Highlight the purpose and object of issuing of
prospectus by the company
Sources
of Data:
Meaning and definition of prospectus.
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| Highlight the purpose and object of issuing of prospectus by the company |
Chapter- 1 Synopsis
Statement of problem:
The main problem of issuing prospectus is that
a private company needs not to issue prospectus but, it is also necessary for a
public company to issue prospectus in some cases. When the shares or debentures
are offered to the existing shareholders or debenture holder of any company, then
it is not necessary for a public company to issue a prospectus.
The
problem is that the prospective shareholders are entitled to true and faithful
disclosure in the prospectus. But most of the cases, it has been seen that a
prospectus containing with false, misleading, ambiguous or fraudulent
statements of material facts, or suppressing material facts. It is termed as misleading
prospectus, and in this case a misled investor is entitled to proceed against
them.
Another
problem also arises when a person applied for shares in the company and who has
been allotted shares has certain remedies against the company. But a buyer of
shares in the open market or a subscriber to the memorandum has no such right
to get same remedies.
Research Objectives:
The object of prospectus is arousing the
interest of the potential investors in the company and induces them to invest
in its share or debentures.
(I)
It is an official and formal notice of formation of a new company.
(II)
It is also an official record describing the terms and conditions of offer of
capital issues
(III)
It is a means of promotion to promote the marketing of new issues and plays the
role of silent salesman
(IV)
However, it is a controlled advertisement and seller beware attitude is
honored.
(V)
To bring to the notice of the public that a new company has been formed.
(VI)
To preserve authentic record of the terms and allotment on which the public
have been invited to buy its shares or debentures.
(VII) To secure that the directors of the company accept responsibility for the
statement in the prospectus.
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| QUESTION & ANSWER |
Research Question:
The research has been conducted with the
following question
(a)
What is the meaning and definition of prospectus?
(b)
When it is necessary for a company to issue a prospectus?
(c)
Explain the procedure regarding registration of prospectus?
(d)
What are the important contents of prospectus?
(e)
Discuss the consequences of misstatement in a prospectus.
Research Method:
The word ‘’ Research ‘means used to collect
data and ‘Method’ may be doctrinal or
empirical. Now in this project the
method is doctrinal.
Doctrinal
research in law field indicates arranging, ordering and analysis of the legal
structure, legal frame work and case laws by extensive surveying of legal
literature but without any field work.
Sources
of Data:
Primary Sources:
secondary
sources:-
Books:- N.K
Jain ( Company Law)
Lexis Nexis (Company Law)
Website:-
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| CHAPTER ONE |
Introduction
The
importance of Company Law has considerably enlarged in modern times. The company
law plays an important and vital role in the affairs of the company. The law
relating to companies is perhaps the most significant and all-pervasive amongst
the various corporate legislation's.
After
getting the company incorporated, promoters will raise finance. The public is
invited to purchase shares and debentures of the company through an
advertisement. A document containing detailed information about the company and
an invitation to the public subscribing to the share capital and debentures is
issued. This document is called prospectus. Private companies cannot issue a
prospectus because they are strictly prohibited from inviting the public to
subscribe to their shares. Only public companies can issue a prospectus.
Prospectus
is a document that invites the public to subscribe to the share capital or
debenture of a company. If it does not do that, it cannot be called prospectus.
According to the companies (Amendment) Act, 1971, an invitation to the public
inviting deposits is also deemed to be a prospectus. Some companies do not
directly to the public themselves, but allot the entire share capital to an
intermediary, which then offers the share to the public by an advertisement of
its own. Any document by which such offer for sale to public is made is deemed
to be a prospectus.
As
per Section 2(36), ‘A prospectus means any document described or issued as a
prospectus and includes any notice, circular, advertisement or other document
inviting deposits from the public or inviting offers from the public for the
subscription or purchase of any shares or debentures of a body corporate ‘. So,
we can say that a document containing detailed information about the company
and an invitation to the public for subscribing to the share capital and
debentures issued is called prospectus.
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| CHAPTER TWO |
Meaning and definition of prospectus.
A
prospectus means, when a public company is duly incorporated, promoters and
directors proceed to secure capital and for this, they approach the public by
issuing a prospectus which is a statement giving all material and essential
information as to the state of affairs of the company, and showing the future
prospects of the company, thereby inducing the public to purchase its shares or
debenture.
As
per section 2(36), ‘’A prospectus means any document described or issued as a
prospectus and includes any notice, circular, advertisement or other document
inviting deposits from the public or inviting offers from the public for the
subscription or purchase of any share or debenture of a body corporate’’.
So,
we can say that a document containing detailed information about the company
and an invitation to the public for subscribing to the share capital and
debenture issued is called prospectus.
It
is one of the three methods by which a company may raise its share capital from
the public. It leads to a contract. Hence, it should be prepared with utmost
good faith. The object of the legislature is to compel the company to provide
the necessary information in a prospectus, to enable the would-be investor to
know the right information about the object and to know who are dealing with
the affairs to the company. Further, the subscriber can decide whether to
subscribe for the company’s share or debenture or not with the help of the
information given in prospectus.
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| CHAPTER THREE |
Necessity
for a Company to issue a Prospectus.
A
prospectus is a document that provides information about a company’s financial
information, its business information and risk considerations. Prospectus is
essentially an invitation to offer for the public to subscribe the securities
of that company. A company as soon after it decides to ‘’go public’’ it should
get the approval of the Securities Commission. Once the approval of the
Securities Commission is given to the company, the company is required to issue
a prospectus. It is mandatory to issue a prospectus since it tells the public
about the company, what it does and how it expects to perform in the future. It
is only through the prospectus potential investors invest in the securities of
the company. It is very important for a prospectus to have the risk
considerations of the company which had incurred in the past or what may affect
its growth in the future. Section 44 of the companies Act, 1956 deals with the
issuance of a prospectus by a private company which plans to cease to be a
private company.
A
private company needs not to issue prospectus but it is also not necessary for a
public company to issue prospectus in the following cases:
(I)
when the share or debenture are not offered to the public directly.
(II)
When the company has entered into an underwriting agreement with any individual
in respect of the share or debentures.
(III)
When shares or debentures are offered to the existing shareholders or debenture
holders of the company.
(IV)
When the shares or debentures offered are uniform with shares of debentures
previously issued by the company and quoted on a recognized Stock Exchange.
3.1 Legal requirement regarding issue of prospectus:
The
Companies Act has defined some legal requirements about the issue and
registration of a prospectus. The issue of the prospectus would be deemed to be
legal only if the requirements are met.
3.2 Issue after the incorporation:
As a rule, the prospectus of a company can only be
issued after its incorporation. A company, or in relation to an intended
company, shall be dated, and that date shall be taken as the date of
publication of the prospectus.
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| CHAPTER FOUR |
The procedure regarding registration of
prospectus
Section
66 of the Act deals with registration of prospectus with the Registrar of
companies. In brief it requires:
(I)
that no prospectus shall be issued by or on behalf of a company or an intended
company unless the name has been delivered for registration to the Registrar on
or before the date of issue, having been signed by all the person named therein
as director or proposed director (in the alternative signed by his agent
authorized in writing);
(II)
the prospectus so delivered shall have endorsed on it or statement are attached
to it in respect of (a) consent of every expert referred to in section 58 of
the Act, (b) a copy of every contract required to be specified in the
prospectus by virtue of clause 16 of schedule II to the Act (Form and Contents
of Prospectus). In case any of the contracts has not been reduced in writing, a
memorandum setting out full particulars of the contract, and (c) adjustments
made in the financial statements required to be included in the prospectus in
terms of clause 20 [sec. 60 however, continue to refer to earlier clause 32 of
schedule II, which dealt with adjustments] of Part of Schedule II duly signed
by the person(s) making the report thereon, with reasons unless the reasons
have been included while making the adjustments in the financial statement or
while indicating in the report by way of note the adjustments considered
necessary;
(III) a statement shall appear on the face of the
prospectus that a copy of the prospectus has been delivered for registration
with the Registrar;
(IV)
Specification of documents required to be attached to or endorsed on the
prospectus or making of a statement referring to such specification already
made in the prospectus.
In
terms of section 60(3) of the Act, the registrar shall not register a
prospectus unless the requirements laid down in various sections of the Act in
regard to prospectus have been, complied with and the prospectus is accompanied
by the consent in writing of persons named therein, if any, as auditor,
attorney, legal advisor, solicitor, banker or broker, to act in respective
capacity.
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| CHAPTER FIVE |
The important contents
of prospectus
The
companies Act intends to secure the fullest disclosure of all material and
essential particulars in a prospectus. The Act provides that every prospectus
issued by or on behalf of a company must state the matters and set out the
reports specified in’’ Schedule II’’ given at the end of the Companies Act,
1956. Section 56 of the Companies Act lay down that the matters reports stated
in Schedule II to the Companies Act must be included in a prospectus. The
format of Schedule II was revised by the Government vide its notification dated
3.10.1990. The revised format of prospectus requires the prospectus to be divided
into three parts. The revised format has been made effective from 1st
November, 1991. This has been done to provide for greater disclosure of
information regarding the company, its management, the project proposed to be
undertaken by the company and the management perception of risk factors so as
to enable the investors to take an informed decision regarding investment in
shares or debentures offered through public issue. In Part 1, brief particulars
are to be given about matters mentioned below:
5.1 General Information:
Under
this head information is given about-
i)
Name and address of registered office of the company.
ii)
Name(s) of stock exchange(s) where application for listing is made.
iii)
Name and address of auditors and lead managers.
iv)
Names and addresses of the underwriters and the amount underwritten by them
together with declaration by the board of directors that the underwriters have
sufficient resources to meet their respective obligations.
v)
Date of opening of the issue.
vi)
Date of closing of the issue including the date of earliest closing of the
issue.
vii)
Declaration about refund of the issue if minimum subscription of 90% is not
received within 90 days from closure of the issue.
viii) Declaration about the issue of allotment
letter/refunds within a period of 10 weeks and interest in case of any delay in
refund at the rate prescribed under section 73.
ix)
Consent of the Central Government about the present issue as also particulars
of letter of intent/industrial license making clear in the statement that the
Central Government does not undertake any responsibility for financial
soundness or correctness of the statement.
x)
Punishment if application for shares is made in a fictitious name (vide sec.
68A)
xi)
Names and addresses of trustees of the debenture trust deed in case of issue of
debenture.
5.2 Capital Structure of the Company:
i)
Authorized, issued, subscribed, called-up and paid-up capital; also paid-up
capital after the present issue or after conversion of debentures, if any.
ii)
Size of the present issue, giving separately reservation for preferential
allotment to promoters and others.
5.3 Terms of the present issue:
i)
Terms of payment.
ii)
Rights of the instrument holders e.g., whether they will get dividend for the
whole year or for the period of holding only.
iii)
How to apply. i.e. for making use of the application form, on the basis of
study of prospectus and mode of payment.
iv)
Any special tax benefits for the company and its shareholders.
5.4 Particulars of the issue:
i)
Object(s) of the issue.
ii)
Project cost.
iii)
Means of financing (including contribution of promoters).
5.5 Company Management and Project:
i) History and main object and present business of
the company, as also name and address of subsidiary, if any.
ii) Nature of the product(s), export possibilities,
export guarantee.
iii) Location of the project.
iv)
Promoters and their background.
v)
Collaborations, if any, with details of any performance guarantee or assistance
in marketing.
vi)
Schedule of implementation of the project and the progress made so far, giving
relevant details like land acquisition, civil construction, installation of
plant and machinery, trial production, date of commercial production etc.
vii)
Names, addresses and occupation of managing director, whole time director,
other directors including nominee directors and manager, mentioning any
directorship held in other company in each case.
viii)
Plant and machinery, technology, process, etc.
ix)
Infrastructure facilities for raw materials and utility like water and
electricity.
x)
Stock market data for shares and debenture of the company including high and
low price in each of the last three years and monthly high/ low during the six
months, if applicable.
xi)
Approach to marketing and proposed marketing set up.
Xii)
Future prospectus, expected capacity utilization during the first three years
from the date of commencement of commercial production, and the expected year
from which the company would be earning cash profits and net profits.
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| CHAPTER SIX |
Discuss
the consequences of misstatement in a prospectus:
6.1 Untrue Statement:
As per sec-65, a statement included in a
prospectus shall be deemed to be untrue if the statement is misleading in the
form and context in which it is included. Where there is any omission of a
matter from the prospectus and this is made to mislead, the prospectus is
deemed to be called as a prospectus in which an untrue statement is included.
Not only in prospectus, but a statement can be said to mislead even if it is
present in any report or memorandum by reference incorporated therein or issued
therewith. The liability accrues where any person subscribes for any shares or
debentures on the faith of the prospectus for any loss or damage he may have
sustained by reason of untrue statement included therein.
In the case of DERRY v.
PEEK, the directors of a tramway company issued a prospectus stating that they
had the right to run tram cars with steam power instead of with horses as
before. The Act incorporating the company provided that such power might be
used with the sanction of the board of trade. But, the board of trade refused
to give permission and the company had to be wound up.
6.2 Remedies for misstatement and omission in prospectus:
If the prospectus contains
a misleading statement, the liability of the company, the directors, promoters
and others who authorized the issue can be classified into three kinds viz.,
1. Civil Liability,
2. Criminal Liability, and
3. Liability under the law of contract.
6.3 (i)
Civil Liability:
An aggrieved shareholder
who purchased shares by placing reliance on the misleading prospectus has
a. remedies against the
company, and
b. remedies against the
directors, promoters and experts.
6.4 (ii)
Criminal Liability:
Anyone who fraudulently
makes any misstatement in the prospectus to induce persons to invest money in
the company is punishable with imprisonment up to 5 years with fine up to Rs.
100000 or with both.
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| CHAPTER SEVEN |
Conclusion
A public company raises its capital from the public
and it issue prospectus for this purpose. Sometimes, the promoters of a company
decide not to approach the public for rising necessary capital. They are
hopeful of rising fund from the friends and relations or through underwriters.
In that case a prospectus need not be issued but a Statement in lieu of
prospectus must be filed with the registrar at least three days before the
first allotment of shares. Such a statement must be signed by every person who
is named therein as a director or proposed director of the company. This
statement will be drafted strictly in accordance with the particular set out in
a part I of Schedule III of the Act.
The Companies Act, 1956 had been enacted with the
object to consolidate and amend the law relating to the companies and certain
other associations. The said Act has been in force for about fifty-five years
and had been amended several times.
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| Highlight the purpose and object of issuing of prospectus by the company |
