COMPANY

UNIT 1
 COMPANY
Definition of a "Company“
• A company is a "corporation" - an artificial person created by law. A human being is a "natural"
person. A company is a "legal" person. A company thus has legal rights and obligations in the
same way that a natural person does.
• A company in broad sense may mean as association of individuals formed for some common
purpose. But it is a voluntary association of persons. It has capital divisible into parts known as
shares.at the same time it is an artificial person created by a process of law. It exists only in
contemplation of law , i.e It is regarded by the law as a person ,just as a human being.
Companies and Partnerships Compared
• (a) A company can be created only by certain prescribed methods - most commonly by
registration under the Companies Act 1985. A partnership is created by the express or implied
agreement of the parties, and requires no formalities, though it is common to have a written
agreement.
• (b) A company incurs greater expenses at formation, throughout its life and on dissolution,
though these need not be excessive.
• (c) A company is an artificial legal person distinct from its members. Although in Scotland a
partnership has a separate legal personality by virtue of s.4(2) of the Partnership Act 1890, this is
much more limited than the personality conferred on companies.
• (d) A company can have as little as one member and there is no upper limit on membership. A
partnership must have at least two members and has an upper limit of 20 (with some exceptions).
• (e) Shares in a company are normally transferable (must be so in a public company). A partner
cannot transfer his share of the partnership without the consent of all the other partners.
• (f) Members of a company are not entitled to take part in the management of the company unless they are
also directors of it. Every partner is entitled to take part in the management of the partnership business
unless the partnership agreement provides otherwise.
• (g) A member of a company who is not also a director is not regarded as an agent of the company, and
cannot bind the company by his actions. A partner in a firm is an agent of the firm, which will be bound by
his acts.
• (h) The liability of a member of a company for the debts and obligations of the company may be limited. A
partner in an ordinary partnership can be made liable without limit for the debts and obligations of the firm.
• (i) The powers and duties of a company, and those who run it, are closely regulated by the Companies Acts
and by its own constitution as contained in the Memorandum and Articles of Association. Partners have
more freedom to alter the nature of their business by agreement and without formality, and to make their
own arrangements as to the manner in which the firm will be run.
• (j) A company must comply with formalities regarding the keeping of registers and the auditing of accounts
which do not apply to partnerships.
• (k) The affairs of a company are subject to more publicity than those of a partnership - e.g. companies must
file accounts which are available for public inspection.
• (l) A company can create a security over its assets called a floating charge, which permits it to raise funds
without impeding its ability to deal with its assets. A partnership cannot create a floating charge.
• (m) If a company owes a debt to any of its shareholders they can claim payment from its assets rateably
with its other creditors. A partner who is owed money by the partnership cannot claim payment in
competition with other creditors.
• (n) A partnership (unless entered into for a fixed period) can be dissolved by any partner, and is
automatically dissolved by the death or bankruptcy of a partner, unless the agreement provides otherwise. A
company cannot normally be wound up on the will of a single member, and the death, bankruptcy or
insanity of a member will not result in its being wound up.
 Difference Between Company And Partnership Firm
• The members of the partnership firm are called partners whereas the members of company are called shareholders.
• The partnership business is to be governed by the Indian Partnership Act, 1932 whereas the business of the company is
determined by Indian Companies act, 2013
• Partnership firm is created by contract between two or more persons whereas company is created by law i.e registration.
• The rules of a partnership are to be registered by the state government whereas in the case of the company it is to be
regulated by the central government.
• Registration of a firm is not necessary whereas the company's registration is mandatory.
• The mandatory document in case of partnership is partnership deed whereas in the case of a company the mandatory
document is the memorandum of association and articles of association.
• A partnership firm is not a separate legal entity from its partners whereas a company is a separate legal entity. Partners
have unlimited liability whereas shareholders have limited liability.
• Seal ( Stamp ) is not required for partnership whereas in case of company stamp is required.
• In case of partnership, management is to be done by active partners whereas in case of company management is done by
the board of directors.
• Decree against a firm can be executed against partners whereas decree can't be executed against shareholders.
• In the case of a private company, the word is to be used Pvt. Ltd and in case of a public company, the word is to be used
Ltd. only whereas such words are not required in case of partnership.
• A partnership firm has to maintain accounts as per the conditions stated in partnership deed whereas a company should
maintain accounts and auditing of accounts by a certified Chartered Accountant.
• The name of the partnership firm can be changed easily by having discussion between the partners and by following the
simple procedure provided in s.60 whereas the name of the company can't be changed easily and prior approval of the
central government is required.
 Characteristics of a Company
Some of the most important characteristics of a company are as follows:
1. Voluntary Association:
A company is a voluntary association of two or more persons. A single
person cannot constitute a company. At least two persons must join hands to
form a private company. While a minimum of seven persons are required to
form a public company. The maximum membership of a private company is
restricted to fifty, whereas, no upper limit has been laid down for public
companies.
2. Incorporation:
A company comes into existence the day it is incorporated/registered. In
other words, a company cannot come into being unless it is incorporated and
recognized by law. This feature distinguishes a company from partnership
which is also a voluntary association of persons but in whose case
registration is optional.
 3. Artificial Person:
(a) Natural persons i.e. human beings and
(b) Artificial persons such as companies, firms, institutions etc.
Legally, a company has got a personality of its own. Like human beings it can buy, own or sell
its property. It can sue others for the enforcement of its rights and likewise be sued by others.
4. Separate Entity:
The law recognizes the independent status of the company. A company has got an identity of its
own which is quite different from its members. This implies that a company cannot be held
liable for the actions of its members and vice versa. The distinct entity of a company from its
members was upheld in the famous Salomon Vs. Salomon & Co case.
5. Perpetual Existence:
A company enjoys a continuous existence. Retirement, death, insolvency and insanity of its
members do not affect the continuity of the company. The shares of the company may change
millions of hands, but the life of the company remains unaffected. In an accident all the
members of a company died but the company continued its operations.
6. Common Seal:
A company being an artificial person cannot sign for itself. A seal with the name of the company
embossed on it acts as a substitute for the company’s signatures. The company gives its assent to any
contract or document by the common seal. A document which does not bear the common seal of the
company is not binding on it. The common seal acts as the official signature of the company.
7. Transferability of Shares:
The capital of the company is contributed by its members. It is divided into shares of
predetermined value. The members of a public company are free to transfer their shares to
anyone else without any restriction. The private companies, however, do impose some
restrictions on the transfer of shares by their members.
8. Limited Liability:
The liability of the members of a company is invariably limited to the extent of the face value of
shares held by them. This means that if the assets of a company fall short of its liabilities, the
members cannot be asked to contribute anything more than the unpaid amount on the shares
held by them. Unlike the partnership firms, the private property of the members cannot be
utilized to satisfy the claims of company’s creditors.
9. Diffused Ownership:
The ownership of a company is scattered over a large number of persons.
According to the provisions of the Companies Act, a private company can have a
maximum of fifty members. While, no upper limit is put on the maximum number
of members in public companies.
10. Separation of Ownership from Management:
Though shareholders of a company are its owners, yet every shareholder, unlike a
partner, does not have a right to take an active part in the day to day management
of the company. A company is managed by the elected representatives of its
members. The elected representatives are individually known as directors and
collectively as ‘Board of Directors’.
corporate veil
• From the juristic point of view, a company is a legal person distinct from its
members [Salomon v. Salomon and Co. Ltd. (1897) A.C 22]. This principle may be
referred to as the ‘Veil of incorporation’.
• The courts in general consider themselves bound by this principle. The effect of
this Principle is that there is a fictional veil between the company and its
members. That is, the company has a corporate personality which is distinct from
its members. But, in a number of circumstances, the Court will pierce the
corporate veil or will ignore the corporate veil to reach the person behind the veil
or to reveal the true form and character of the concerned company. The rationale
behind this is probably that the law will not allow the corporate form to be
misused or abused. In those circumstances in which the Court feels that the
corporate form is being misused it will rip through the corporate veil and expose
its true character and nature disregarding the Salomon principal as laid down by
the House of Lords.
Lifting of corporate veil
• What is Lifting of corporate veil?
• A Company is an artificial person having separate legal entity, distinct from its
members. However, the title given to a company of an artificial person having its own
legalities does not take away the fact that it is not a human being capable of knowing
whats rights and wrong. Company enjoys a separate position from that of position of it’s
owners, but still it cannot act on it’s own. It goes to say, that there is some human
agency involved behind the functioning of a company. A human agency works on in the
name / behalf the company, for the company to achieve its objectives, maintain social
order etc.. However, when this human agency has ill motives to defraud the company,
the concept of lifting of corporate veil comes in to existence.
• Under this concept, the company is treated as a distinct individual having no role to play
in the acts undertaken by human agency. Here, human agency cannot take shield behind
the Company being an artificial person, having separate legal entity. The human Agency
is picked and punished, the grunt is not borne by the Company as a whole.
• When directors, or whosoever in charge of the company, commits frauds, or illegal
activities, or does any activities outside scope of the objects, memorandum, articles of
the company, the principle of lifting of corporate veil is initiated. The concept of lifting of
corporate veil scrutinizes, the human agency behind the scenes of the Company, to
determine the real culprit committing such offences.
• Courts have authority to ignore the corporate character and remove the veil against any
person hiding behind the name of the Company, for fraud committed.
When is corporate veil lifted?
• There are no hard and fast rules for the applicability of this doctrine,
However, over a period of time, Courts and Legislatures throughout
the globe have attempted to narrow down scope and applicability of
the doctrine under following two heads:-
• Broadly there are two types of provisions for the lifting of the
Corporate Veil- Judicial Provisions and Statutory Provisions.
• Judicial Provisions include Fraud, Character of Company, Protection
of revenue, Single Economic Entity etc.
• Statutory Provisions include Reduction in membership,
misdescription of company’s name, Fraudulent conduct of business,
Failure to refund application money, etc.
1.Statutory Provisions:
• The Companies Act, 2013, integrated with various provisions, points out the person liable
for any such improper/illegal activity as “officer who is in default” under Section 2(60) of
the Act, and also includes people holding the positions of directors and key-managerial
personnel’s. A few instances of lifting of the corporate veil cases are listed below:
A. Misstatement in Prospectus:
• Under Section 26 (9), Section 34 and Section 35 of the Companies Act, it is a punishable
offence to furnish untrue or false statements in prospectus of a company offering
securities for sale. Prospectus issued under Section 26 contains key notes of the
company containing details of shares and debentures, names of directors, main objects
and present business of the company. If any person attempts to furnish false or untrue
statements in prospectus, he is subject to penalty or imprisonment or both, as
prescribed under the aforesaid sections.
B. Failure to return application money:
• Under Section 39 (3) of the Companies Act, gives provision against allotment of
securities. If the minimum stated amount has not yet been subscribed and the sum
payable on application is not received within a period of thirty days from the date of
issue of the prospectus, then the officers in default are fined with an amount of one
thousand rupees for each day till the time the default continues or one lakh rupees,
whichever is less.
C. Misdescription of Company’s name:
• The name of the company is very important. Attention should be paid to every detail in the spelling and
pronunciation of the name of company. Usage of approved name entitles the company to enter into
contracts and make them legally binding. The name of the company requires prior approval as under Section
4 and printed under Section 12 of the Companies Act. Thus, if any representative of the company collect bills
or sign on behalf of the company, and enter in incorrect particulars of the company, then he is personally
liable.
Case Law: Hendon vs. Adelman, signatory directors were held personally liable for stating company’s name
on a signed cheque as “L R Agencies Ltd” while the original name was “L & R Agencies Ltd.”
D. For investigation of ownership of company:
• Under Section 216 of the Act, the Central Government has authority to appoint inspectors to investigate and
report matters relating to the company, and its membership for the purpose of determining the true
persons, financially interested in the success or failure of the company; control or to materially influence the
policies of the company.
E. Fraudulent conduct:
• Under Section 339 of the Act, in case of winding up of the company, it is found that company’s name was
being used for carrying out a fraudulent activity, the Court is empowered to hold any such person be liable
for such unlawful activities, be it director, manager, or any other officer of the company.
• Case Law: Delhi Development Authority vs. Skipper Construction Company, determined that, where,
corporate character is employed for the purpose of committing illegality or for defrauding others, the court
would ignore the corporate character and will look at the reality behind the corporate veil.
F. Inducing persons to invest money in company:
• Under Section 36 of the Companies Act, any person making false, deceptive, misleading or untrue
statements or promises to any other person or concealing relevant data from other person with a
view to induce him to enter into either of following:-
i. An agreement of acquiring, disposing, subscribing or underwriting securities.
ii. An agreement to secure profits to any of the parties from the yield of securities or by reference
to fluctuations in the value of securities.
iii. Agreement to obtain credit facilities from any bank or financial institution.
In such circumstances, the corporate personality can be ignored with a view to identify the real
culprit making him personally liable under Section 447 of the Act accordingly.
G. Furnishing false statements:
• Under Section 448 of the Act, if in any return, report, certificate, financial statement, prospectus,
statement or other document required, any person makes false or untrue statements, or conceals
any relevant or material fact, then he is liable under Section 447 of the Act.
H. Repeated defaults:
• Under Section 449 of the Act, if a company or an officer of a company commits an offence
punishable either with fine or with imprisonment and this offence is being committed again
within period of 3 years, such company and officer are to pay twice the penalty of that offence in
addition to any imprisonment provided for that offence.
I. Reduction in membership: Reduction of the number of members below the statutory limits.Public
minimum number of persons 7 and in partnership firm minimum number of persons 2 .
 2) Judicial Pronouncements:
• Apart from the mandatory statutory provisions provided by the Companies Act, 2013
with regards to offences behind lifting of Corporate veil, the Legislature has also played
an important role to make sure guilty person is pointed to lift corporate veil. Following
are few such scenarios where Court has without any doubt lifted the corporate veil:
A. Tax Evasion:
• It’s the duty of every earning person to pay taxes. Company is no different than a person
in eyes of law. If anyone attempts to unlawfully avoid this duty, he is committing an
offence. What rule applies to a human being also applies to a company.
• Case Law: DinshawManeckjee Petit, in this case, the founding person of 4 new private
companies, Sir Dinshaw, was enjoying huge dividend and interest income, and in order to
evade his tax, he thus found 4 sham companies. His income was credited in the accounts
of these companies and these amounts were repaid to Sir Dinshaw but in form of a
pretended loan. These loans entitled him to have certain tax benefits. It was rather held
that purpose of founding these new companies was simple as means of avoiding super-
tax.
• Supreme Court of India had adopted the similar thinking in the case Tata Engineering
And Locomotive Co. Ltd. vs. State of Bihar & Ors, where the corporations petitioning
had joined together and claimed protection under Article 286 of Constitution of India for
non-imposition of taxon the sale or purchase of goods, the Apex Court held that “If their
contention is accepted, it would really mean that what the corporations or companies
cannot achieve directly, they can achieve indirectly by relying upon the doctrine of lifting
the veil.”
B. Prevention of fraud/ improper conduct:
• It is obvious that no company can commit fraud on it’s own. Human agency involved
commits such acts. Thus, one may make efforts to prevent upcoming frauds, but such
efforts are in vain, when human agency here has ulterior motive.
C. Determination of enemy character:
• The purpose of forming a company is profit driven. A company will not attempt to do
good towards society consciously. However, it may opt to cause damage instead.
• Case law: Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd. A Germany based
company was incorporated in England to sell tyres manufactures in Germany. The
German company had however held the bulk of shares in this English company. As World
War I broke out, the English company commenced an action to recover trade debt. The
question was brought before House of Lords which decided the case against the
claimant, stating that, company is not a real person but a legal entity, it cannot be a
friend or an enemy. However, it may assume an enemy character when persons in de
facto control of it’s affairs are residents of the enemy territory. Thus, the claim was
dismissed.
• It was rather held in the case Sivfracht vs. Van UdensScheepvart[11] that, if in such
scenarios where a company is suspected to be of enemy character or is proved to be of
enemy character, then such granted monetary funds would be used as machinery to
destroy the concerned State itself. That would be monstrous and against public policy of
that concerned State.
D. Liability for ultra-vires acts:
• Every company is bound to perform in compliance of it’s memorandum of association, articles of
association, and the Companies Act, 2013. Any action done outside purview of either is said to be
“ultra-vires” or improper or beyond the legitimate scope. Such operations of the company can be
subjected to penalty.
• The doctrine of ultra-vires acts against companies was evolved in the case Ashbury Railway
Carriage & Iron Company Ltd v. Hector Riche[12] where a company entered into a contract for
financing construction of railway lines, and this operation was not mentioned in the
memorandum. The House of Lords held this action as ultra-vires and contract, null and void.
E. Public Interest/Public Policy
• Where the conduct of the company is in conflict with public interest or public policies, Courts are
empowered to lift the veil and personally hold such persons liable who are guilty of the act. To
protect public policy is a just ground for lifting the corporate personality.
• One such scenario is Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr.,[13] where it was held that
corporate veil maybe ignored if representatives of the company commit contempt of the Court so
punishment can be inflicted upon.
F. Agency companies:
• Where it is expedient to identify the principal and agent concerning an improper action
performed by the agent, the corporate veil maybe neglected. Such as in the case of Bharat Steel
Tubes Ltd vs IFCI[14] where it was held that it doesn’t matter and it isn’t necessary that
Government should be holding more than 51% of the paid-up capital to be the principal. In fact,
in the case New Tiruper Area Development Corporation Ltd vs. State of Tamil Nadu[15] where
Government was holding mere 17.4% of the investment funds, it was found that Area
Development Corporation was actually a public authority through the Government. It was created
under a public-private participation to build, operate and transfer water supply and sewage
treatment systems.
G. Negligent activities:
• Every company law distinguishes between holding and subsidiary companies. Holding companies
under Indian company law[16]are the companies which have right in composition of Board of
Directors, or which have more than 50% of the total share capital of the subsidiary company. For
example, Tata Sons is the holding company while Tata Motors, TCS, Tata Steel are it’s subsidiary
companies.
• In cases where subsidiary companies have been found with tainted operations, Courts have
power to make holding companies liable for actions of their subsidiary companies as well for
breach of duty or negligence on their part. Such as in the case of Chandler vs Cape Plc[17] where
an employee brought an action against holding company ‘Cape Plc’ for not taking proper health
and safety measures, even though employee was employed in it’s subsidiary company.
• Employee was appointed in the year 1959 in the subsidiary company while he had discovered the
fact that he is suffering from asbestosis in year 2007. When he was aware of his condition it was
that the subsidiary company was no longer in existence, thus, he brought action against the
holding company, which was still in existence. This matter was held to be maintainable. Rather,
holding company was held guilty and made liable as it owed duty of care towards employees. It
was for the first time where a holding company, despite the fact that it’s a legal entity separate
from that of its subsidiary, is however liable for actions of it’s subsidiary.
H. Sham Companies:-
• The Courts are also empowered to lift the corporate veil if they are of the opinion that such
companies are sham or hoax. Such companies are mere cloaks and their personalities can be
ignored in order to identify the real culprit. This principle can be seen in the prior discussed case
of Gilford Motor Co Ltd vs. Horne[18] where it was held that the newfound company was mere
cloak or sham, for purpose of enabling Sir Dinshaw to commit breach of his covenant against
solicitation.
I. Companies intentionally avoiding legal obligations:-

• Wherever an incorporated company is deliberately tries to avoid legal

obligations, or wherever it is found that this incorporation of a
company is being used to avoid force of law, the Courts have
authority to disregard this legal personality of the company and
proceed as if no company existed. The liabilities can be straight away
imposed on persons concerned.
Types of Company
Types of Company
• A company can be formed in a number of ways:
(a) By Royal Charter (Chartered Companies) Formed by grant of a charter by the Crown.
Promoters of the company petition the Privy Council attaching draft of proposed
charter to the petition. Still used to incorporate learned societies and professional
bodies. No longer used to incorporate trading companies.
(b) By Act of Parliament (Statutory Companies) Formed by private Act of Parliament.
Formerly used to incorporate public utilities such as gas, electricity and railways. (The
privatized public utilities have been incorporated as registered companies).
(c) By Registration (Registered Companies) Formed by registration under the Companies
Act 1985 (as amended) or one of the preceding Companies Acts. Registration is the most
commonly used means of forming a company and virtually the only method now used to
form a trading company. CA 1985, s.1(1): "Any two or more persons associated for a lawful
purpose may, by subscribing their names to a memorandum of association and otherwise
complying with the requirements of this Act in respect of registration, form an
incorporated company, with or without limited liability."
Classification of Registered Companies
• "Limited Liability" - this refers to the liability of the members, not the
liability of the company. The company will always be liable to the full
extent of its debts.
• The liability of the members, whether limited or unlimited, is to the
company, not to the individual creditors of the company.
• (a) Unlimited Companies
(i) Members have unlimited liability (If company is being wound up,
members can be made to contribute to the company’s assets without
limit to enable it to pay its debts.)
(ii)Cannot be public companies.
(iii)Can be set up with or without a share capital.
(iv)Not subject to the same restrictions on alteration of capital as other
types of company, and do not normally have to file annual accounts.
(b) Companies Limited by Guarantee
(i) Members agree to contribute a specified amount to the company’s assets
in the event of the company being wound up. (Total amount payable by all
members is called the "guarantee fund")
(ii) Members do not have to pay anything as long as company is a going
concern - so company has no contributed capital.
(iii) Companies limited by guarantee are not usually formed for business
ventures.
(iv) Prior to 1980, a company could be registered as a company limited by
guarantee, but also have a share capital - these are called "hybrid
companies".
(c) Companies Limited by Shares
(i) The most common kind of registered company.
(ii) Members of the company take shares issued by the company. Each share
is assigned a nominal value - the amount that must be paid to the
company for the share. Members may also agree to pay an extra amount
- called a premium
(iii)When the company is registered, its memorandum must state the
total nominal value of all the shares it is going to issue (called the
registered capital, or nominal capital or authorised share capital). The
memorandum also states the number of shares to be issued: e.g.
10,000 shares of £1 each = registered capital of £10,000.
(iv)Liability of a member (shareholder), when the company is wound up
is limited to the amount, if any, of the nominal value of his shares
which has not been paid. ( Shareholder is also contractually bound to
pay any premium which has not been paid).
(v) Shares are normally partly or fully paid for when issued, so company
will have a contributed capital.
Companies Limited by Shares may be Public or Private
(i) Public Companies
CA 1985, s.1(3): "a company limited by shares which has a
memorandum stating that it is to be a public company and which
complies with the requirements of the Act for registration as a public
company."
• Main requirements: - A company cannot be registered as a public
company unless it has a minimum allotted share capital of £50,000, at
least one quarter of which has actually been paid. - A public company
must have at least two shareholders and at least two directors.
(ii) Private Companies
CA 1985 defines a private company as "any company that is not a
public company". Private companies have no authorised minimum
share capital.
A private company is only required to have one director and, since
1992, it can be formed with only one member.
Only Public Companies can have their shares listed on the Stock
Exchange - but Public Companies are regulated much more strictly than
Private Companies.
 Formation of the company: Promoter and its legal position
• Section 2(69) of Companies Act 2013, deals with the term Promoter:
1.+A person who has been named as such in a prospectus or is
identified by the company in the annual return in section 92; or
2. A person who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise; or
3. A person who is in agreement with whose advice, directions or
instructions the Board of Directors of the company is accustomed to
act.
• In a simple word, the promoter may be an individual, a firm or a
company that does all the necessary preliminary duties to bring a
company into existence. The promoter’s work is to formulate new
ideas and to develop it and also persuade others to join the company.
• According to Palmer, “Company promoter is a person who originates
a scheme for the formation of the company, has the memorandum
and the articles prepared, executed and registered and finds the first
directors, settles the terms of preliminary contracts and prospectus (if
any) and makes arrangement for advertising and circulating the
prospectus and placing the capital.
• According to Guthmann and Dougall. “Promoter is the person who
assembles the men, the money and the materials into a going
concern.”
• Legal Position of a Promoter is that he is not an agent or trustee of
the company. Promoter has a fiduciary relationship with the company
which is based on trust and confidence. Therefore, a promoter is
obliged to disclose all the relevant facts and any secret profit which is
made by him in relation to the formation of the Company.
Functions of a Promoter:
1. To think of the idea of forming a company and also to determine the possibilities.
2. The necessary negotiation can be conducted for the purchase of business if it is
intended to purchase an existing business. The help of the expert can be taken only
if it is necessary.
3. To collect the requisite number of persons which is 7 in the case of the public
company and 2 in case of a private company, who can sign the Articles of
Association’ and ‘Memorandum of Association’ of the company and also agree to
as act as the first directors of the company.
4. To decide about the following:
(i) The name of the Company,
(ii) The location of its registered office,
(iii) The form and amount of its share capital,
(iv) The brokers or underwriters for the capital issue
(v) The bankers,
(vi) The auditors,
(vii) The legal advisers.
Functions of a Promoter:
5. To draft and print the Memorandum of Association (M/A) and
Articles of Association (A/A)
6. Making of preliminary contracts with underwriters, vendors, and
others.
7. Making arrangements for the preparation of the prospectus, it’s
filing, advertisement and the issue of capital.
8. Arrangement for the registration of the company and obtaining the
certificate of incorporation.
9. To defray preliminary expenses.
10. To arrange the minimum subscription.
Rights of Promoter:
1. If there is more than one promoter in a company then the promoter can
claim against another promoter for the damages and compensation paid by
him.
2. If any untrue statement is given in the prospectus and for the secret
profits then the promoters will be held liable severally and jointly as well.
3. The promoter has the right to get paid for all the legitimate expenses he
has incurred in the process of formation of the company such as fee of a
solicitor or the cost of advertisement etc. However, it is not a contractual
right to receive the preliminary expenses but it depends on the director’s
discretion.
4. A promoter has no right against the company for his remuneration unless
there is a contract to that effect. In some cases, articles of the company
provide for the directors paying a specified amount to promoters for their
services but this does not give the promoters any contractual right to sue the
company. This is simply an authority vested in the directors of the company.
Duties of Promoter:
1. It is the duty of the promoter to disclose all the secret profits made
by him and also he should not make any secret profit and even if he
does, then he has to disclose it.
2. It is the duty of the promoter to disclose all the relevant material
facts.
3. It is the duty of the promoter to make good to the company what he
has obtained as a trustee and not what he may get at any time.
4. The promoter has to disclose all the private arrangement which gives
him the profit by promoting the company.
5. It is the duty of the promoter to stand in relation to the future
allottees of the shares.
Pre-Incorporation Contracts & Provisional Contracts
• The company is an artificial person and is capable of entering contracts in its
own legal capacity. The separate legal entity feature is awarded to most of the
business structures in India, under the Companies Act 2013. As per the Act, the
company under its legal entity capacity, can employ people, can purchase and
sell goods and services, can own property, can enter into contracts with third
parties. The existence of the company is completely on registration of the
company with the Registrar of Companies. If the company is not registered,
then the advantages of limited liability, perpetual succession, contractual
powers etc do not come into being.
• It is the duty of the promoter to bring the company in the legal existence and
thereby ensuring its successful running.
• Accordingly, to accomplish the obligation of creating the separate legal status for
the company, the promoter may enter into some contract on behalf of
prospective company.
• The company or its promoters may have to enter into contracts before and after
its formation, or even during the time of its formation.
• The contractual features of the company can be exercised only after obtaining it
legal features by incorporation. However, the company is required to enter into
various contracts prior to its incorporation also.
Preliminary Contracts or Pre-Incorporation Contracts
• As the name stands, these contracts are made before the formation
of a company. For the formation of the company, the promoters are
required to enter into various contracts with third parties e.g.
purchasing some property or hiring the services of professions like
lawyers, technicians, etc.
• After the incorporation of the company such contracts are not
attached to the company, as the company obtains legal entity status
only after its incorporation.
• As per the Act, the company can neither sue nor it can be sued on
the basis of such contracts because the company was not a party to
such contracts. At the same time, company cannot even ratify or
adopt such contracts to get the benefit of such contracts.
Highlights of Preliminary Contracts
• Contracts entered by the promoters on behalf of the company which is yet to be
incorporated.
• Can be applicable to public limited and private limited companies.
• Company is not bound by pre-incorporation contracts.
• Company cannot sue or be sued on the basis of such contracts.
• Promoters, themselves, remain personally liable on all such contracts, unless a new
contract on the same terms as that of the old one is made by the company after
incorporation.
• Company, after its incorporation, cannot even ratify such contracts.
• The liability of the promoter ceases on the adoption of such agreement by the company
after incorporation
• As per the Act, either party can rescind the agreement if the incorporation is not
obtained in a specific period of time.
• Further to the incorporation of the company, the company may adopt the preliminary
agreement. In certain cases, the company can enforce a pre-incorporation contract if it is
warranted by the terms of incorporation. At the same time, specific performance of such
contracts can be enforced by other parties against the company if such contracts are for
the purposes of the company and are warranted by the terms of incorporation of the
company. This is so provided under the provisions of Specific Relief Act, 1963.
Provisional Contracts
• As per the Act, the contracts made after incorporation of the
company but before it is entitled to commence business are termed
as Provisional Contracts.
• Any contract made by a company before the date on which it is
entitled to commence business shall be provisional only and binding
on the company until that date, and on that date, it shall become
binding.
• The private companies can commence its business immediately after
the incorporation of the company, however, for a public limited
company, the commencement of business occurs only after obtaining
certificate of commencement of business. The term Provisional
Contract applies only to the companies with share capital.
Major differences between Pre-incorporation and
provisional contract
• Preliminary contracts are those contracts made before the formation of the company,
whereas the contract entered by a company after incorporation but before it is entitled
to commence business is termed as provisional contracts.
• As per the provisions of the act, neither the company can sue nor can it be sued to
enforce the preliminary contracts, whereas the provisional contracts can be enforced
only on receiving a certificate of Commencement of Business.
• Preliminary contracts are the liabilities of promoters, his liability ceases only after
adoption of such contract by the company after incorporation. However, provisional
contracts are the responsibilities of the company. Preliminary contracts may relate to
property which the promoters desire to purchase for the company or they may be made
with the persons whose know-how is vital to the success of the company.
• As per the Act, both private and public company have the right to undertake these
contracts, whereas only public limited companies can undertake provisional contracts.
• As the provisional contracts are being entered in a period after incorporation and before
obtaining business commencement certificate, it can be applied only to public limited
companies.
• However, no such case arises in private limited companies as private limited company
obtain legal feature immediately on receipt of incorporation certificate.
Memorandum of Association
Meaning
• Memorandum of Association is the main document of a company which
defines its objects. It lays down the fundamental conditions upon which
alone the company is allowed to be formed. It may be termed as the
charter or the constitution of the company since it governs the relationship
of the company with outside world.
• According to Section 2(56) of Companies Act, Memorandum means
“Memorandum of Association as originally framed or as altered from time
to time in pursue of any previous companies law or of this Act”. Any
provisions contained in the Memorandum of Association will be void to the
extent to which they are repugnant to the provisions of the Companies Act.
• According to Palmer, the Memorandum of Association contains the objects
for which the company is formed, and therefore identifies the possible
scope of its operations beyond which its actions cannot go. It defines as
well as confines the power of the company. If anything is done beyond
these powers that will be ultra vires the company and therefore void
Memorandum of Association
Purposes of Memorandum
• A memorandum serves two important purposes:
• It enables the intending shareholder to know the field of activity or to what
purpose his money is going to be used by the company, and what risk he is
taking in making the investment.
• Similarly, anyone who is dealing with the company, for example, the supplier
of goods or money, will know whether the transaction he intends to make
with the company is within the objects of the company, and not ultra vires its
objects.
• The memorandum is required to be printed, divided into paragraphs,
numbered consecutively and signed by at least seven persons (two in
case of a private company) in the presence of at least one witness,
who will attest the signatures. The particulars about the signatories to
the memorandum as well as the witness, as to their address,
description, occupation etc., must also be entered.
Memorandum of Association

A Public Document
• Memorandum of Association is a public document, therefore, every person
who deals with the company is presumed to have sufficient knowledge of
its contents. It is open for public inspection.
• A company, on being required by a member, is bound to supply to him with
a copy of its memorandum on payment of the prescribed fee. The copy
must be sent within seven days. In case the company makes default in
complying with this requirement, the company, and every officer of the
company who is in default shall be punishable for each offence, with a fine
of Rs. 1000 per day till the default continues or Rs. 1 lakh whichever is less
(Sec. 17). However, the right to obtain copy has not been given by law to a
person other than a member.
Clauses of Memorandum of Association [Sec. 4]
• Memorandum must have the following clauses:
• Name Clause
• Situation Clause
• Objects Clause
• Liability Clause
• Capital Clause
• Association Clause or Subscription Clause
Name Clause
• A company being a distinct legal entity must have a name of its own in order to
establish its separate identity. The general rule is that a company can be
registered with any name it likes subject to the following restrictions:
• The last words of the name must end with the words ‘limited’ or ‘private limited’ as the case
may me. It is not necessary that the word ‘company’ should form part of the name.
• As per Section 4(2) no company can be registered with a name, which in the opinion of the
Central Government is undesirable. If a name is identical with, or closely resembles the name
of an existing company, it may be deemed to be undesirable by Central Government.
• The name adopted by the company should not violate the provisions of the Emblems and
Name Act, 1950.
• The name should not connote Government participation or patronage unless circumstances
justify the usage of such words. It should not include the word co-operative, bank, banking,
insurance, investment unless the circumstances justifies.
• Requirements
• As per Section 12(3) every company should
• Paint or affix its name, outside its registered office, and outside every place
where it carries on business, in a conspicuous position, in legible letters and in
the language in general use in the locality;
• Have its name engraved in legible characters on its seal;
• Get its name, address of its registered office and corporate identity number
along with telephone number, fax number, if any, e-mail and website
addresses, printed in all its business letters, letter papers, billheads and in all
its notices and other official publications; have its name printed on hundies,
promissory notes, bills of exchange.
• Default
• If there is any default in compliance it will lead to a fine of Rs. 1000
per day on the company and every officer of the company who is in
default till the default continue but not exceeding one lakh rupees.
• Situation Clause
• Memorandum of Association must state the name of the State in
which the registered office of the company is to be situated. The
registered office clause is important for two reasons.
• Firstly, it determines the domicile of the company. This in turn establishes the
jurisdiction of the High Court of the State in which the registered office is
situated.
• And secondly, it is at the registered office where the company’s statutory
books are normally kept, and to which notices and other communication can
be sent.
• Registered office of a company is the place of its residence of the
purposes of delivering or addressing any communications, service of
any notice or process of Court of Law and for determining the
question of jurisdiction in any action against the company. A company
need not carry on its business at its registered office. Nor there is any
bar to having a registered office in one state and carrying on business
in another. But, every company must have a registered office within
30 days of its incorporation.
 Objects Clause
• The most important clause in the memorandum of association of a
company is the object clause. It is object clause which lays down the
objects of the company. A company cannot do anything beyond or outside
its objects and any act done beyond them will be ultra vires and void. A
company can exercise only such powers as are either expressly stated
therein or as may be necessary in furtherance of its objects.
• According to Section 4(C) the Memorandum of Association of a company
must state the objects for which the company is proposed to be
incorporated and any matter considered necessary in furtherance thereof
Capital Clause
• Memorandum of Association of a limited company having share capital (i.e.
company limited by shares or company limited by guarantee having share
capital) must also state the amount of share capital with which the
company is to be registered which is usually called authorized or nominal
capital. Further, division of registered share capital into shares of a fixed
amount is also required to be given in the memorandum. Each subscriber
must take at least one share and write opposite his name the number of
shares he takes.
• Liability Clause
• Liability clause mentions the liability of members of the company. In case of a company limited by shares,
Memorandum of Association must have a clause to the effect that the liability of the members is limited to
the extent of the amount of the unpaid portion of the shares held by him. The Memorandum of Association
a company limited by guarantee must state the amount which each member undertakes to contribute to the
assets of the company in the event of its being wound up. [Section 4(1)(d)]
• In case of a company having a share capital [Sec. 4(1)(e)], the amount of share capital with which the
company is to be registered and the division thereof into shares of a fixed amount and the number of shares
with the subscribers to the memorandum agree to subscribe which shall not be less than one share and the
number of shares each subscriber to the memorandum intends to take indicated opposite his name.
• In case of One Person Company, the name of the person who, in the event of death of the subscriber, shall
become the member of the company [Sec. 4(1)(f)].

• Association Clause
• This clause states that the persons subscribing their signatures at the end of the Memorandum are desirous
of forming themselves into an association in pursuance of the Memorandum. Memorandum of Association
must be signed by seven or more persons in the case of a public company and by two or more persons in the
case of a private company. Signatures shall be attested by witnesses. There may be one witness for all
signatures but one subscriber cannot be a witness to the signatures of another. Full description,
address, occupation, etc. of the subscribers and witnesses must be written. In the case of a company having
share capital, each subscriber is also required to take at least one share and to write opposite his name the
number of shares he agrees to take. Subscribers are required to pay for these shares after the company is
incorporated. They must also sign articles of association of the company.
Article Of Association
• Articles of association form a document that specifies the regulations for a
company's operations and defines the company's purpose. The document
lays out how tasks are to be accomplished within the organization,
including the process for appointing directors and the handling of financial
records.
• Articles of association can be thought of as a user's manual for a company,
defining its purpose and outlining the methodology for accomplishing
necessary day-to-day tasks.
• The content and terms of the "articles" may vary by jurisdiction, but
typically include provisions on the company name, its purpose, the share
structure, the company's organization, and provisions concerning
shareholder meetings.
• In the the U.S. and Canada, articles of association are often referred to as
"articles" for short.
Article Of Association
• In corporate governance, a company's articles of association (AoA,
called articles of incorporation in some jurisdictions) is a document
which, along with the memorandum of association (in cases where
the memorandum exists) form the company's constitution, and
defines the responsibilities of the directors, the kind of business to be
undertaken, and the means by which the shareholders exert control
over the board of directors. In contrast to the memorandum, which
declares the business objectives and manners of external affairs, the
articles of association defines the businesses internal affairs and
manner of achieving the business objective.
• Articles of Association is an important document of a Joint Stock
Company. It contains the rules and regulations or bye-laws of the
company. They are related to the internal working or management of
the company. It plays a very important role in the affairs of a
company. It deals with the rights of the members of the company
between themselves.
Article Of Association
• contents of articles of association should not contradict with the
Companies Act and the MoA. If the document contains anything contrary
to the Companies Act or the Memorandum of Association, it will be
inoperative. The pvt concern that are limited by shares and those limited
by guarantee and unlimited companies must have their articles of
association. Public companies may not have their articles but may adopt
Model articles given in Table A of Schedule I of Companies Act, 1956. If a
public company has only some articles of its own, for the rest, articles of
Table A will be applicable.
• Articles that are profound to be registered should be printed, segmented
well and sequenced consecutively. Each subscriber to Memorandum of
Association must sign the articles in the presence of at least one witness.
 Contents Of AOA
• The Articles generally contains the following matters:
1.Adoption of preliminary contracts
2.Number and value of shares
3.Issue of preference shares
4.Allotment of shares
5.Call on shares
6.Lien on shares
7.Transfer and transmission of shares
8.Nomination
9.Forfeiture of shares
10.Alteration of capital
11.Buy back
12.Share certificate
13.Dematerialization
14.Conversion of shares into stock. Incorporation of companies and matters incidental thereto.
15.Voting rights and proxies
16.Exclusion wholly or in part of Table F
 Contents Of AOA
17.Meetings and rules regarding committee
18.Directors their appointment and delegation of power
19.Nominee director
20.Issue of debentures and stocks
21.Audit committee
22.Managing directors , Whole time directors , Manager ,Secretary
23.Additional directors
24.Seal
25.Remuneration of directors
26.General meetings
27.Directors meetings
28.Borrowing powers
29.Dividents and reserves
30.Accounts and audit
31.Winding up
32.Indemnity
33.Capitalisation of reserves
Difference between MOA and AOA
S. No Basis of distinction Memorandum of Association Article of Association

1 Nature MOA is the charter or the AOA refers to the bye -laws of the company
constitution of the company. for smooth and internal management of
the company.

2. Scope It defines the objects and powers of It contains rules and regulations for
the company. carrying out day- to-day operations.

3. Status It is the fundamental document of It is a supplementary document of the

the company it supersedes the company.
article.
Difference between MOA and AOA
4. Legal effect Acts done beyond the scope of Acts done beyond the article can be
memorandum is void. ratified by the shareholders.

5. Compulsion The preparation and filing of The preparation of article of

memorandum of Association is Association is not compulsory. A
compulsory. company may adopt Table F of the
companies act.

6. Relationship It defines the relationship of the company It defines the internal relationship
with the outside world. between the company and its
members.

7. Alteration Alteration in MOA is a difficult and Alteration in AOA is a easy and simple
lengthy process. The approval of the process. The approval of the
government is necessary for alteration. government is not necessary for
alteration.
 The doctrine of constructive notice and the
doctrine of indoor management
• A company has separate legal entity which can be formed by an association of individuals to with
the intention to carry commercial activities to generate profit. The formation and functioning of
the company are governed by certain laws, rule and regulations. The intention to behind the
enactment of such laws is to provide protection to company, its management as well as the
outsider person who is contractually engaging with the company. There are certain set of laws
and the principles which provide safeguard to the company from the outsider person and vice
versa. Companies use to resources in the country and generate revenues. So, companies
constitute important role in the growth of the economy and hence, it becomes necessary to
create the laws governing them. These laws operate as prevention to curb the unfair and wrong
practices in the corporate world. The doctrine of constructive notice and the doctrine of indoor
management are important principles in the Company Laws. The former being the rule and the
latter being the exception to it.
• The doctrine and its exception provide the protection. The doctrine of constructive notice
protects the company from the actions of outsider person and the doctrine of indoor
management protects the outsider person from the actions of the company. The interest of the
company and the outsider person has been protected. Both the doctrines make sure that no
party gets unfair gain out of any contractual operation.
Doctrine of Constructive Notice:
• This doctrine reduces the complicity in the rules and regulations of the business. This
Doctrine functions as a safety to the company while dealing with the outsider party.
There is no strict definition to constitute the Doctrine of Constructive Notice, but it can
be summed as follows. A company is public body and the documents such as
Memorandum of Association and the Article of Association of the company are open to
public for inspection. Therefore, it is assumed that the outsider person, who is involving
with the company for business, has gone through these documents. It is a duty of
outsider person to be aware of the rules and regulations of the company because they it
is available in public record. This assumption is called the Doctrine of Constructive
Notice.
• At the time of the formation of the company MOA and the AOA of the company are
submitted with the Registrar of Companies. These documents are the charter of the
company and the company is governed by laws mentioned there. This doctrine puts the
obligation on the outsider person to inspect and well verse with these two documents. In
the event of a dispute, the outsider person cannot take the defence that he doesn’t have
the knowledge of the rules given in the MOA or AOA. This rule is vital while the
adjudicating the disputes arising out of the violations of MOA and AOA. So, the doctrine
of constructive notice can be termed as the bylaws of the company must to be known to
the outsider person as that information is available in the public domain. It is not the
company’s duty to convey this information to the outsider person as that information is
available in the public domain.
Doctrine of Constructive Notice:
• Section 399 of the Companies Act, 2013 gives the legal foundation for this doctrine. As
per this section, the Companies Act allows the outsider person to inspect and go through
the records of the Company which are available with registrar of the Company. This
section also provides the right of inspection of the documents of the company. The MOA
and AOA of the company are the public document and the outsider person shall get into
the contract only after the inspection of these documents. By this provision, the doctrine
of constructive notice is established by which the person is presumed to have the
knowledge of the information in the documents available publically. Before getting into
the contract with any company, the outsider person must have knowledge of the
company and he shall ensure that his purpose shall be fulfilled. Making available the
documents of the public is the assumed and implied notice to the outsider person.
• This doctrine is applicable to the documents which are available in the public record at
the Registrar of Company. In the case of Oakbank Oil Co. vs. Crum it was held that,
anyone who is involving in the contract with the company shall be assumed to have the
knowledge and the understanding of the company’s MOA and AOA. Therefore, the
person is presumed to have the notice of it. This principle is called doctrine of the
constructive notice.
Doctrine of Indoor management:
• The nature of the Doctrine of Indoor Management is wholly opposite to that of
the doctrine of the constructive notice. The former protects the outsider person
from the illegal actions of the company and the latter works as a protection to the
company from the illegal actions of the outsider person. The principle of the
constructive extends to operation that there shall no need to deliver actual
notice. Doctrine of Indoor Management sets the principle that the persons
involving into contract with the company cannot be compelled to obtain the
knowledge of the internal functioning and the proceeding of the company in
relation with the contract. The doctrine of Indoor Management is exception to
the rule established by the Doctrine of constructive notice. This doctrine of
indoor management is derived on the concept that the person getting into the
contract with the company operates in good faith and he shall not suffer by the
illegal actions of the company.
• The Doctrine of Indoor Managements states that outsider person has no
responsibility to have the knowledge about the internal affairs of the company.
The outsider person cannot be bound by the duty to review the internal
functioning or the internal managerial proceedings of the company. So, the
outsider person shall not be made liable for the irregularities in the internal
proceedings of the company. The company cannot transfer its liability on the
outsider person of its own irregular internal actions. This principle is called the
Doctrine of the Indoor Management.
Doctrine of Indoor management:
• It is not the responsibility of the outsider person to look into internal management and the compliances of
the company except MOA and AOA. If any such irregularity occurs due to the actions of the company then
the company itself is responsible as the outsider person has acted in good faith. As it is assumed that the
outsider person has the knowledge of the MOA and AOA, it shall also be assumed that, the internal
compliance has been done by the company.
• It is the responsibility of the company to comply all the requirements provided in the in the MOA and AOA,
the outsider person cannot be bound with the responsibility of to inspect the internal matters of the
company. Though, it is obligatory for the outsider person to check whether the contract is in consistency
with the MOA and AOA. If the object of the contract is in accordance with and authorised by the MOA or
AOA of the company, then the outsider person can presume that all the internal regulations are being
completed by the Company. The obligation of the outsider person ends there and the company becomes
responsible for any ultra vires act or any irregularity remained in the contract. The doctrine of Indoor
Management simply states that the indoor affairs of the company are the company’s difficulty to tackle and
company has to bear its consequences. This doctrine is essential for directors who act on behalf of the
companies. Persons contracting with the company can presume that the acts done by these directors are
within their powers and scope. So, any act done by them in accordance with the MOA or AOA then the
outsider person can assume validity of that act as it is done in their capacity.
• Both the doctrines have been established maintain the balance between both the parties to the contract. No
party in the contract shall take unfair advantage of its irregular and illegal actions and it is made sure that
the other party shall not suffer by its consequences.
Prospectus
• The Companies Act, 2013 defines a prospectus under section 2(70).
Prospectus can be defined as “any document which is described or issued
as a prospectus”. This also includes any notice, circular, advertisement or
any other document acting as an invitation to offers from the public. Such
an invitation to offer should be for the purchase of any securities of a
corporate body. Shelf prospectus and red herring prospectus are also
considered as a prospectus.
Essentials for a document to be called as a prospectus
For any document to considered as a prospectus, it should satisfy two
conditions.
• The document should invite the subscription to public share or debentures,
or it should invite deposits.
• Such an invitation should be made to the public.
• The invitation should be made by the company or on the behalf company.
• The invitation should relate to shares, debentures or such other
instruments.
Statement in lieu of prospectus
• Every public company either issue a prospectus or file a statement in lieu of
prospectus. This is not mandatory for a private company. But when a private
company converts from private to public company, it must have to either file a
prospectus if earlier issued or it has to file a statement in lieu of prospectus.
• The provisions regarding the statement in lieu of prospectus have been stated
under section 70 of the Companies Act 2013.
Advertisement of prospectus
• Section 30 of the Companies Act 2013 contains the provisions regarding the
advertisement of the prospectus. This section states that when in any manner the
advertisement of a prospectus is published, it is mandatory to specify the
contents of the memorandum of the company regarding the object, member’s
liabilities, amount of the company’s share capital, signatories and the number of
shares subscribed by them and the capital structure of the company. Types of the
prospectus as follows.
• Red Herring Prospectus
• Shelf Prospectus
• Abridged prospectus
• Deemed Prospectus
Red herring prospectus
• Red herring prospectus is the prospectus which lacks the complete
particulars about the quantum of the price of the securities. A company
may issue a red herring prospectus prior to the issue of prospectus when it
is proposing to make an offer of securities.
• This type of prospectus needs to be filed with the registrar at least three
days prior to the opening of the subscription list or the offer. The
obligations carried by a red herring prospectus are same as a prospectus. If
there is any variation between a red herring prospectus and a prospectus
then it should be highlighted in the prospectus as variations.
• When the offer of securities closes then the prospectus has to state the
total capital raised either raised by the way of debt or share capital. It also
has to state the closing price of the securities. Any other details which have
not been included in the prospectus need to be registered with the
registrar and SEBI.
• The applicant or subscriber has right under Section60B(7) to withdraw the
application on any intimation of variation within 7 days of such intimation
and the withdrawal should be communicated in writing.
Abridged Prospectus
• The abridged prospectus is a summary of a prospectus filed before
the registrar. It contains all the features of a prospectus. An abridged
prospectus contains all the information of the prospectus in brief so
that it should be convenient and quick for an investor to know all the
useful information in short.
• Section33(1) of the Companies Act, 2013 also states that when any
form for the purchase of securities of a company is issued, it must be
accompanied by an abridged prospectus.
• It contains all the useful and materialistic information so that the
investor can take a rational decision and it also reduces the cost of
public issue of the capital as it is a short form of a prospectus.
Shelf Prospectus
• Shelf prospectus can be defined as a prospectus that has been issued by
any public financial institution, company or bank for one or more issues of
securities or class of securities as mentioned in the prospectus. When a
shelf prospectus is issued then the issuer does not need to issue a separate
prospectus for each offering he can offer or sell securities without issuing
any further prospectus.
• The provisions related to shelf prospectus has been discussed
under section 31 of the Companies Act, 2013.
• The regulations are to be provided by the Securities and Exchange Board of
India for any class or classes of companies that may file a shelf prospectus
at the stage of the first offer of securities to the registrar.
• The prospectus shall prescribe the validity period of the prospectus and it
should be not be exceeding one year. This period commences from the
opening date of the first offer of the securities. For any second or further
offer, no separate prospectus is required.
• While filing for a shelf prospectus, a company is required to file an
information memorandum along with it.
Deemed Prospectus
• A deemed prospectus has been stated under section 25(1) of the
Companies Act, 2013.
• When any company to offer securities for sale to the public, allots or
agrees to allot securities, the document will be considered as a
deemed prospectus through which the offer is made to the public for
sale. The document is deemed to be a prospectus of a company for all
purposes and all the provision of content and liabilities of a
prospectus will be applied upon it.
• In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held by
the court that where a rights issue is made to the existing members
with a right to renounce in the favour of others, it becomes a deemed
prospectus if the number of such others exceeds fifty
Registration of prospectus
• Section26(7) states about the registration of a prospectus by the
registrar. According to this section, when the registrar can register a
prospectus when:
• It fulfils the requirements of this section, i.e., section 26 of the
Companies Act, 2013; and
• It contains the consent of all the persons named in the prospectus in
writing.
Process for filing and issuing a prospectus
Contents
For filing and issuing the prospectus of a public company, it must be signed and dated and contain all the necessary information as
stated under section 26 of the Companies Act,2013:
• Name and registered address of the office, its secretary, auditor, legal advisor, bankers, trustees, etc.
• Date of the opening and closing of the issue.
• Statements of the Board of Directors about separate bank accounts where receipts of issues are to be kept.
• Statement of the Board of Directors about the details of utilization and non- utilisation of receipts of previous issues.
• Consent of the directors, auditors, bankers to the issue, expert opinions.
• Authority for the issue and details of the resolution passed for it.
• Procedure and time scheduled for the allotment and issue of securities.
• The capital structure of the in the manner which may be prescribed.
• The objective of a public offer.
• The objective of the business and its location.
• Particulars related to risk factors of the specific project, gestation period of the project, any pending legal action and other
important details related to the project.
• Minimum subscription and what amount is payable on the premium.
• Details of directors, their remuneration and extent of their interest in the company.
• Reports for the purpose of financial information such as auditor’s report, report of profit and loss of the five financial years,
business and transaction reports, statement of compliance with the provisions of the Act and any other report.
Book Building
• A corporate may raise capital in the primary market by way of an initial public offer, rights issue or
private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the
primary market. It is the largest source of funds with long or indefinite maturity for the company.
• What is Book Building?
• SEBI guidelines defines Book Building as "a process undertaken by which a demand for the
securities proposed to be issued by a body corporate is elicited and built-up and the price for such
securities is assessed for the determination of the quantum of such securities to be issued by
means of a notice, circular, advertisement, document or information memoranda or offer
document".
• Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It
is a mechanism where, during the period for which the IPO is open, bids are collected from
investors at various prices, which are above or equal to the floor price. The offer price is
determined after the bid closing date.
• As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in
the following manner:
• 100% of the net offer to the public through book building process
• 75% of the net offer to the public through book building process and 25% at the price determined
through book building. The Fixed Price portion is conducted like a normal public issue after the
Book Built portion, during which the issue price is determined.
• The concept of Book Building is relatively new in India. However it is a common practice in most
developed countries.
Book Building
• Book building is the process by which an underwriter attempts to
determine the price at which an initial public offering (IPO) will be
offered. An underwriter, normally an investment bank, builds a book
by inviting institutional investors (such as fund managers and others)
to submit bids for the number of shares and the price(s) they would
be willing to pay for them.
• Book building is the process by which an underwriter attempts to
determine the price at which an initial public offering (IPO) will be
offered.
• The process of price discovery involves generating and recording
investor demand for shares before arriving at an issue price.
• Book building is the de facto mechanism by which companies price
their IPOs and is highly recommended by all the major stock
exchanges as the most efficient way to price securities.
Understanding Book Building
• Book building has surpassed the 'fixed pricing' method, where the
price is set prior to investor participation, to become the de facto
mechanism by which companies price their IPOs. The process of price
discovery involves generating and recording investor demand for
shares before arriving at an issue price that will satisfy both the
company offering the IPO and the market. It is highly recommended
by all the major stock exchanges as the most efficient way to price
securities
• The book building process comprises these steps:
1.The issuing company hires an investment bank to act as
an underwriter who is tasked with determining the price range the security
can be sold for and drafting a prospectus to send out to the institutional
investing community.
2. The investment bank invites investors, normally large scale buyers and
fund managers, to submit bids on the number of shares that they are
interested in buying and the prices that they would be willing to pay.
3. The book is 'built' by listing and evaluating the aggregated demand for the
issue from the submitted bids. The underwriter analyzes the information and
uses a weighted average to arrive at the final price for the security, which is
termed the cutoff price.
4. The underwriter has to, for the sake of transparency, publicize the details
of all the bids that were submitted.
5.Shares are allocated to the accepted bidders.
Even if the information collected during the book building process suggests a
particular price point is best, that does not guarantee a large number of
actual purchases once the IPO is open to buyers. Further, it is not a
requirement that the IPO be offered at that price suggested during the
analysis.