Professional Documents
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BUSINESS
LAW
Examinable Supplement
with Questions
Note:
This supplement is meant to replace Chapter 22 of the existing edition 2013 of both
i.e. the study text and the question bank of CAF-03 Business Law. With the issue of this
supplement old Chapter 22 of the study pack (edition 2013 of study text and question
bank) would stand completely ineffective and hence would not be examined instead
this supplement would stand examinable.
CHAPTER
22
Share Capital-Prospectus
Contents
1 Introduction to prospectus
2 Chapter review
Business Law
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system and
commercial laws; and build a knowledge base of corporate laws.
LO4.1.1
LO4.1.2
LO4.1.3
LO4.1.4
LO4.1.5
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INTRODUCTION TO PROSPECTUS
Section overview
Basics
Approval of prospectus
Availability of prospectus
Contents of prospectus
Expert to be independent
1.1 Basics
Definition
Definition: Prospectus (Section 2(41) Securities Act, 2015)
prospectus means any document described or issued as a prospectus and
includes any document, notice, circular, material, advertisement, offer for sale
document, publication or other invitation offering to the public (or any section of
the public) or inviting offers from the public for the subscription or purchase of
any securities of a company, body corporate or entity, other than deposits
invited by a bank and certificate of investments and certificate of deposits
issued by non-banking finance companies;
As per the above definition it can be construed that the prospectus
Prohibits companies from inviting deposits form public other than deposit
invited by a bank a bank and certificate of investment and certificate of
deposits by a Non-Banking Finance Company
Business Law
The friends or relatives of the promoters and directors can get every information
about the objects, prospects and operations of the company however if the general
public wants to subscribe or purchase any securities in the company, it shall have no
avenue available regarding the company to make investment or otherwise decision
about the company.
Prospectus comes to play in these situations and provides the readers with all the
information required by them before making any investment decision or otherwise in
the company.
However the prospectus must be approved by the Commission prior to its issuance
to the public. A prospectus approved by the Commission shall be valid for a period of
sixty days from the date of such approval.
Provided that the time period of sixty days provided for approval of prospectus may
be extended by the Commission by reasons to be recorded in writing.
The issuer or the offeror, as the case may be, shall, not less than twenty one days
before the proposed date of publication of the prospectus, submit a copy to the
Commission for approval.
Statement in Lieu of prospectus
Alternatively if a company does not want to call subscriptions from general public and
wants to carry on business as a public unlisted company, it shall be required to file a
statement in lieu of prospectus with the registrar at least three days before first
allotment of any shares or debentures. It may however be noted that the private
company is not required to file the statement in lieu of prospectus.
Examinable Supplement
Number and value of shares with existing members and nature of extent of
interest of such shareholders in the company.
Working capital
If the company intends to meet the all or any of the above needs from any
source other than the issue of shares, such source shall be disclosed.
Date and time of opening and closing of subscription lists. It states the time and
day when applicants can deposit money in bank account of company.
Full particulars of auditors and legal advisors of the company appointed under
the Ordinance.
Business Law
Voting rights on the shares of the company and any restrictions on it as per
articles of association of the company.
If the company had already commenced business then length of time from the
date of commencement of business shall also be mentioned in the prospectus.
Purpose or the activity for which the proceeds of the issue of shares shall be
used.
Summery in columnar form of the earnings of the company for each of the last
three financial years.
Pending litigations of the company or its subsidiaries other than the routine
litigations.
As we can now see that all the contents of the prospectus lead to one conclusion,
whether the person reading the prospectus should decide to buy the shares or
debentures of the company or he should decide otherwise. The company would
surely want that all the good aspects are shown and people are allured to invest in
the company but this is the time when regulators like, Commission, Stock exchange
and Registrar come to the rescue and ask the company about every fact written in or
omitted from the prospectus, before approving the prospectus for issue to the
general public.
It is customary for the authorities to require the company to arrange and write the risk
factors separately. All the factors that could be risky for investment in the company
are written in a single paragraph and readers of the prospectus are specifically
advised to read at least that paragraph before making any investment decision.
It does not however mean that the authorities act just to discourage the company
and its promoter but it is the duty of authorities to make sure the provision of
accurate information to the prospective shareholders or members.
A report on assets and liabilities at the last date when accounts were prepared
and Profit and loss account of the company along with any unusual or
extraordinary or non-recurring item
Dividends paid by the company during last five financial years for all classes of
shares including when dividend was not paid and also on the matter when
accounts of the company were not prepared for any year during last five years.
If the company has got subsidiaries the auditors report shall deal with the profit
and loss accounts and statements of assets and liabilities of the subsidiaries as
well along with the same financial statements of the company itself.
If the proceeds of the issue shall be used for the acquisition of any business or any
interest therein then the auditors (of that company whose shares or interest is
proposed to be purchased) shall report separately on last five years profits and
losses of that business or company and assets and liabilities of that business or
company at a date not earlier than 120 days of the prospectus.
Emile Woolf International
Examinable Supplement
Further If the proceeds of the issue shall be used for the acquisition of any business
or any interest therein, which shall make the other company as subsidiary of the
company, then the auditors (of that company whose shares or interest is proposed to
be purchased) shall report separately on last five years profits and losses of that
business or company and assets and liabilities of that business.
The report shall also explain that what difference would it have been on the profit and
loss of the company (issuing a prospectus) had the company always held those
shares in that company which are proposed to be purchased now.
Further if that other business or company has subsidiaries, the report shall include
the performance and assets and liabilities of that business as well.
Business Law
The Securities Act, 2015 does not allow a company to issue shares unless the
Commission approves the prospectus. A prospectus approved by the
Commission is valid for sixty days from the date of approval or such longer
period as approved by the Commission. Consequently, a) ABC limited shall
have to wait for the approval from the Commission or b) apply for grant of
extension for the validity of the Prospectus beyond sixty days.
The expert has given, his written consent to the issue of the prospectus with
the statement in the form and context in which it is included; and
ii.
There appears in the prospectus a statement that the expert has given and
has not withdrawn his consent.
1.9 Criminal liability for defective prospectus (Section 92, Securities Act, 2015)
A person commits an offence, who:
i.
ii.
1.10 Compensation for false or misleading prospectus (Section 93, Securities Act,
2015)
Every offeror, issuer, director of an offeror or issuer or any person who has signed
the prospectus shall be liable to pay compensation to any person who acquires any
of the securities, in reliance upon the prospectus, to which the prospectus relates
and suffers loss in respect of them as a result of any incorrect, untrue or misleading
statement in the prospectus or the omission from it of any matter required to be
included under Securities Act, 2015.
Examinable Supplement
CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know about:
Business Law
10
Examinable Supplement
QUESTIONS
93
94
95
(a)
Describe the term Expert as explained in Securities Act, 2015 in the above
context.
(02)
(b)
Narrate the conditions that a company should comply with if its prospectus contains
a statement by an expert.
(03)
Deo Limited (DL) has published a prospectus on March 1, 20X4. The subscription list
is due to open on April 5, 20X4. Explain whether the company is in compliance with
the provisions of the Securities Act, 2015 regarding the publication of its prospectus.
What relaxation can DL avail, in this regard?
(03)
(b)
Identify the places where DL is required to make available the copies of its
prospectus.
(02)
Prospectus - registration
The Securities and Exchange Commission of Pakistan shall not approve a prospectus
unless certain requirements of the Securities Act, 2015 are complied with. You are
required to list such requirements.
(06)
96
97
Minimum subscription
Under the applicable legal framework, what are the contents of the prospectus as regards
minimum subscription?
(05)
11
Business Law
ANSWERS
93
94
(b)
the expert has given, his written consent to the issue of the prospectus with the
statement in the form and context in which it is included; and
(ii)
there appears in the prospectus a statement that the expert has given and has
not withdrawn his consent.
Prospectus publication and availability [Section 88(4) (5)(6) & (7), Securities Act,
2105
(a)
The prospectus shall not be published in the newspapers less than seven (7) days
or more than thirty (30) days before the commencement of the public subscription.
Since, Deo Limited published the prospectus on March 1, 20X4, which is more than 30
days before the subscription list was due to open i.e. April 5, 20X4. The Company is in
violation of the requirements of above provision of Law.
(b)
Free of charge, from the date of its publication in the newspapers till the
closing of the subscription at the registered office of the Company, with all the
securities exchanges of the country, with all the bankers to the issue, the
concerned share registrar, the concerned ballotter and the concerned credit
rating agency, if any.
(ii)
The prospectus in full text and the shares subscription form shall be uploaded
on the website of the Company and shall remain there from the date of its
publication in the newspapers till the closing of the subscription.
(iii)
The Company shall not issue, circulate, publish, telecast or broadcast without
the prior written approval of the Commission, an advertisement, other than a
prospectus, announcing a public offer of securities for which a prospectus is
required unless a prospectus has been published and the advertisement gives
an address in Pakistan from which it can be obtained.
(iv)
The Company shall not issue, circulate, publish, telecast or broadcast without
which it can be obtained.
12
Examinable Supplement
95
Prospectus - registration
The registrar shall not register a prospectus unless the following requirements have been
complied with:
96
i)
Prospectus is dated.
ii)
It shall state the matters and reports specified in the Second Schedule.
iii)
Experts whose statements are included have not been connected with the formation,
promotion or management of the company.
iv)
Experts whose statements are included in the prospectus have given written consent
for issue of such statements.
v)
All requirements regarding approval, issue and registration have been complied with.
vi)
The prospectus is accompanied by the written consent of the auditor, legal adviser,
attorney, solicitor, banker and the broker who have agreed to act in that capacity.
(2)
(a)
(b)
97
Minimum subscription
The amount of minimum subscription must be stated in the prospectus. This includes:
Working capital.
If the company intends to meet all or any of the above needs from any source other
than the issue of shares, such source shall be disclosed.
13
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2015
BUSINESS
LAW
Examinable Supplement