Red-Herring Prospectus in Indian Securities Law: Statutory Architecture, Judicial Oversight, and Contemporary Issues

Red-Herring Prospectus in Indian Securities Law: Statutory Architecture, Judicial Oversight, and Contemporary Issues

Introduction

The red-herring prospectus (RHP) is a cornerstone of India’s primary securities market architecture. It operates at the intersection of corporate law (primarily the Companies Act, 1956 and its successor of 2013) and the regulatory framework administered by the Securities and Exchange Board of India (SEBI). This article undertakes a critical examination of the legal contours of the RHP, analysing statutory provisions, SEBI regulations, and seminal judicial pronouncements. Particular attention is afforded to Sahara India Real Estate Corporation Ltd. v. SEBI[1], DLF Ltd. v. SEBI[2], and allied jurisprudence, which collectively illuminate the duties, liabilities, and policy rationale that surround the preparation and circulation of an RHP.

Statutory Framework

1. Companies Act, 1956 & Section 60B

Section 60B, inserted by the Companies (Amendment) Act, 2000, created a bespoke regime for information memoranda and red-herring prospectuses. Sub-section (1) permits a public company to circulate an information memorandum prior to filing a prospectus, while sub-section (2) mandates that a prospectus be filed “as a red-herring prospectus” at least three days before the opening of the offer. The Explanation appended to Section 60B defines an RHP as “a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered”. Sub-section (3) stipulates that the information memorandum and the RHP “shall carry the same obligations as are applicable in the case of a prospectus”. The combined reading of Sections 67 and 73 layers additional obligations, notably mandatory listing when the offer is made to fifty or more persons.[3]

2. Companies Act, 2013 & Section 32

The Companies Act, 2013 substantially reproduces the 1956 construct in Section 32, thereby continuing the statutory recognition of the RHP while incorporating references to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR 2018). Although the present analysis focuses on the 1956 framework (owing to the vintage of the lead cases), the continuity underscores the entrenched relevance of the RHP mechanism.

3. SEBI (ICDR) Regulations

Part A of Schedule VIII of the ICDR 2009 (retained, mutatis mutandis, in ICDR 2018) lays down exhaustive disclosure requirements. The issuer must present information that is “truthful, fair and not manipulative or deceptive”[4]. Regulation 57 further requires that the RHP contain all material disclosures necessary for an informed investment decision, incorporating Schedule II of the Companies Act, 1956.[5]

Functional Rationale of the Red-Herring Prospectus

The RHP facilitates price discovery through the book-building process while ensuring pre-issue transparency. By allowing the price and quantum variables to remain open, it enables market feedback to be incorporated prior to final pricing. However, the RHP carries the same civil and criminal liabilities as a full prospectus; misstatements or material omissions attract consequences under Sections 62, 63 and 68 of the Companies Act, 1956 and Sections 11, 11B and 15HA of the SEBI Act, 1992.

Judicial Scrutiny

1. Sahara India Real Estate: RHP as an Instrument of Regulatory Evasion

In Sahara India Real Estate Corporation Ltd. & Ors. v. SEBI, the Supreme Court scrutinised two Sahara group entities that filed RHPs with the Registrar of Companies (RoC) but expressly disclaimed any intent to list the optionally fully convertible debentures (OFCDs) on a recognised stock exchange.[1] The Court held that:

  • Issuance to fifty or more persons constitutes a public issue under Section 67(3), triggering mandatory listing under Section 73.
  • The RHP, enjoying parity with a prospectus under Section 60B(3), could not be used as a shield to bypass SEBI oversight.
  • SEBI’s jurisdiction is not ousted merely because an RHP is filed with the RoC; the filing does not dilute the obligation to comply with other provisions of the Act.
The decision fortified SEBI’s authority to demand refunds (approximately ₹17,400 crore) and underscored that formal compliance (i.e., filing an RHP) does not sanitise substantive illegality.

2. DLF Ltd. v. SEBI: RHP Misstatements and Investigative Powers

Although DLF Ltd. v. SEBI concerned an order under Section 11C of the SEBI Act initiating investigation, the underlying complaints alleged non-disclosure and misrepresentation in DLF’s RHP filed during its 2007 IPO.[2] The Delhi High Court upheld SEBI’s investigative mandate, emphasising that:

  • Reasonable grounds—rooted in alleged RHP misstatements—justify investigation.
  • The initiation stage does not violate natural justice; adequate opportunity is afforded at the adjudicatory stage.
The ruling reinforces that the integrity of RHP disclosures is policed not only ex ante (through SEBI observations) but also ex post via investigative powers.

3. Transparency and Investor Autonomy: Rajkot Saher/Jilla Grahak Suraksha Mandal v. Pradeep Nambiar

The Securities Appellate Tribunal (SAT) in the RPL IPO appeal dismissed allegations of investor deception, observing that all “relevant and detailed information” had been furnished in the RHP and that investors had exercised an “informed commercial decision”.[6] The case illustrates judicial deference where disclosure standards are met, thereby allocating residual risk to the investor.

4. Administrative Delays: Palco Recycle Industries Ltd. v. SEBI

In Palco Recycle, the SAT noted SEBI’s delay in providing observations on a draft RHP, emphasising the regulatory duty to act expeditiously.[7] While the case turned on procedural timeliness, it highlights the delicate balance between rigorous scrutiny and market efficiency.

5. Civil Litigation: Injunctive Relief against DRHP Approval

The Hyderabad Senior Civil Judge in Lanka Jagannadham v. SEBI & Ors. granted interim relief restraining SEBI and the RoC from proceeding with an IPO where the DRHP allegedly misidentified a promoter entity.[8] The order evidences the civil court’s willingness to intervene where prima facie misstatements in an RHP threaten investor interests.

6. Ancillary Domains: RHP under the Right to Information Act

SEBI’s appellate orders in Ashok Bapu Patil[9] and S. V. Khandekar[10] clarified that once an RHP is placed in the public domain (SEBI website), it ceases to be “information exclusively held” by SEBI, and therefore need not be separately furnished under the RTI Act. The rulings align with the principle of maximal public dissemination of offer documents.

Regulatory Orders Illustrating Compliance Expectations

  • Sudar Industries Ltd. IPO Order (2021): reiterates that disclosures must be “truthful, fair and not manipulative”. The order references Part A of Schedule VIII, underscoring granular disclosure obligations in an RHP.[4]
  • Kelvin Fincap Ltd. Order (2020): stresses that any revision of the price band requires extension of the bidding period and concomitant updates to the RHP.[5]
  • Regal Hitech Agro Projects & RBHAPL Orders (2015-2016): demonstrate SEBI’s power under Sections 11(4) and 11B to restrain issuers from further public solicitation when prima facie violations (including faulty offer documents) are observed.[11]

Tax Treatment of Aborted RHP Expenditure

The Income-tax Appellate Tribunal in Road Infrastructure Development Co. of Rajasthan Ltd. v. ACIT held that expenses incurred on a draft RHP, subsequently written off when the IPO was abandoned, are revenue in nature and deductible.[12] The ruling draws on the Delhi High Court’s decision in Priya Village Roadshows Ltd., recognising that once an IPO is shelved, the RHP ceases to provide an enduring benefit and is reduced to “waste paper.”

Liability Regime

1. Civil Liability

Sections 62 and 63 of the Companies Act, 1956 render directors, promoters and experts liable for untrue statements in an RHP. Damages include rescission, compensation, and statutory interest. Parallel liability may arise under Sections 11 and 15HA of the SEBI Act (fraudulent and unfair trade practices).

2. Criminal Liability

Section 68 imposes criminal sanctions, including imprisonment up to two years and fine up to ₹50,000, for misstatements made knowingly in an RHP. The mens rea threshold distinguishes inadvertent omissions from wilful deceit.

3. Due Diligence Defence

Persons liable may invoke the “reasonable diligence” defence (Section 62(2)(c)), demonstrating that they had reasonable grounds to believe, and did believe, that the statement was true. The jurisprudence in DLF suggests that SEBI and courts will examine the robustness of the due-diligence process, including board minutes, legal opinions, and auditor certificates.

Contemporary Challenges

  • Information Asymmetry v. Information Overload: While disclosure volumes have increased, retail investors often grapple with complex financial data. Regulatory initiatives, such as abridged prospectuses and plain-language drafting, seek to recalibrate the balance.
  • Technology & Speed: Electronic filing and rapid book building compress the timeline between DRHP filing and price discovery, necessitating agile yet thorough regulatory review.
  • Cross-border Offers: Global depository receipts and concurrent international offerings introduce conflicts of law, particularly regarding liability standards and disclosure benchmarks.
  • ESG Disclosures: Emerging expectations around environmental, social and governance metrics are not explicitly codified in Schedule VIII, raising questions about materiality thresholds and prospective amendments.

Conclusion

The red-herring prospectus remains indispensable to India’s capital-raising ecosystem, coupling market-based price discovery with a robust disclosure paradigm. Judicial decisions—most notably Sahara and DLF—affirm that formal compliance cannot camouflage substantive illegality and that SEBI’s protective mandate extends beyond mere vetting of draft documents. Future reforms should address evolving market dynamics, harmonise ESG disclosures, and enhance retail investor comprehension, thereby sustaining the delicate equipoise between capital formation and investor protection.

Footnotes

  1. Sahara India Real Estate Corporation Limited & Ors. v. SEBI & Anr., (2013) 1 SCC 1 (SC, 2012).
  2. DLF Ltd. v. Securities and Exchange Board of India & Ors., 2012 SCC OnLine Del 46 (Del HC, 2012).
  3. Sahara SEBI Order, 2010 (para 23); see also Companies Act, 1956, ss. 67 & 73.
  4. SEBI, Order in the Matter of Initial Public Offer of Sudar Industries Ltd. (2021).
  5. SEBI, Order in the Matter of Kelvin Fincap Ltd. (2020), reg. 47; ICDR 2009, reg. 57.
  6. Rajkot Saher/Jilla Grahak Suraksha Mandal v. Pradeep Nambiar, SAT Appeal (2008).
  7. Palco Recycle Industries Ltd. v. SEBI, 2012 SCC OnLine SAT 164.
  8. Court of the V Senior Civil Judge, Hyderabad, I.A. No. 581/2016 in O.S. No. 697/2016 (Lanka Jagannadham v. SEBI & Ors.).
  9. SEBI RTI Appeal No. 3318 (Ashok Bapu Patil) (2019).
  10. SEBI RTI Appeal No. 1206 (S. V. Khandekar) (2011).
  11. SEBI, Orders in the matter of Regal Hitech Agro Projects (2015) and RBHAPL (2016).
  12. Road Infrastructure Development Company of Rajasthan Ltd. v. ACIT, ITAT Jaipur (2020).