Background

A Red Herring Prospectus is a preliminary prospectus issued by a company intending to make a public offer of securities. It serves as an initial disclosure document that provides investors with substantial information about the offering while certain critical detail particularly the quantum and price of securities remain undecided at the time of issuance.

As per the Explanation to Section 32, “red herring prospectus” means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

Compliance Requirements under the Act

Authority to Issue [Section 32(1)]

A company proposing to make an offer of securities is permitted to issue a red herring prospectus prior to the issue of the final prospectus. This provision is permissive rather than mandatory, allowing companies flexibility in their offering process.

Filing Requirements [Section 32(2)]

The company must file the red herring prospectus with the Registrar at least three days prior to the opening of the subscription list and the offer.

Legal Obligations [Section 32(3)]

A red herring prospectus carries the same obligations as are applicable to a prospectus. This means:

• • All disclosure requirements applicable to a final prospectus apply equally
  • The company and its officers bear the same liabilities for misstatements or omissions
  • Compliance with all statutory requirements remains mandatory

Any variation between the red herring prospectus and the final prospectus must be highlighted as variations in the prospectus, ensuring transparency and enabling investors to identify changes made during the book-building process.

Post-Closure Filing [Section 32(4)]

Upon closing of the offer of securities, the company must file the final prospectus with both:

• • The Registrar
  • The Securities and Exchange Board

This final prospectus must state:

• • Total capital raised (whether by way of debt or share capital)
  • Closing price of the securities
  • Any other details not included in the red herring prospectus

Integration with Stock Exchange Requirements (Section 40)

Pre-Offer Stock Exchange Application [Section 40(1)]

Every company making a public offer must, before making such offer, apply to one or more recognized stock exchanges and obtain permission for the securities to be dealt with on such exchange(s).

This requirement ensures that securities offered to the public will have a trading platform, providing liquidity to investors.

Disclosure in Prospectus [Section 40(2)]

Where a prospectus states that an application for listing has been made, it must also specify the name(s) of the stock exchange(s) where the securities will be dealt with.

Investor Protection – Escrow Account [Section 40(3)]

All monies received from the public for subscription must be kept in a separate bank account in a scheduled bank and can only be utilized for:

(a) Adjustment against allotment – where securities have been permitted to be dealt with in the specified stock exchange(s); or

(b) Repayment to applicants – within the time specified by the Securities and Exchange Board, where the company is unable to allot securities for any reason.

This provision protects investor funds and ensures they are not misappropriated before allotment.

Non-Waivability [Section 40(4)]

Any condition requiring applicants to waive compliance with these requirements is void. This ensures that investor protection mechanisms cannot be circumvented by contractual provisions.

Commission Payments [Section 40(6)]

A company may pay commission in connection with subscription to its securities, subject to prescribed conditions. This provision permits legitimate underwriting and intermediary fees while allowing regulatory oversight through prescribed conditions.

Penalty & Punishment

• Section 450 – company and every officer of the company in default or such other person shall be liable to a penalty of Rs. 10,000, and in case of continuing default, with a further penalty of Rs. 1000 for per day of default, subject to a max Rs. 2 lakhs in case of a company and Rs. 50000 in case of an officer who is in default or any other person
• For default, Company punishable with fine of Rs. 5 lakhs which, may extend to Rs. 50 lac Every officer in default, punishable with fine of Rs. 50 thousand which, may extend to Rs. 3 lakhs