(1)(c) borrowing limits, a single Special Resolution once in a year is sufficient; within Sec 180(1)(c) limits, a Board Resolution suffices for NCDs).
  4. No Right of Renunciation (Section 42(3)): Unlike a Rights Issue, a Private Placement offer carries NO Right of Renunciation to any other person!
  5. No Cash Subscription Allowed (Section 42(4)): Subscription money must be paid ONLY by cheque, demand draft, or banking channels (NEVER by Cash) and kept in a separate Bank Account.
  6. Strict Allotment & Refund Timeline (Section 42(6)):
    • Securities MUST be allotted within 60 DAYS from the date of receipt of the application money.
    • If not allotted within 60 days, the application money MUST be repaid within 15 DAYS from the expiry of 60 days (i.e., by the 75th day).
    • If not repaid within those 15 days, the company is liable to repay that money with Interest at 12% per annum from the expiry of the SIXTIETH (60th) DAY!
  7. Return of Allotment (Form PAS-3 — Section 42(8)): Must be filed with the RoC within 15 DAYS of allotment (Notice: 15 days for Private Placement under Sec 42(8) vs 30 days for Public Issue under Sec 39(4)!), and the company cannot utilize the money raised until Form PAS-3 has been filed with the RoC!

🎯 High-Yield Exam One-Liners (Last-Minute Revision Box)

  1. Chapter III of the Companies Act, 2013 spans Sections 23 to 42 and is divided into Part I (Public Offer, Sec 23–41) and Part II (Private Placement, Sec 42).
  2. Under Section 25, when shares are allotted to an Issue House for Offer for Sale to the public within 6 MONTHS, the document issued to the public is a ‘Deemed Prospectus’.
  3. Under Section 26(8), a Prospectus is valid only if it is issued to the public within 90 DAYS from the date on which a copy thereof is delivered to the Registrar of Companies (RoC).
  4. Under Section 31, a ‘Shelf Prospectus’ remains valid for a period NOT exceeding 1 YEAR from the date of opening of the first offer of securities under that prospectus.
  5. Prior to issuing a second or subsequent offer under a Shelf Prospectus, the company must file an ‘Information Memorandum’ in Form PAS-2 within 1 MONTH prior to the issue.
  6. Under Section 32, a ‘Red Herring Prospectus’ (RHP) does not state complete particulars of the quantum or price of securities, and must be filed with the RoC at least 3 DAYS prior to the opening of the subscription list.
  7. Under Section 33, every application form for shares/debentures must be accompanied by an ‘Abridged Prospectus’; default attracts a penalty of ₹50,000 per default.
  8. Criminal liability for misstatements in a prospectus (Section 34), fraudulently inducing investment (Section 36), and personation (Section 38) are all punishable under Section 447 (Punishment for Fraud).
  9. Under Section 39(2), the minimum application money payable on every security in a public offer shall NOT be less than 5% of the nominal amount of the security (or % specified by SEBI).
  10. Under Section 40(6) read with Rule 13, the maximum Underwriting Commission cannot exceed 5% of the issue price for Shares and 2.5% (2½%) of the issue price for Debentures.
  11. No underwriting commission can be paid on shares or debentures that are NOT offered to the public for subscription!
  12. Under Section 41, a company requires a ‘Special Resolution’ in a General Meeting to issue Global Depository Receipts (GDRs) in a foreign country.
  13. Under Section 42 read with Rule 14, a Private Placement offer can be made to a maximum of 200 PERSONS in the aggregate in a Financial Year (excluding QIBs and ESOP employees).
  14. A Private Placement Offer-cum-Application Letter is issued in Form PAS-4 and carries NO Right of Renunciation.
  15. In a Private Placement under Section 42(6), securities must be allotted within 60 DAYS from receipt of application money.
  16. If allotment is not made within 60 days under Section 42(6), application money must be refunded within 15 DAYS, failing which interest at 12% per annum is payable from the expiry of the 60th DAY.
  17. Return of Allotment in Form PAS-3 must be filed with the RoC within 15 DAYS of allotment in a Private Placement (Sec 42(8)) and within 30 DAYS in a Public Offer (Sec 39(4)).
  18. Under Section 42(4) & (8), a company CANNOT utilize any money raised through Private Placement until the securities are allotted AND the Return of Allotment (Form PAS-3) is filed with the RoC!

📝 UPSC & Regulatory Level Practice MCQs (With Detailed Solutions)

Q1. Match List-I (Type of Prospectus / Provision under Chapter III of Companies Act, 2013) with List-II (Statutory Time Limit / Section):
List-I: (a) Validity of Prospectus after delivery to RoC (Sec 26(8)), (b) Maximum validity of Shelf Prospectus (Sec 31), (c) Filing of Red Herring Prospectus before opening of offer (Sec 32), (d) Allotment of securities in Private Placement (Sec 42)
List-II: (1) At least 3 days prior, (2) Within 60 days, (3) Within 90 days, (4) Not exceeding 1 year
  • A. a-3, b-4, c-1, d-2
  • B. a-4, b-3, c-2, d-1
  • C. a-3, b-1, c-4, d-2
  • D. a-2, b-4, c-1, d-3
Correct Answer: (A) — A Prospectus must be issued within 90 days of delivery to RoC (3); Shelf Prospectus is valid for max 1 year (4); Red Herring Prospectus must be filed with RoC at least 3 days prior to opening of offer (1); and Private Placement allotment must be completed within 60 days (2).

Q2. Under Section 40(6) of the Companies Act, 2013 read with Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, what is the maximum rate of ‘Underwriting Commission’ payable on the issue price of ‘Shares’ and ‘Debentures’ respectively?
  • A. 2.5% on Shares and 5% on Debentures
  • B. 5% on Shares and 2.5% on Debentures
  • C. 5% on both Shares and Debentures
  • D. 10% on Shares and 5% on Debentures
Correct Answer: (B) — Rule 13 read with Section 40(6) caps the underwriting commission at 5% of the price at which shares are issued (or rate authorized by Articles, whichever is less) and 2.5% (two and a half percent) of the price at which debentures are issued (or rate in Articles, whichever is less).

Q3. Under Section 42 of the Companies Act, 2013 read with Rule 14, a Private Placement offer can be made to a maximum of how many persons in the aggregate in a financial year, and which two categories of investors are EXCLUDED while calculating this limit?
  • A. Maximum 50 persons; Promoters and Foreign Nationals excluded
  • B. Maximum 200 persons; Qualified Institutional Buyers (QIBs) and Employees offered securities under ESOP excluded
  • C. Maximum 500 persons; Retail Investors and Mutual Funds excluded
  • D. Maximum 100 persons; Existing Shareholders and Directors excluded
Correct Answer: (B) — Under Section 42(2) read with Rule 14(2), a private placement offer shall not be made to more than 200 persons in the aggregate in a financial year (calculated individually for each kind of security), excluding Qualified Institutional Buyers (QIBs) and employees offered securities under ESOP (Sec 62(1)(b)).

Q4. Under Section 42(6) of the Companies Act, 2013, if a company making a Private Placement fails to allot securities within 60 days of receiving the application money and also fails to repay the application money within the next 15 days, from which day and at what rate is the company liable to pay interest to the applicants?
  • A. Interest @ 12% per annum from the expiry of the 60th day
  • B. Interest @ 15% per annum from the expiry of the 75th day
  • C. Interest @ 18% per annum from Day 1
  • D. Interest @ 6% per annum from the 60th day
Correct Answer: (A) — Under Section 42(6), if the company fails to repay the application money within 15 days after the expiry of 60 days, it is liable to repay that money with interest at 12% per annum from the expiry of the SIXTIETH (60th) day (not the 75th day!).

Q5. Under Section 39(2) of the Companies Act, 2013, the amount payable on application on every security in a public offer shall NOT be less than what percentage of the nominal amount of the security?
  • A. 2% of the nominal amount
  • B. 5% of the nominal amount (or such other percentage or amount as may be specified by SEBI)
  • C. 10% of the nominal amount
  • D. 20% of the nominal amount
Correct Answer: (B) — Section 39(2) stipulates that the amount payable on application on every security shall not be less than 5% of the nominal amount of the security, or such other percentage or amount as may be specified by SEBI by making regulations.

❓ Frequently Asked Questions (Exam FAQs)

Q: What is the difference between a Shelf Prospectus (Sec 31) and a Red Herring Prospectus (Sec 32)?

A Shelf Prospectus (Section 31) is issued by financial institutions/banks/NBFCs to make multiple bond/debt issues over a 1-year validity period without filing a full fresh prospectus each time (only an Information Memorandum in Form PAS-2 is filed). A Red Herring Prospectus (Section 32) is used in Book-Built IPOs/FPOs and lacks complete details of either the exact issue price (shows a price band) or the exact quantum of shares, and is filed at least 3 days before opening the offer.

Q: When can a company utilize the money raised through a Private Placement under Section 42?

Under Section 42(4) and (8), a company is strictly prohibited from utilizing any monies raised through Private Placement unless two conditions are both satisfied: (1) the securities have been allotted, AND (2) the Return of Allotment in Form PAS-3 has been filed with the Registrar of Companies (within 15 days of allotment).

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