Prospectus
By Asok Nadhani
5.1 Prospectus
a.
Prospectus means any document issued
by a body corporate as prospectus and includes any notice, circular,
advertisement or other document: (s.2(36))
-
Inviting deposits from the public
-
Offering the public to subscribe or purchase of any
shares in, or debentures of, the Company
b.
Offer or invitation to the public includes
invitation to any section of the public, (e.g. members, debenture holders,
clients), but does not include: (s.67)
i.
Offer of right shares to existing members.
ii.
Invitation to subscribe for shares or debentures
which are in all respects uniform with shares or debentures previously issued
and currently being quoted on a recognized stock exchange.
iii.
Personal invitation to less than 50 persons where
any other person would not be entitled to subscribe. [Nash Vs Lynde]
5.2 Characteristics of a Prospectus
a.
Written Document: Mere oral
invitation is not a prospectus.
b. Invitation to public: The document must be
an invitation to the General public to subscribe to the shares of the company. [Pramatha
Nath Sanyal v. Kali Kumar Dutt,]
c.
Offer to the public: The shares must be offered to the public for subscription. [South of England Natural Gas & Petroleum
Co.]
d.
Dated and signed: A prospectus must be dated (i.e., the date is taken as the
date of publication of the prospectus) and signed by: (Sec. 55)
i.
In case of intended
company: All proposed director (or their agents).
ii.
In case of existing Company: All Directors
of the company named in the prospectus (or their authorized agents).
5.3
Registration of Prospectus (Sec. 60)
i.
Purpose: The prospectus must be registered: [Superintendent & Remembrancer
of Legal Affairs, Bengal vs. Bengal Salt Co. Limited]
a.
to keep an authenticated record of the terms and
conditions of issue of shares or debentures.
b.
to fix the responsibility of the persons issuing
the prospectus for statements made by them in the prospectus.
ii.
Time: The Prospectus
must be registered on or before the date of publication thereof
and the prospectus must state that a copy of it has been delivered to the
Registrar for registration, on or before the date of its publication.
iii.
Issue: Prospectus can
be issued within 90 days of registration with the Registrar.
iv.
Consequences for
non-registration of prospectus: If a prospectus
is issued before a copy thereof being delivered to the Registrar for
registration or without the necessary documents or the consent of the experts,
the issue is not valid and a subscriber to share may rescind the contract.
Further, the company and every person who is knowingly a party to the issue of
the prospectus shall be punishable with fine which may extend to Rs.50.000.
v.
Documents: The following
documents must be attached to the copy of prospectus filed with the Registrar:
a. The consent of the expert whose report is to
be published in the prospectus,
b. A copy of every
contract relating to the appointment and remuneration of a managing director or manager,
c. A copy of
material contract (except contracts entered into in the ordinary course of
business of the company or entered into two years prior to the issue of
prospectus). All material contracts
(whether executed or executory) should be disclosed,
d. A written
statement relating to the adjustments, if any, in respect of figures of any
profits or losses and assets and liabilities, giving reasons and signed by an
expert,
e. Consent in
writing of the person named in the prospectus as an auditor, legal advisor,
attorney, solicitor, banker,
representative of the issue house to act in that capacity,
f. The consent of
director under Section 266 in respect of new director, if any, named therein,
g. Upon
registration the prospectus, it becomes a public document and can be inspected
by any member.
vi.
Changes:
a.
Any change in the prospectus can be effected only
with the approval of the board on the authority of all directors who have
signed the prospectus.
b.
Where the prospectus is already registered, no
change can be made. In such an event, the company has to file a revised
prospectus after complying with the provisions of Section 60 de novo. Except
with the specific approval of the company given in a general meeting, the terms
of contract stated in the prospectus or statement in lieu of prospectus cannot
be altered.
vii. Approval: Before the prospectus is
registered with the Registrar, the company should ensure that it is approved by
the lead manager to the issue, the stock exchanges where the shares of the
company are listed or proposed to be listed and the lead financial institution
underwriting the issue.
5.4 Issue of prospectus
The prospectus must be issued within 90 days of the date on which
a copy thereof is delivered for registration. The provision relating to
prospectus also apply to advertisement u/s 58A. (S. 58B).
i.
Time of Issue: The date of
issue of prospectus is the date on which the prospectus first appears as an
advertisement.
ii.
Allotment: Where a
prospectus has been issued, no allotment can be made until:
a.
beginning of the 5th day after
prospectus is first issued; or such later time as specified in the prospectus;
or
b.
5th day after public notice is given under section
62.
iii.
No Issue: A
prospectus is not to be issued in the following cases:
a.
where shares or
debentures are offered to existing members or debenture holders (s.56(5)).
b.
where shares or
debentures are not issued to the public.
c.
where invitation is made
to subscribe for shares or debentures which are in all respects uniform with
shares or debentures previously issued and for the time being dealt in or
quoted on a recognised stock exchange.
d.
Where a invitation is
made to a person bonafide invited to enter into an underwriting agreement with
regard to shares or debentures (s.56(3)).
iv.
Variation: The
terms of contract referred to in prospectus or Statement in lieu of prospectus
shall not be varied except approved by Company in General Meeting. (S.61)
v.
Newspaper Advertisement: In a prospectus published as newspaper advertisement, the contents of
memorandum, signatories and number of shares subscribed by them need not be
mentioned. (S.66)
5.5 Information Memorandum
i.
A public company making an issue of securities may
circulate Information Memorandum to the public prior to filing of a
prospectus, by which (S. 2(19B)).
demand for the
securities proposed to be issued by a company is elicited
the price and
terms of issue for such securities is asserted.
ii.
If a Company invites subscription by Information
Memorandum, it must file: (S. 60B(2))
a.
Prospectus before opening of the subscription list,
b.
Red Herring Prospectus, 3 days before
opening of the offer.
iii.
Upon closing of the offer, a final prospectus shall
be filed with SEBI, which shall state: (S. 60B(9))
the total capital raised;
the closing price of the securities;
any other details which were not complete in the red-herring
prospectus.
5.5.1 Red
Herring Prospectus
i. A Red Herring
Prospectus is a prospectus which does not contain complete information about
price and quantum of securities offered.
ii.
The information memorandum and red-herring
prospectus shall carry same obligations as applicable to prospectus. (S.
60B(3))
5.5.2 Variations in information memorandum (S. 60B)
a.
Any
variation between the information memorandum and the red-herring prospectus shall
be- (S. 60B (5))
i.
highlighted as variations by the issuing company; and
ii.
individually intimated to the proposed
investors.
b. Any advance
subscription for securities, if already received by the issuing company, shall
not be encashed until (S. 60B (6))
i.
such variation has been individually intimated to
them; and
ii.
the company has offered an opportunity to them to
withdraw their applications and cancel the subscription moneys paid.
c.
A proposed investor may withdraw his application within
7 days from the date of such intimation given by the company. (S. 60B (7))
d.
An allotment shall be void if the company has not
given enough information of any variations to a proposed investor; or an
opportunity for cancelling
the application. (S. 60B (8))
e.
Where an application becomes void, the proposed
investor shall be entitled to get refund of his subscription money alongwith interest
@ 15% per annum. (S. 60B (8))
5.6 Shelf
Prospectus (S. 60A)
i.
A prospectus issued by any financial institution or
bank for one or more issues of the securities or class of securities specified
in that prospectus can be termed as shelf
prospectus.
ii.
Such shelf prospectus can be issued by any –
public financial institutions
public sector bank
scheduled bank whose main object is financing.
iii. Procedures for
filling shelf prospectus:
a.
It should be issued within 3 months and prior to
making of a second or subsequent offer under shelf prospectus
b.
An updated Information Memorandum is to be filed
every time along with a shelf prospectus which shall contain material facts
relating to –
new charges
created
change in the
financial position in between the first, previous and successive offer of
securities.
c.
The validity of the shelf prospectus shall be for 1
year from the date of opening of the first issue of securities under the
prospectus.
d.
The company need not file any fresh prospectus at
every stage of offer of securities within the period of validity of shelf
prospectus.
5.7 Abridged Prospectus
a.
Abridged prospectus means a memorandum containing
salient features of a prospectus as prescribed by the Central Government.
(s.2(1))
b.
Appending of Abridged Prospectus [S. 56(3)]
i.
Instead of appending the full prospectus, ‘abridged
prospectus’ may be appended to the Application Form for subscription of share
of public.
ii.
The Abridged Prospectus and the Application Form
shall contain the same Serial Number separated by a perforated line, so that
the investor may detach and retain the abridged prospectus.
iii.
However, full prospectus shall be furnished to
every applicant who makes a demand for the same before closing of the
subscription list.
iv.
The issue of abridged prospectus is not required in
the following cases:
a.
Where shares or debentures are offered to existing members
or debenture holders.
b.
Where invitation is made to subscribe for shares or
debentures which are in all respects uniform with shares or debentures
previously issued and for the time being dealt in or quoted on a recognized
stock exchange.
c.
Where a bona fide invitation is made to a person to
enter into an underwriting agreement with respect to the shares or debentures.
5.8 Statement in
Lieu of Prospectus (Sec. 70)
1.
Where a public company, instead of inviting
subscription of its shares to general public, arranges to offer its
subscription to select private sources, may issue a draft prospectus instead of
a prospectus (known as Statement in Lieu of Prospectus), drafted in
accordance with the form set out in Part-I
of Schedule III of the Companies Act.
2.
The Company must not allot any share unless the
Statement in Lieu of Prospectus has been delivered to Registrar, at least 3
days before.
3.
A Statement in Lieu of Prospectus :
i.
contains almost the same information as in the
prospectus.
ii.
should not contain any misleading or any untrue
statement.
iii.
must be signed by every person named therein as
director.
iv.
A Private company need not issue a Statement in
Lieu of Prospectus.
4.
Penalty for
contravention
i.
Any Company or its defaulting
officer contravening the provisions shall be punishable with fine which may
extend to Rs.1,000.
ii.
If it includes any untrue statement, he may be
punished with imprisonment upto 2 years and / or with upto Rs. 50.000
5.9 Deemed Prospectus (S.
64)
a.
Prospectus by implication. All documents
containing offer of shares or debentures for sale are deemed to be a prospectus
by implication of law and all enactments and rules of law in regard to a
prospectus are applicable thereto.
b.
Intention to offer shares or debentures
to the public. Unless the contrary is proved, an allotment of, or
agreement to allot, shares or debentures to an Issuing House is deemed to have
been made for sale to the public, if:
i.
the offer of shares or debentures for sale was made
within 6 months of the allotment or agreement to allot; or
ii.
at the date when the offer was made, the whole
consideration to be received by the company in respect of shares or debentures
had not been received by it.
c.
Additional information. The following
additional information is required to be given in the document deemed to be
prospectus:
i.
The net amount of the consideration received (or to
be received) by the company
ii.
The place and time at which the contract of
allotment may be inspected.
d.
Issuing House to be deemed director. The
persons making the offer of sale to the public are to be deemed directors of
the company for the purpose of registration of the prospectus.
e.
Signing of prospectus. Where the Issuing House is
a company or a firm, the prospectus should be signed by 2 directors of the
company or at least one-half of the partners in the firm.
5.10 Contents of
Prospectus (Sec. 56)
A prospectus shall contain:
a.
Information as specified
in Part I Schedule II as follows:
i.
General Information
ii.
Capital Structure of the
Company
iii.
Terms & Particulars
of Present Issue
iv.
Company management &
Project particulars
v.
Particulars of other
companies under same management
vi.
Particulars of
Outstanding Litigation
vii.
Perception of Risk
Factors
b.
Reports as set out in
Part II Schedule II as follows:
i.
General Information
ii.
Financial information
iii.
Statutory and other information
c.
The contents of
Prospectus will further be subject to provisions laid down in Part III Schedule
II:
5.10.1
Information to be set out in Prospectus as per Part I of Schedule II
i.
General
information:
a.
Name and address of registered office of the company
b.
Consent of the
Central Government for the present issue and declaration of the Central Government about
non responsibility for financial soundness or correctness of statements.
c.
Names of Regional Stock Exchange and other stock
exchanges where application is made for listing of present issue
d.
Provisions relating to punishment for
fictitious applications
e.
Declaration about refund of the issue if minimum
subscription of 90 per cent is not received within 90 days from closure of the
issue
f.
Declaration about the issue of allotment/refund
within a period of 10 weeks
g.
Date of opening, date of closing & date of
earliest closing of the issue
h.
Name and address of auditors and lead managers
i.
Name and address of trustee under debenture trust
deed (in case of debenture issue).
j.
Rating from CRISIL (Credit Rating Information
Services of India Limited) or any rating agency obtained for the proposed
debenture, preference share issue. If no rating has been obtained this fact
should be stated.
k.
Underwriting of the issue (names and addresses of the underwriters and
the amount underwritten by them).
ii.
Capital
structure of the company
a.
Authorised, Issued, Subscribed and Paid-up Capital
b.
Size of present issue giving separate details about
preferential allotment (to promoters and others).
c.
Paid-up Capital after the present issue and after
conversion of debentures (if applicable)
iii.
Terms and particulars of the present issue
a.
Objects, Project cost & Means of financing
(including contribution of promoters).
b.
Terms of Payments
c.
Rights of the instruments holders
d.
Availability of prospectus forms and mode of
payment
e.
Any special tax benefits for company and its
shareholders.
iv.
Company, management and project Particulars
a.
History and main objects and present business of
the company
b.
Subsidiary of the company (if any)
c.
Promoters and their background
d.
Names, addresses and occupations of manager,
managing director and other directors including nominee directors, whole-time
directors (with details of directorship in other companies)
e.
Location of project
f.
Plant and machinery, technology process, etc
g.
Collaboration agreements.
h.
Infrastructure facilities for raw material, water,
electricity, etc
i.
Schedule of implementation of the project and
progress so far
j.
Nature of product, approach to marketing and export
possibilities
k.
Future prospects. Expected capacity utilisation
during the first 3 years of commencement of production.
l.
Expected time when the company could earn cash
profits and net profits.
m.
Stock market
data for share/debentures of the company (high/low price for each of the last 3
years and monthly high/low during the last 6 months (where applicable).
v.
Particulars of Other Companies under same
Management
Following
particulars in regard to the company and other listed companies under the same
management which made any capital issue during the last 3 years:
a.
Name of the Company,
b.
Year of the issue.
c.
Type of the issue (Public/Rights/Composite).
d.
Amount of issue.
e.
Date of closure of issue,
f.
Date of completion of delivery of share/debenture
certificates,
g.
Date of completion of the project where object of
the issue was financing of the project,
h.
Rate of dividend paid.
vi.
Particulars of Outstanding Litigation
a.
Matters likely to affect operation and finance of
the company including disputed tax liabilities of any nature, and criminal
prosecution launched against the company and the directors
b.
Particulars of default, if any, in meeting
statutory dues, institutional dues and dues towards debenture-holders, fixed
-depositors.
c.
Any material developments after the date of the
latest balance sheet and their likely impact.
vii.
Perception of risk factors:
Management
opinion about perceptible risk factors (e.g. availability of raw
materials, marketing of products. cost/time over-run. foreign exchange rate
fluctuations etc.).
5.10.2 Information
to be set out in Prospectus as per Part II of Schedule II
i.
General Information
a.
Consent of Directors, Auditors,
Solicitors/Advocates. Managers to Issue. Registrar of Issue. Bankers to the
Company. Bankers to the Issue and Experts.
b.
Experts' opinion obtained. if any.
c.
Change in directors and auditors during the last 3
years and reasons thereof.
d.
Authority for the issue and details of resolution
passed for the issue.
e.
Procedure and time schedule for allotment and issue
of certificates.
f.
Names and addresses of the Company Secretary. Legal
Adviser. Lead Managers & Co-Managers, Auditors, Bankers to the company
& to the Issue, Brokers to the Issue.
ii.
Financial Information
a.
Report by the auditors
i.
A report by the auditors of the company regarding :
a.
profits and losses (distinguishing items of nonrecurring
nature)
b.
Assets and Liabilities
c.
Rates of dividends paid during the preceding 5
financial years.
ii.
If no accounts have been prepared for any part of
the period of 5 years (ending on a date 3 months before the issue of the
prospectus), the report shall contain a statement of that fact.
iii.
If the company has subsidiaries, the report shall
also show the profits, losses, assets and liabilities of its subsidiaries
(combined or each of the subsidiary), so far as they concern the members of the
company. .
b.
Reports by the accountants.
i.
A report by the accountants (qualified as auditor)
named in the prospectus must also be given showing profits or losses, assets
and liabilities of the business for the preceding 5 financial years as on the
date not before 120 days of issue of the prospectus.
ii.
If the proceeds of the issue are to be applied to
purchase of shares of a body corporate becoming a subsidiary of the acquiring company, a
similar report by an accountant (named
in the prospectus) on the accounts of the body corporate.
iii.
Principal terms of loans and' assets charged as
security.
iii.
Statutory and other Information
a.
Minimum subscription.
- Option to subscribe.
- Expenses of the issue & fees payable to
Advisers, Registrars, Managers & Trustees
- Underwriting commission and brokerage.
- Previous issue for cash.
- Previous public or rights issue, if any,
during last 5 years
- Commission or brokerage on previous issue.
- Issue of shares otherwise than for cash.
- Debentures, Redeemable preference shares and
other instruments issued by the company outstanding as on the date of
prospectus.
- Details of purchase of business carried on for
less than 3 years.
- Details of directors, proposed directors,
whole-time directors, their remuneration, appointment and remuneration of
managing directors, interests of directors, their borrowing powers and
qualification shares.
- Rights of members regarding voting, dividend,
lien on shares and the process for modification of such rights and
forfeiture of shares.
- Restrictions, if any, on transfer and
transmission of shares/ debentures.
- Revaluation of assets, if any (during last 5
years).
- Material contracts and inspection of
documents.
5.10.3
Provisions applying to Parts I & II of Schedule II
i.
Every person, who has entered into any contract for
the sale/purchase of any property shall be deemed to be a vendor, where the :
a.
purchase money is not fully paid
b.
purchase money is to be paid out of the proceeds of
the issue
c.
contract depends on the result of that issue.
ii.
In the case of a company carrying business for less
than 5 financial years, reference to 5 financial years means number of
financial years for which business has been carried on.
iii.
Reasonable time and place at which copies of all
balance sheets and profit and loss accounts on which the report of the auditors
is based, material contracts and other documents may be inspected, must be
stated.
iv. Term 'year' means financial year.
v.
The prospectus must contain a declaration that all
the relevant provisions of the Companies Act and the guidelines issued have
been complied and no statement made the prospectus is contrary to the Companies
Act & Rules.
vi.
The prospectus shall be dated and signed by the
directors.
5.10.4 Additional Disclosure in Prospectus
The following are additional disclosures to be
made as per SEBI guidelines
a.
Disclaimer clause stating
that vetting of offer document by SEBI should not be construed as approval
b.
Details of reservation
made to various category of applicants viz NRI/OCBs, if any.
c.
Manner of obtaining and
disposal of stock invest, if applicable
d.
Buyback arrangement for
purchase of Non-Convertible (Khokha) portion of PCDs, if any.
e.
Performance vis-Ã -vis
promises relating to previous issue.
f.
Deployment of proceeds of
issue.
g.
Stock market data.
h.
Statement relating to
allotment and refund.
5.10.5
Statements by Experts
i.
Statement of
Experts: A prospectus may contain a statement made by Expert. An ‘expert’
includes an engineer, a valuer, an accountant and any other person whose
profession gives authority to a statement made by him.
a.
Where a prospectus includes a statement made by an
expert, that expert shall not be engaged or interested in the formation,
promotion or management of the company (Sec. 57).
b.
Statement made by an expert shall not be issued,
unless:
-
he has given his written consent for of the prospectus with the statement included.
-
a statement that the expert has given the consent
and has not withdrawn it.(s.58).
ii. Liability of Expert: An expert shall not be liable for any untrue statements in the
prospectus when he had :
reasonable ground to believe that the statement was true upto the date
of allotment of shares or debentures.
withdrawn his consent before delivering the prospectus for registration
to the Registrar of the Companies.
withdrawn his consent
and gave reasonable public notice on becoming aware of the untrue
statement.
5.11
Liabilities for Mis-statements in Prospectus
a.
Information provided in
the prospectus shall be treated as untrue if it is misleading in form and
content. (S.65) [Al Nakib Investments (Jersey ) vs.
Longcroft], [Edgington vs. Fitzmaurice]
b.
It is the duty of the
persons responsible for the issue of a prospectus, to disclose all relevant
facts and to see that any relevant fact is not omitted.
c.
If there is any false
statement in the prospectus, it creates Civil and Criminal liability on the
part of those who are responsible to publish it.
5.11.1
Civil Liability
for Mis-Statement in Prospectus (Sec. 59, 62)
i.
Civil Liability against
the Company
a.
Rescission of Contract
b.
Claim for Damages
ii.
Civil Liability against
the Promoters, Directors & Experts
a.
Damages for
misrepresentation
b.
Damages for Non
Compliance
iii. The allottee cannot
both retain the shares and get damages from the company. Damages are normally
claimed from the directors, promoters and other persons who had authorized the
issue of the prospectus personally, or from experts who had signed reports
referred to in the prospectus.
5.11.1.1
Civil Liability Against the company
i.
In case of a misstatement or withholding of
material information in a prospectus, a shareholder can:
- Rescind the contract
- Claim damages from the company
ii.
Rescission of
contract
a.
Any subscriber of share can apply to the Court for rescission
of the contract, if any :
i.
Statement of fact (not mere statement of opinion or
expectation) in the prospectus is false or fraudulent. [Rex V. Lord Kylsant], [Ross
v. Estates Investments Co.]
ii.
Must have relied on the statement of prospectus. [Peek
v. Gurney]
iii.
Material information has been withheld. [Coles v. White
City Greyhound Assn. Ltd.]
b.
On decision of the court, the person will have to
surrender the allotted shares to the company and get back the money paid for
the shares, along with interest.
iii.
Claim for
Damages
The investors may, at the time of rescission of
contract, can claim damages for loss caused to him due to misleading statements
in the prospectus. [Ross v. Estates
Investments Co.]
5.11.1.2 Civil Liability for misrepresentation in
Prospectus
i.
The following persons are liable to pay
compensation for any loss or damage to subscribers of shares or debentures due
untrue statements in a prospectus:
- directors at the time of the issue of the
prospectus,
- persons who have authorised themselves to be
named as directors in the prospectus,
- promoters,
- persons who have authorised the issue of the
prospectus.
ii. Damages for Misrepresentation
a.
Every director, promoter and every person
authorizing the issue of the prospectus (even if he has not seen it) is liable
to pay compensation to subscribers who acquired shares on the faith of the
prospectus.
b.
Every person who becomes liable to make any payment
under Sec. 62 may recover contribution from other guilty persons who are liable
for misrepresentation in the prospectus. [Metropolitan Coal Consumer's
Association Limited, Karbergs case], [Rose vs. Estates Investment Company]
iii.
Damages for Non
Compliance
The Directors
are liable for the loss suffered by a subscriber for omission of matter which
ought to have been included in the Prospectus.
iv. Relief for
Innocent Misrepresentation
However
the directors or the promoters, etc. will not be held liable in following cases
(s.62 (2))
a.
He withdraws his consent before the issue of the
prospectus or proves that he never gave such consent at all.
b.
He withdraws his consent (after awareness of any
untrue statement) before the allotment, through public notice of the withdrawal
and of the reasons.
c.
He shows that he believed the statement to be true
based on honest & reasonable grounds.
d.
A director will not be held liable where the
statement is a fair extract or copy of expert’s statement and the expert has given their consent
5.11.2
Criminal Liability for Mis-Statement in Prospectus
a.
Prospectus containing untrue statement : Every person
who authorises such issue of prospectus is punishable with imprisonment upto 2
years and or with fine extending to Rs.50,000. (S. 63)
b.
Fraudulently inducing
persons to invest money (Sec.
68) : A person knowingly making any misleading or deceptive statement,
promise or forecast in a prospectus, or dishonestly conceals any material fact
to induce any one to subscribe shares, will be punished with imprisonment
upto 5 years and / or fine upto Rs.
1,00,000.
5.11.3 Remedies
for Misstatement in a Prospectus against the Company
a.
Any person who takes shares from the company
relying on a prospectus containing misstatements or omission of material facts
may (a) rescind the contract to take the shares, and (b) claim damages for loss
suffered by him due to misstatement in the Prospectus. Rescission of the
contract can be resorted to only when an investor subscribes to shares based on
a material misrepresentation of fact in the prospectus. The aggrieved investor
should also ensure that he rescinds the contract within a reasonable time.
b.
Rescission will not be a remedy, if the investor
has been induced to buy shares on a material misrepresentation of law.
c.
It must be noted that the allottee cannot both
retain the shares and get damages from the company. Damages are normally
claimed from the directors, promoters and other persons who had authorized the
issue of the prospectus personally, or from experts who had signed reports
referred to in the prospectus.
5.12 Underwriting
i.
Agreement: Underwriting is
an agreement whereby the underwriters undertake to guarantee whole or part, if
the public do not subscribe to them. For this, the underwriters take a
specified commission. Underwriting ensures that the issues are fully
subscribed.
ii.
Disclosure: The
prospectus shall disclose the following particulars regarding underwriting:
a.
The name and address of
every underwriter in the issue.
b.
The rate (or fixed
amount, as applicable) of underwriting commission payable to every underwriter.
c.
The number of shares or
debentures underwritten by every underwriter.
iii.
Filing: The
company shall file with the Registrar a copy of underwriting agreement along
with the prospectus.
iv.
Underwriting
Commission: A company may pay underwriting
commission subject to the following conditions (Sec. 76):
a.
The payment of underwriting commission should be
authorised by the Articles of Association. It may be paid out of Profits or out
of Capital.
b.
The rate of commission shall not exceed 5 per cent
(for shares), 2.5% (for Debentures) of the issue price.
c.
The commission shall not exceed the rate authorised
by the Articles of Association.
d.
The amount or rate of the underwriting commission
shall be disclosed in the prospectus or statement in lieu of prospectus.
e.
The number of shares or debentures which the
underwriters have agreed for a commission to subscribe absolutely or
conditionally shall also be disclosed in the prospectus or in the statement in
lieu of prospectus.
f.
A copy of the contract for the payment of the
commission shall be delivered to the Registrar at the time of delivery of the
prospectus or the statement in lieu of prospectus for registration.
g.
No commission shall be paid on shares / debentures
which are not offered to public. (76(4))
h.
Non compliance of the provisions attract fine upto Rs
5000.
v.
Shares in lieu
of underwriting commission [Sec. 76(2)]: No company shall allot its
Shares/Debentures for making payment of commission, discount allowance as
consideration of subscription to Shares/Debentures of the company.
5.13 Brokerage
Brokers are professionals in exhibiting and publicising the issue to
public for subscription.
a.
A company may pay usual brokerage to the brokers (i.e
persons who deal in shares and debentures) for procuring of subscription
for shares and debentures and must be indicated as the prospectus or the
statement in lien of prospectus.
b.
Unlike underwriters, they do not undertake to take
up the shares or debentures which are not subscribed for by the public.
c.
The brokerage is paid only on those shares or
debentures which are subscribed through brokers and not on the entire issue.
d.
The payment of brokerage need not be authorized by
company’s articles or memorandum.
5.13.1 Distinction between underwriting and brokerage
|
Basis
|
Underwriting
|
Brokerage
|
|
Meaning
|
Underwriters undertake to guarantee whole or part, if the public do
not subscribe to them.
|
Brokers publicise the issue, but do not provide any guarantee.
|
|
Charges
|
The amount of commission cannot exceed the rate as prescribed in the
Companies act, 1956.
|
Maximum rate not specified under the Companies act, 1956.
|
|
Basis
of payment
|
Underwriting commissions are paid on those shares only which are
underwritten by the underwriter.
|
Brokerage is paid on such shares which are subscribed by the person
through broker.
|
|
Authorisation
in the Articles
|
Payment of underwriting commission must be authorised in Articles.
|
No authorisation in Articles is required for payment of brokerage.
|
|
Nature
of issue
|
Underwriter cannot be employed where the shares are not issued to the
public.
|
Brokers may be employed even when the shares are not issued to the
public.
|
|
Conditions
|
An underwriter is liable to take up those shares also the public falls
short to subscribe.
|
No such liability in case of the brokers.
|
5.14 Commencement of Business (S. 149)
a. A public company cannot start the business
without having a ‘certificate of commencement’ from the Registrar.
b. To commence a business, the company must
comply the following :
i.
Pass a special resolution to commence business as
per objects stated in its Memorandum. [S. 149(2A)]
ii.
File a declaration by one of the directors (or the
secretary, or a secretary in whole-time practice, as the case may be) that a
special resolution to commence a new business has been duly passed. [S. 149(1(d))]
iii.
If no special resolution is passed but the votes in
favour exceeds the votes against, the Central Government, on an application by
Board of Directors, may allow the Company to commence its business. [S. 149(2B)]
5.14.1 Restrictions on
Commencement of Business
i. A Public Company cannot commence business or exercise its borrowing
powers, unless following conditions are also satisfied
a. In case of Public company issuing a prospectus [S. 149 (1)]
i. Minimum Subscription for cash has been
received
ii. Every Director has paid for the application
& allotment money for shares subscribed by them
iii. No money is payable to applicants for failure
to get permission from stock exchange
b. In case of Public company not
issuing a prospectus (S. 149 (2)]
i. A statement in lieu of prospectus
has been filed with the Registrar
ii. Every Director has paid for the application
& allotment money for shares subscribed by them
ii.
A
declaration by the Secretary (by part time secretary, if no full time secretary
has been appointed) that the above have been complied with, is filed with the
registrar. (S. 149 (1) (d))
iii. Any Company or its defaulting officer contravening the provisions shall be punishable
with fine extend upto Rs.5,000 for every day of default. (S. 149 (6))
5.14.2 Certificate of Commencement
i. Issue: The Registrar,
being satisfied that everything has been properly complied with, will issue a Certificate of
commencement in favour of the
public company. (S. 149 (3))
ii. Types of Companies:
The Certificate of commencement of business is not
required to be obtained by the following companies:
-
Private Co. (S. 149 (7))
-
Limited by guarantee
without share capital
-
Unlimited Co.
iii. Effects of certificate of commencement:
-
Entitles the company to
carry on any business specified under ‘main objects’.
-
The certificate of
commencement is a conclusive evidence of the fact that the company is entitled
to commence business, but does not certify the legality of objects contained in
the object clause of memorandum.
-
The certificate empowers
the company to exercise the borrowing powers.
-
On issue of such
certificate, all provisional contracts become automatically binding on the
company. (S. 149 (4))
For more details, refer to Business & Corporate Laws, by
Asok Nadhani, BPB Publications-ww.bpbonline.com, bpbpublications@gmail.com
