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CHAPTER 05- PROSPECTUS

CHAPTER 05- PROSPECTUS

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WLC CHAPTER 05 –PROSPECTUS
Chapter 5
PROSPECTUS
DEFINITION
[
SECTION 2(36)]
Any document inviting deposits from the public for the subscription or purchase of any securities of a bodycorporate. Following types of documents are prospectus: -
Any document described or issued as prospectus;
including
 
any notice,
circular,
advertisement or 
other document
Ingredient to constitute a “prospectus”
i)
There must be an “
invitation to the public 
”;ii)The invitation must be made by or on behalf of the company or in relation to an intended company;iii)The invitation must be “to subscribe or purchase iv)The invitation must relate to securities or such other instrument.
Invitation to public
meansAn offer or invitation shall be treated as made to the public; keeping in view all circumstances as calculated toresult directly or indirectly, it may properly be regarded, the securities of the company become available for subscription or purchase by persons other than those receiving the offer or invitation. [The word "calculated" insuggests design, forethought or intention to accomplish a purpose.]
The test is not who receives the offer but who accepts the offer.
CASE EXAMPLES
In
Pramatha Nath Sanyal Vs Kali Kumar Dutt
, an advertisement was inserted in a newspaper stating, “Someshares are still available for sale according to the terms of the prospectus of the company which can be obtained onapplication”. This was held to be a prospectus as it invited the public to purchase the shares. The prosecution wasaccordingly launched on the Directors for non-compliance.“Public” is a general word, and includes any section of the public. This means that if a document inviting persons tobuy shares is issued for example to all advocates or to all doctors, or to all foreigners living in India or to all Indiancitizens or to all shareholders in a particular company, it will still be deemed to be issued to the public with in themeaning of the Act
(In re: South of England Natural Gas and Petroleum Co. Ltd).
In this case, 3000 copies of adocument in the form of a prospectus were sent out and distributed among the members of certain gas companiesonly. It was held that it was prospectus issued to the public.
When prospectus is not required to be issued 
The issue of a prospectus is not necessary in the following cases:1.When shares/debentures are offered to 50 or less persons.2.When shares or debentures are offered to existing holders of shares or debentures.(Rights Issue)
3.
Where a person is
bona fide
invited to enter into an underwriting agreement.
4.
Where shares are not offered to the public
e.g.
when shares are placed privately.
EXCLUSIVE AUTHORITY TO SEBI'S TO DEAL WITH MARKET RELATED MATTERS
(SECTION 55A)
Section 55A confers power on SEBI to deal exclusively in respect of listed/to be listed companies in thefollowing areas relating to issue and transfer of securities and non-payment of dividend:
Sections
55
to
84
(other than sections 68A,
77, 77
 A, 77B, 79A, 80A)
Matters relating to prospectus, and other matters relating to issue of shares or debentures; allotmentof shares and further issue of capital; public deposits.
Section 68A
- Personation for acquisition etc. of shares.
Section
77 - Restriction on purchase by company, etc., of its own or holding company's shares.
Section 77A
- Power of company to buy its own shares.
Section 77B
- Prohibition for buy-back in certain circumstances.
Section 79A
- Issue of sweat equity shares.
Section 80A
- Redemption of irredeemable preference shares etc.
Sections 108 to 110 
- Transfer of shares.
Section
112 - Certification of transfers.
Section
113 - Limitation of time for issue of certificates.
LECTURES BY PROF. S N GHOSH
17
 
WLC CHAPTER 05 –PROSPECTUS
Section
116 - Penalty for personation of shareholder.
Sections
117
to
122 - Provisions relating to Debentures.
Sections 206, 206A and 207 
- Matters relating to dividends.
CONTENTS OF PROSPECTUS [SECTION 56}
Every public company issuing a prospectus has to comply with: -
Companies Act 1956
SEBI (Disclosure and Investors Protection) Guidelines 2000
read with SEBI Act 1992. It must be notedthat by virtue of powers under the SEBI Act 1992, every company making a public issue has also to get theProspectus approval/vetted and obtain in-principal approval of the
Central Listing Authority
andsubsequently obtain approval of the Stock Exchange where at the securities are proposed to be listed.
Section 56 mandates that every prospectus shall be as per Schedule II: -
Part I of Schedule II - the matters specified in and
Part II of Schedule II - the reports therein
Part III of Schedule III – provisions effecting Part I and Part II
SEBI (DIP) Guidelines 2000 also contains provisions, which shall have to be complied with by every companymaking a public issue. The accountability and responsibility of the Abridged Prospectus is with the SEBIRegistered Category I Merchant Banker.
Statements in prospectus should be true, accurate and fair. The Act as well as the SEBI Act 1992 prescribesstringent penal actions on untrue or misrepresentation in the prospectus.
The salient features of such requirements are given below: -
Companies Act 1956SEBI (DIP) Guidelines 2000
Cover page
No provision
General Information
No provision re Disclaimer/Compliance Officer 
Capital structure of the companyTerms of the present issue
No provision re: Promoters` Contribution/lock in period
Company management and project
No provision re Key personnel
Cover PagesFront Outer Cover Page
The name and address of the registered office of the company,telephone, fax number and E. mail address.
The nature, number, price and amount of the instruments offered.
The ‘Risks in relation to the first issue’
‘Issuer’s Absolute Responsibility’
The name and address of the Registrar to the issue
Issue Opening Date
Credit Rating, if applicable
Name/s of stock exchanges where listing of the securities isproposed and the details of in-principle approval for listingobtained from these stock exchanges
Front Inside Cover Page
Index of the contents
Inner Cover Pages
The other risk factors
Back Cover PagesPART IGeneral Information
Disclaimer Clause (from SEBI, Merch. Banker)
Filing of offer document with the Board and RoC
Intermediaries and auditors
Compliance Officer 
Capital Structure of the company
Notes to Capital Structure
Promoters’ contribution and lock-in period
Details regarding major shareholders
Terms of paymentsProject Cost
Means of financing
Appraisal
History and main objects and present business of the companyPromoters and their Background
Key Managerial Personnel
Names, address, occupation of manager, directors (their directorships in other companies)
Location of the Project
Collaboration, any performance guarantee or assistance inmarketing by the collaborators
Schedule of implementation of the project and progress made sofar 
LECTURES BY PROF. S N GHOSH
18
 
WLC CHAPTER 05 –PROSPECTUSManagement perception of risk factorsPART IIGeneral information
Consent of directors, auditors, solicitors/advocates etc
Financial information
Statutory and other informationMaterial contracts and inspection of documentsFuture prospectsStock Market DataManagement Discussion and Analysis of the Financial Conditionand Results of the Operations as Reflected in the FinancialStatements
.
Financial of Group CompaniesPromise vis-à-vis Performance - Issuer Company
Listed Ventures of Promoters
Basis for Issue PriceOutstanding litigations or DefaultsRisk factors and management perception
 
Disclosure on Investor Grievances and Redressal SystemPART IIGeneral Information
Consent of directors, auditors, solicitors/ advocates etc
Financial Information
A report by the auditors
Statutory and other information
Revaluation of assets, if any (during last five years)
Material contracts and inspection of documents
ABRIDGED PROSPECTUS
[SECTION 56 [3)]
Every set of two applications should accompany the
 
memorandum containing salient features of AbridgedProspectus (Form No. 2A).
This memorandum is required to be signed by all the directors who
 
have signed the main prospectus and is notrequired to be filed with Registrar of Companies.
SEBI (Disclosure and Investor Protection) Guidelines, 2000 prescribes the guidelines for Abridged Prospectus.The accountability and responsibility of the Abridged Prospectus is with the SEBI Registered Category IMerchant Banker.
GOLDEN RULE OR GOLDEN LEGACY 
The “golden rule “ as to framing a prospectus was laid down by Kindersley VC in New
Brunswick etc. Co. Vs.Muggeridge
 Those who issue a prospectus holding out to the public the great advantages which will accrue to personswho will take shares in a proposed undertaking and inviting them to take shares of the faith of therepresentationsc therein contained are bound to state every thing with strict an scrupulous accuracy andnot only to abstain from stating as fact that which is not so, but to omit no one act within their knowledgethe existence of which might in any degree affect the nature, or extent or quality of the privilege andadvantages which the prospectus holds out as inducements to take shares.The public is at the mercy of company promoters. Everything must, therefore, be stated with strict andscrupulous accuracy. Nothing should be stated as a fact which is not so and no fact should be omitted, theexistence of which might in any degree affect the nature or quality of privileges and advantages which theprospectus holds out as inducement to take shares. In short, the true nature of the company ventureshould be “disclosed”. If concealment of any material fact has prevented an adequate appreciation of whatwas stated, it would amount to misrepresentation. Thus, even if every specific statement is literally true,the prospectus may be false if by reason of the suppression of other material facts, it conveys a falseimpression.
OTHER STATUROTY PROVISIONS RELATING TO PROSPECTUS
Dating of prospectus
[Section 55]A prospectus issued by or on behalf of a company or in relation to an intended company shall be dated, and thedate of publication of the prospectus shall be the date of the prospectus
.
 
The expression 'expert' includes anengineer, a valuer, an accountant and any other person whose profession gives authority to a statement madeby him
Reports/Statements of Experts contained in the Prospectus [
Section 57 and 58]
 
A person whose name appears in the prospectus, as an expert should not be engaged in the formation,promotion or in the management of the company. However, this prohibition does not apply to a professionalsuch as a chartered accountant, company secretary or a solicitor.
A statement should also appear in the prospectus itself that the expert has given his consent and has notwithdrawn it before the delivery of the copy the prospectus for registration with the Registrar.
Penalty for violation of above provisions
[Section 59]
If any prospectus is issued in contravention of above provisions, the company, and every person, who is
LECTURES BY PROF. S N GHOSH
19

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