Statement in Lieu of Prospectus – The Backdoor Document! 🚪📄
Scenario: You're throwing a party.
Option 1: Public invitation (Facebook event, anyone can come!) = PROSPECTUS
Option 2: Private invitation (only close friends!) = STATEMENT IN LIEU
Let's understand when companies use the "private party" route! 🎉
What is Statement in Lieu of Prospectus?
Definition: A document filed with the Registrar when a public company does NOT issue a prospectus but still needs to raise capital.
"In Lieu" = Instead of / In place of
Simple: "We're not inviting the general public, but we still need to tell the government what we're doing!"
When is it Used? (3 Scenarios)
Scenario 1: Private Placement 🤝
What: Selling shares directly to select investors (not general public)
Example - Flipkart (before Walmart acquisition):
- Needed ₹1,000 crores
- Instead of IPO (public), approached Softbank directly
- Softbank invested ₹1,000 crores (private placement!)
- No prospectus issued to public
- But filed Statement in Lieu with ROC
Why companies prefer this:
- ✅ Faster (no SEBI approvals, no roadshows!)
- ✅ Less compliance
- ✅ No public scrutiny
- ✅ Valuation stays private
Scenario 2: No New Issue 💼
Company formed but:
- All shares taken by promoters/founders
- No money raised from public
Example - Family-owned company:
- Sharma family starts "Sharma Industries Ltd" (Public Company)
- All shares taken by family members
- No outsiders involved
- File Statement in Lieu (just a formality!)
Scenario 3: Converting to Public from Private
Company was Private Ltd → Converts to Public Ltd
BUT doesn't issue new shares to public immediately
Example:
- ABC Pvt Ltd → ABC Ltd (conversion)
- Existing shareholders continue
- No fresh capital raise
- File Statement in Lieu!
What Must Be Included? (Contents)
1. Share Capital Details 💰
- Total authorized capital
- Issued, subscribed, paid-up capital
- Types of shares (equity, preference)
Example:
"Authorized Capital: ₹10 crores
Issued Capital: ₹5 crores
Paid-up Capital: ₹4 crores"
2. Directors & Management 👔
Full details of:
- All directors (name, address, qualification)
- Key Managerial Personnel (CEO, CFO, Company Secretary)
- Their shareholding in company
Why? ROC wants to know who's running the show!
3. Minimum Subscription 📊
Required subscription to proceed with allotment
Rule: Minimum 90% of issued amount must be subscribed
Example:
- Issuing shares worth ₹100 crores
- Minimum subscription: ₹90 crores
- If less than ₹90 crores subscribed → Refund all money!
(Protects investors - company gets adequate capital or none!)
4. Underwriting Details 💼
If shares underwritten:
- Who are underwriters?
- How much commission?
- Their liability?
Underwriter = Institution guaranteeing to buy unsold shares
5. Preliminary Expenses 💸
Costs incurred before company started:
- Legal fees
- Registration fees
- Consultant charges
Why disclose? Transparency! Investors know where money went!
6. Material Contracts 📝
Important contracts entered by company:
- Property purchases
- Major supplier agreements
- Technology licenses
Example:
"Company has entered into a 10-year office lease with XYZ Properties for ₹50 lakhs per annum"
7. Benefits to Promoters 🎁
Any special benefits to promoters?
Example:
- Founder getting ₹1 crore salary
- Promoter's company supplying raw materials
(Prevents hidden benefits to insiders!)
Statement in Lieu vs Prospectus
| Feature | Prospectus | Statement in Lieu |
|---|---|---|
| Issued to | General Public | Not to public (filed with ROC) |
| Purpose | Invite public to buy shares | Inform ROC (compliance) |
| When used | Public issue/IPO | Private placement / No issue |
| SEBI approval | Required | Not required |
| Contents | Extensive (marketing + legal) | Basic (legal compliance only) |
| Liability | Civil + Criminal | Civil only (less stringent) |
Legal Requirements (Section 26, Companies Act 2013)
1. Must be Signed ✍️
By every person named as director in the document
(Can't sneak in unnamed directors!)
2. Filing Deadline ⏰
Must be filed with ROC before allotment of shares
(Can't allot first, file later!)
3. Certified Copy Attached 📎
Attach contracts mentioned in the statement
(Proof of what you're claiming!)
4. Inspection Rights 👀
Statement available for public inspection at ROC
(Anyone can see it, unlike prospectus which is advertised!)
Real-Life Example: Startup Funding Round
Case: TechStartup Solutions Ltd (hypothetical)
Situation:
- Public limited company
- Needs ₹50 crores for expansion
- Approached Sequoia Capital (VC firm)
- Sequoia agrees to invest!
What happens:
Without prospectus route:
- Directly allot shares to Sequoia
- File Statement in Lieu with ROC showing:
- Sequoia getting 20% stake for ₹50 crores
- Promoters' shareholding diluted from 100% → 80%
- Use of funds (R&D, marketing, hiring)
Benefits:
- Deal closed in 2 months (vs 6+ months for IPO!)
- Valuation stays private
- No media scrutiny
Compliance: Statement filed with ROC (legal requirement met!)
Modern Trend: Private Placements Rising! 📈
Why startups prefer private placements:
- Speed: Months vs years for IPO
- Cost: ₹10-50 lakhs (vs ₹5-10 crores for IPO!)
- Privacy: Valuations not public
- Flexibility: Customized terms with investors
Famous examples:
- Byju's: Raised billions via private placements (not listed!)
- OYO Rooms: Multiple funding rounds, no IPO yet
- Paytm: Private rounds before eventual IPO in 2021
Later, if needed: Convert to public via IPO!
(Flipkart, Zomato, Nykaa all started with private placements!)
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 5
1. Statement in Lieu of Prospectus is filed when:
💡 Final Wisdom: "Prospectus = Megaphone announcement to everyone! Statement in Lieu = Quiet filing with the registrar. Both legal, both valid, but very different vibes! Most startups prefer the quiet route until they're ready for the IPO spotlight!" 🔇📣
🎉 UNIT II COMPLETE! You now understand everything from company basics to IPO documents! Next up: Management Functions - How these companies are actually RUN! 🏃♂️💼