CA Inter P2 · Chapter 3
Prospectus and Allotment of Securities MCQs with Answers
10 multiple-choice questions on Prospectus and Allotment of Securities for CA Inter P2 Corporate and Other Laws. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under section 23(1), a public company may issue securities to the public:
- A) Only through a rights issue
- B) Through a prospectus
- C) Only through private placement
- D) Only through bonus issue
Show answer & explanation
Answer: B) Through a prospectus
Section 23(1) states that a public company may issue securities to the public through a prospectus. It may also issue them through private placement, by way of a rights issue or a bonus issue. Section 23(2) allows a private company to issue securities only by rights issue, bonus issue or private placement.
Question 2
Section 25 deems a document containing an offer for sale of securities to the public to be a prospectus issued by the company. Unless the contrary is proved, an allotment with a view to the securities being offered for sale to the public is presumed where:
- A) The securities are listed on a recognised stock exchange
- B) The offer for sale is made within one year after the allotment
- C) The allottee is a director of the company
- D) The offer for sale is made within six months after the allotment, or before the whole consideration for the securities has been received by the company
Show answer & explanation
Answer: D) The offer for sale is made within six months after the allotment, or before the whole consideration for the securities has been received by the company
Section 25(2) presumes that an allotment was made with a view to an offer for sale to the public in either of two cases. The first is that the offer was made within six months after the allotment. The second is that, at the date of the offer, the whole consideration had not been received by the company. The document is then a deemed prospectus.
Question 3
A red herring prospectus under section 32 is a prospectus that:
- A) Is valid for one year and covers multiple issues
- B) Does not include complete particulars of the quantum or price of the securities included in it
- C) Contains a false statement and is liable to be cancelled
- D) Is issued only by a company incorporated outside India
Show answer & explanation
Answer: B) Does not include complete particulars of the quantum or price of the securities included in it
As per the Explanation to section 32, a red herring prospectus does not include complete particulars of the quantum or price of the securities. Once the offer closes, the prospectus stating the total capital raised, the closing price and any details left out must be filed with the Registrar and SEBI. A prospectus covering several issues over a period is a shelf prospectus under section 31.
Question 4
As per section 31, a shelf prospectus is valid for a period not exceeding:
- A) Ninety days from the date of filing with the Registrar
- B) One year from the date of opening of the first offer of securities under it
- C) Three years from the date of its issue
- D) Six months from the date of filing with the Registrar
Show answer & explanation
Answer: B) One year from the date of opening of the first offer of securities under it
Section 31(1) allows prescribed classes of companies to file a shelf prospectus. Under it, no further prospectus is needed for subsequent offers within a period of validity not exceeding one year from the date of opening of the first offer. An information memorandum must be filed before each subsequent offer.
Question 5
Which of the following persons is NOT liable to pay compensation under section 35 for a misleading statement in a prospectus?
- A) A person who authorised the issue of the prospectus
- B) A person who withdrew his consent to act as director before the issue of the prospectus, and the prospectus was issued without his authority
- C) A promoter of the company who knew about the misleading statement
- D) A person named in the prospectus as a proposed director with his consent
Show answer & explanation
Answer: B) A person who withdrew his consent to act as director before the issue of the prospectus, and the prospectus was issued without his authority
Section 35(1) makes directors, persons named with their consent as proposed directors, promoters, persons who authorised the issue and experts liable to compensate those who subscribed on the faith of a misleading prospectus. Section 35(2) excuses a person who, having consented to become a director, withdrew that consent before the issue, and the prospectus was issued without his authority or consent.
Question 6
Under section 39(2), the amount payable on application on every security offered in a public issue shall not be less than:
- A) The full nominal amount of the security
- B) Twenty-five per cent of the issue price of the security
- C) Ten per cent of the nominal amount of the security
- D) Five per cent of the nominal amount of the security, or such other percentage or amount as SEBI may specify
Show answer & explanation
Answer: D) Five per cent of the nominal amount of the security, or such other percentage or amount as SEBI may specify
Section 39(2) provides that the amount payable on application on every security shall not be less than five per cent of its nominal amount, or such other percentage or amount as SEBI may specify by regulations. SEBI regulations for listed issues prescribe higher application money.
Question 7
Under section 39(3), if the stated minimum amount has not been subscribed and the sums payable on application have not been received within thirty days from the date of issue of the prospectus, or such other period as SEBI may specify:
- A) The company may allot shares in proportion to the money received
- B) The directors must subscribe for the shortfall
- C) The application money must be returned within the prescribed period
- D) The company must issue a fresh prospectus within thirty days
Show answer & explanation
Answer: C) The application money must be returned within the prescribed period
Section 39(1) prohibits allotment unless the minimum amount stated in the prospectus has been subscribed and the application money received. Under section 39(3), if this does not happen within thirty days of the issue of the prospectus, or the period specified by SEBI, the amount received must be returned within the prescribed time.
Question 8
Nova Pvt Ltd received application money in a private placement on 1 June. It has not allotted the securities. Under section 42(6), which of the following is correct?
- A) It must allot within 90 days of receipt; if not, refund with interest at 15% per annum from the date of receipt
- B) It must allot within 60 days of receipt; if not, refund within 15 days after the 60 days, failing which it pays interest at 12% per annum from the expiry of the 60th day
- C) It must allot within 30 days of receipt, failing which the money becomes a deposit immediately
- D) It must allot within 60 days of receipt; if not, refund within 30 days after the 60 days without any interest
Show answer & explanation
Answer: B) It must allot within 60 days of receipt; if not, refund within 15 days after the 60 days, failing which it pays interest at 12% per annum from the expiry of the 60th day
Section 42(6) requires a company making a private placement to allot within sixty days from receipt of the application money. If it cannot, it must repay the money within fifteen days from the end of the sixty days. If it fails to repay within that time, it must repay with interest at twelve per cent per annum from the expiry of the sixtieth day.
Question 9
Which of the following is NOT permitted for a private placement under section 42?
- A) Releasing a public advertisement about the offer through newspapers
- B) Making an offer to qualified institutional buyers in addition to other identified persons
- C) Receiving subscription money by cheque from identified persons
- D) Issuing a private placement offer and application letter to identified persons
Show answer & explanation
Answer: A) Releasing a public advertisement about the offer through newspapers
Section 42(7) prohibits a company making a private placement from releasing any public advertisement, or using any media, marketing or distribution channel or agent, to inform the public about the offer. Under section 42(4), subscription money must be paid by cheque, demand draft or other banking channel, not in cash. Offers to qualified institutional buyers are permitted.
Question 10
Section 34 expressly provides that every person who authorises the issue of a prospectus containing an untrue or misleading statement shall be liable under:
- A) Section 36, which alone deals with such statements
- B) Section 35 only, and not under any penal provision
- C) The Indian Contract Act, 1872 only
- D) Section 447, which deals with punishment for fraud
Show answer & explanation
Answer: D) Section 447, which deals with punishment for fraud
Section 34 provides that where a prospectus includes any untrue or misleading statement, or omits a matter likely to mislead, every person who authorises its issue is liable under section 447 (fraud). It is a defence to prove that the statement or omission was immaterial, or that he had reasonable grounds to believe it was true. Section 35 deals with civil liability separately.