Section 32 of Companies Act 2013: Understanding Red Herring Prospectus
Raising money from the public is not a small step for any company. It’s exciting, risky, and heavily scrutinised. One wrong disclosure, one missing detail, and the entire issue can land in legal trouble. That’s exactly why Section 32 of Companies Act 2013 exists.
This section deals with something called a Red Herring Prospectus. Sounds odd, yes. But in the corporate world, it’s a very powerful document.
A Red Herring Prospectus, often called an RHP, is issued when a company is planning to go public but hasn’t finalised everything yet. Especially the price. Or the exact number of shares. Instead of waiting till every detail is locked, the law allows companies to release this preliminary document and test the market.
In simple words, Section 32 allows companies to say:
“Here’s who we are. Here’s our business. Here are the risks. Price? We’ll decide that after seeing how investors react.”
And that flexibility can make or break a public issue.
What Exactly Is a Red Herring Prospectus?
A Red Herring Prospectus is not the final prospectus. It’s more like a detailed preview.
It contains almost everything an investor needs to know—company background, financials, promoters, management, future plans, risk factors—but it does not mention the issue price or the final quantity of securities.
That’s intentional.
Because the whole idea is to understand market appetite before locking numbers.
Under Section 32 of Companies Act 2013, this document must still follow strict disclosure rules. You can’t hide losses. You can’t exaggerate growth. You can’t skip risks just because the price isn’t fixed yet.
Investors read the RHP.
They analyse.
They discuss.
They decide whether the company is worth betting on.
Only after that does the company move towards the final prospectus.
Why Section 32 Exists
Without Section 32, public issues would be chaotic.
Imagine companies collecting money first and explaining risks later. Or fixing unrealistic prices without knowing if the market even wants the shares.
Section 32 stops that.
Its real purpose is simple:
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Protect investors
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Force transparency
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Create discipline before public fundraising
It ensures that no company walks into the market half-prepared. If you want public money, you first show your cards.
All of them.
When Do Companies Use a Red Herring Prospectus?
Most commonly, during an IPO.
But not limited to that.
Companies may issue an RHP when:
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Planning an Initial Public Offering
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Making a public issue of securities
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Unsure about final pricing due to market conditions
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Wanting investor feedback before locking issue size
This stage is critical. Market sentiment can change everything. Sometimes pricing is adjusted. Sometimes issue size changes. Sometimes companies even delay the issue altogether.
The RHP helps companies read the room.
What Does a Red Herring Prospectus Contain?
Even though price details are missing, the document itself is heavy.
And detailed.
Typically, an RHP includes:
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Company history and business model
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Promoters and management background
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Audited financial statements
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Industry overview
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Risk factors (and yes, there can be many)
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Objects of the issue
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Tentative number of securities
Nothing vague. Nothing casual. Every statement is legally accountable.
Once published, the company can’t pretend it didn’t say something.
Legal Compliance Under Section 32
This is where companies need to be careful.
Issuing a Red Herring Prospectus is not informal marketing. It’s a legal document.
Under Section 32 of Companies Act 2013, companies must:
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File the RHP with the Registrar of Companies
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Follow all disclosure requirements under the Act
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Comply with SEBI regulations
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Update the RHP if any material change occurs
Failure to do this can attract penalties. In some cases, it can even derail the entire public issue.
Directors and officers are not spared either. Responsibility is personal.
Why Companies Prefer a Red Herring Prospectus
Despite the effort involved, companies still prefer issuing an RHP. And for good reason.
It gives:
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Flexibility in pricing
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Real market feedback
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Better issue structuring
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Stronger investor confidence
From an investor’s point of view, it reduces blind risk. They know what they’re stepping into.
From a company’s perspective, it reduces surprises after listing.
Challenges Companies Face
Of course, it’s not all smooth.
Preparing an RHP is expensive.
Audits, legal vetting, disclosures—it all adds up.
There’s also uncertainty. The market may not respond as expected. Sometimes enthusiasm is low. Sometimes demand is overwhelming.
And if anything changes materially after filing, the RHP must be revised. That means more time. More cost.
Still, most companies agree—it’s better than rushing blindly into the market.
Role of SEBI Alongside Section 32
Section 32 doesn’t work alone.
SEBI regulations sit right beside it, ensuring:
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Honest disclosures
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Fair pricing mechanisms
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Investor protection
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Accountability of promoters
Together, they create a framework where public fundraising is regulated, transparent, and fair.
That balance is crucial.
Conclusion
Section 32 of Companies Act 2013 plays a quiet but powerful role in India’s capital markets. By regulating the issuance of a Red Herring Prospectus, it ensures companies don’t cut corners while raising public money.
It protects investors.
It disciplines companies.
And it promotes trust in the market.
If your company is planning an IPO or any public issue and needs guidance on drafting, filing, or complying with Red Herring Prospectus requirements, the professionals at Callmyca.com can help you navigate the process smoothly, legally, and without costly mistakes.
