Companies Act 2013 Chapter 3 Notes, Download Free PDF

Published on 29 October 2025 by

The Companies Act, 2013 is one of India’s most significant business laws. It governs how companies are created, managed, and regulated. One of the most important parts of this Act is Chapter III, which focuses on the “Prospectus and Allotment of Securities.”

This chapter explains the legal framework for how companies raise money through public offers and private placements. It also protects investors from fraud and ensures that companies follow fair and transparent practices while issuing securities.

In this blog, we have provided details about the topics covered under Chapter 3 of the Act, along with a direct link to download the Companies Act, 2013 PDF.

Topics Covered Under Companies Act 2013 Chapter 3

Chapter III of the Companies Act, 2013, includes Sections 23 to 42 and is divided into two parts:

NotificationNotification
UGC NET NotificationSEBI Grade A Notification

Part I – Public Offer (Sections 23 to 41)

  1. Section 23 – Public offer and private placement
  2. Section 24 – Power of SEBI to regulate issue and transfer of securities
  3. Section 25 – Offer of securities for sale to be deemed prospectus
  4. Section 26 – Matters to be stated in prospectus
  5. Section 27 – Variation in terms or objects in prospectus
  6. Section 28 – Offer of sale by certain members of the company
  7. Section 29 – Public offer to be in dematerialised form
  8. Section 30 – Advertisement of prospectus
  9. Section 31 – Shelf prospectus
  10. Section 32 – Red herring prospectus
  11. Section 33 – Application forms for securities
  12. Section 34 – Criminal liability for misstatements in prospectus
  13. Section 35 – Civil liability for misstatements in prospectus
  14. Section 36 – Punishment for fraudulently inducing persons to invest money
  15. Section 37 – Action by affected persons
  16. Section 38 – Punishment for personation for acquisition of securities
  17. Section 39 – Allotment of securities by company
  18. Section 40 – Securities to be dealt with in stock exchanges
  19. Section 41 – Global Depository Receipt

Part II – Private Placement (Section 42)

  1. Section 42 – Issue of shares on private placement basis

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Understanding Public Offer and Private Placement

The details of the public offer and private placement are as follows:

1. What is a Public Offer?

A public offer means inviting the general public to buy the company’s securities, usually through a prospectus.
It includes:

  • Initial Public Offer (IPO) – When shares are offered for the first time.
  • Further Public Offer (FPO) – When a company that’s already listed offers more shares.

2. What is a Private Placement?

A private placement is when a company offers its securities to a selected group of investors, rather than the public. It is a more controlled and restricted way to raise funds.

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Part I – Public Offer (Sections 23–41)

The detailed notes related to Part I of the public offer are as follows:

Section 23 – Public Offer and Private Placement

This section explains how:

  • Public companies can issue securities through a prospectus, private placement, or rights/bonus issue.
  • Private companies can issue securities only through private placement or rights/bonus issue.

Section 24 – Power of SEBI

The Securities and Exchange Board of India (SEBI) regulates the issue and transfer of securities and cases of non-payment of dividends for listed or to-be-listed companies. The Central Government regulates unlisted companies. This division ensures proper regulatory control.

Section 25 – Offer for Sale to be Deemed Prospectus

If a company issues securities to a person who then sells them to the public, the offer document is treated as a prospectus. This prevents companies from bypassing legal disclosure requirements.

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Section 26 – Matters to be Stated in Prospectus

A prospectus must contain complete and accurate details like:

  • The company’s financial information
  • Details of directors and promoters
  • Objects of the issue
  • Risk factors and legal compliance statements

Providing false or incomplete information can attract serious penalties.

Section 27 – Variation in Terms or Objects

Once funds are raised, a company cannot change the use or purpose of funds (called “objects”) without shareholder approval through a special resolution.
If changes occur, shareholders who disagree must be given an exit option at a fair value.

Section 28 – Offer of Sale by Certain Members

Existing shareholders can sell their shares to the public, with the company’s approval. The sale document is treated as a prospectus, ensuring the same level of investor protection.

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Section 29 – Public Offer in Dematerialised Form

All securities offered to the public must be in dematerialised (electronic) form.
This ensures transparency, faster transactions, and reduced risk of fraud.

Section 30 – Advertisement of Prospectus

When a company advertises its prospectus, the advertisement must include key details such as:

  • Company name
  • Objectives of the issue
  • Liability of members
  • Capital structure
    This ensures clarity for potential investors.

Section 31 – Shelf Prospectus

A shelf prospectus allows a company to issue securities in multiple tranches within one year using a single prospectus. Each time the company issues securities, it files an information memorandum with updated details.

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Section 32 – Red Herring Prospectus

A red herring prospectus is a preliminary version that doesn’t include final pricing or quantity details. After the issue closes, the final prospectus (with all details) is submitted to the Registrar and SEBI.

Section 33 – Issue of Application Forms

Companies cannot issue an application form for securities without an abridged prospectus.
This ensures that investors receive essential information before investing.

Sections 34 & 35 – Liabilities for Misstatements

If a prospectus contains false or misleading statements, those responsible can face:

  • Criminal liability under Section 34 (punishable under Section 447 for fraud).
  • Civil liability under Section 35 (compensation for investor losses).

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Section 36 – Fraudulent Inducement

If a person intentionally gives false information to encourage someone to invest, it is a fraudulent act punishable under Section 447.

Section 37 – Action by Affected Persons

Investors who suffer losses because of misleading information in a prospectus can take legal action under Sections 34, 35, or 36.

Section 38 – Personation for Acquisition of Securities

Applying for securities under a false or fictitious name is a serious offence. The person may face punishment under Section 447, and the court may transfer such securities to the Investor Education and Protection Fund (IEPF).

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Section 39 – Allotment of Securities

A company must:

  • Receive at least the minimum subscription mentioned in the prospectus.
  • Allot securities within 30 days (as per SEBI’s rules).
  • Refund the money if the subscription is incomplete.
  • File a return of allotment with the Registrar.

Section 40 – Listing of Securities

Before making a public offer, a company must obtain approval from a recognised stock exchange. Funds raised must be kept in a separate bank account and used only for allotment or refund purposes. Violation of this rule can lead to heavy penalties.

Section 41 – Global Depository Receipts (GDRs)

Companies may issue Global Depository Receipts in foreign markets after passing a special resolution and following the prescribed rules.

Part II – Private Placement (Section 42 – Issue of Shares on Private Placement Basis)

Private placement means offering securities to a select group of investors instead of the public. It is a common way for startups and private companies to raise funds.

  • Can be made to a maximum of 50 persons in a financial year (excluding QIBs and employees under ESOPs).
  • Offers must be made through a private placement offer-cum-application form.
  • Public advertisements are not allowed.
  • Money received must be kept in a separate bank account until allotment.
  • Allotment must be completed within 60 days.
  • The company must file a return of allotment within 15 days.
  • Non-compliance attracts penalties and refund with 12% interest.

If the offer is made to more than the allowed number of investors, it will be treated as a public offer, and the company must follow all public issue requirements.

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Download Companies Act 2013 Free PDF

Aspirants preparing for the UGC NET Commerce paper, SEBI Grade A exam, and various other government exams can download the complete details of the Companies Act, 2013 through the direct link provided below.

Download Companies Act 2013 Free PDF

Questions Based on Companies Act 2013, Chapter 3

1. Under which section of the Companies Act, 2013 is the distinction between public offer and private placement defined?

A. Section 22
B. Section 23
C. Section 25
D. Section 27
E. Section 42

Correct Answer: B. Section 23
Explanation: Section 23 defines the methods by which a company may issue securities — through public offer or private placement.

2. Which authority regulates the issue and transfer of securities for listed companies

A. Ministry of Corporate Affairs (MCA)
B. Registrar of Companies (ROC)
C. Securities and Exchange Board of India (SEBI)
D. Reserve Bank of India (RBI)
E. Central Government

Correct Answer: C. SEBI
Explanation: As per Section 24, SEBI regulates listed and proposed-to-be-listed companies.

3. A document issued to the public inviting them to subscribe for shares or debentures is known as—

A. Memorandum of Association
B. Articles of Association
C. Prospectus
D. Offer Document
E. Letter of Allotment

Correct Answer: C. Prospectus
Explanation: A prospectus is a legal document inviting the public to invest in company securities.

4. Matters to be stated in a prospectus are given under—

A. Section 25
B. Section 26
C. Section 27
D. Section 28
E. Section 29

Correct Answer: B. Section 26
Explanation: Section 26 specifies the information that must be included in a company’s prospectus.

5. A prospectus issued by certain members offering to sell shares to the public is known as—

A. Red herring prospectus
B. Deemed prospectus
C. Shelf prospectus
D. Private placement offer
E. Offer document

Correct Answer: B. Deemed prospectus
Explanation: As per Section 25, when a company allots securities to intermediaries who then sell them to the public, the offer document is treated as a deemed prospectus.

6. Which section deals with variation in terms of contracts or objects in a prospectus?

A. Section 26
B. Section 27
C. Section 28
D. Section 31
E. Section 35

Correct Answer: B. Section 27
Explanation: Section 27 allows companies to vary terms of contracts or objects only with shareholder approval.

7. Which section mandates that public offers of securities be in dematerialised form?

A. Section 29
B. Section 30
C. Section 32
D. Section 33
E. Section 41

Correct Answer: A. Section 29
Explanation: Section 29 requires every public offer of securities to be made in dematerialised (electronic) form.

8. A shelf prospectus is issued by—

A. Private companies
B. Listed companies
C. Public financial institutions or banks
D. SEBI
E. Government companies only

Correct Answer: C. Public financial institutions or banks
Explanation: Section 31 allows public financial institutions and banks to file a shelf prospectus valid for multiple issues.

9. A red herring prospectus is used for—

A. Private placements
B. Small issue offerings
C. Book building issues
D. Rights issues
E. Preferential allotments

Correct Answer: C. Book building issues
Explanation: As per Section 32, a red herring prospectus is filed before the price or quantity of securities is finalized.

10. Civil liability for misstatement in a prospectus arises under—

A. Section 33
B. Section 34
C. Section 35
D. Section 36
E. Section 38

Correct Answer: C. Section 35
Explanation: Section 35 provides for civil liability on directors and experts for misstatements in a prospectus.

11. Criminal liability for misstatement in a prospectus is covered under—

A. Section 34
B. Section 35
C. Section 36
D. Section 38
E. Section 40

Correct Answer: A. Section 34
Explanation: Section 34 prescribes criminal punishment for any person authorising the issue of a misleading prospectus.

12. Fraudulently inducing persons to invest money is punishable under—

A. Section 33
B. Section 36
C. Section 39
D. Section 41
E. Section 42

Correct Answer: B. Section 36
Explanation: Section 36 deals with punishment for fraudulently inducing persons to invest money in company securities.

13. What is the minimum application money required before allotment of shares?

A. 2% of nominal value
B. 5% of nominal value
C. 10% of nominal value
D. 15% of nominal value
E. No limit prescribed

Correct Answer: C. 10% of nominal value
Explanation: As per Section 39, the minimum subscription (application money) must be at least 10% of the nominal value of securities.

14. Securities of a company can be dealt with only on—

A. The company’s own portal
B. Recognised stock exchanges
C. Private platforms
D. SEBI’s database
E. Company websites

Correct Answer: B. Recognised stock exchanges
Explanation: Section 40 requires that securities be listed on a recognised stock exchange before being dealt with.

15. Global Depository Receipts (GDRs) are governed under—

A. Section 37
B. Section 39
C. Section 41
D. Section 42
E. Section 28

Correct Answer: C. Section 41
Explanation: Section 41 allows companies to issue Global Depository Receipts (GDRs) in foreign markets.

16. The maximum number of persons allowed in a private placement (excluding QIBs and employees) is—

A. 50
B. 100
C. 200
D. 500
E. Unlimited

Correct Answer: C. 200
Explanation: Section 42(2) restricts a private placement offer to a maximum of 200 persons in a financial year.

17. Which document is issued to a select group of persons under private placement?

A. Prospectus
B. Offer letter (PAS-4)
C. Memorandum of offer
D. Offer of sale
E. Shelf prospectus

Correct Answer: B. Offer letter (PAS-4)
Explanation: Section 42 mandates that a private placement must be made through an offer letter in Form PAS-4.

18. If a company allots securities to more than 200 persons, it shall be deemed as

A. Private placement
B. Preferential issue
C. Public offer
D. Rights issue
E. ESOP

Correct Answer: C. Public offer
Explanation: Any offer made to more than 200 persons is considered a public offer under Section 42.

19. The penalty for contravention of provisions of private placement is—

A. ₹1 lakh
B. ₹2 lakh
C. ₹50 lakh or amount raised, whichever is lower
D. ₹50 lakh or amount raised, whichever is higher
E. ₹1 crore

Correct Answer: D. ₹50 lakh or amount raised, whichever is higher
Explanation: As per Section 42(10), the company and its officers are liable to a penalty up to ₹50 lakh or the amount involved, whichever is higher.

20. The Companies Act, 2013 replaced which earlier law?

A. Companies Act, 1949
B. Companies Act, 1956
C. Indian Companies Ordinance, 1951
D. Companies Act, 1960
E. Business Corporations Act

Correct Answer: B. Companies Act, 1956
Explanation: The Companies Act, 2013 replaced the Companies Act, 1956 as India’s primary corporate law.