An invitation to Public to subscribe to

Company’s capital.

Law relating to Prospectus of a

Company
 An Invitation to the public: Prospectus of a Company

The Document U/Sec. 2(36) which includes:

• any notice, circular, advertisement or other documents

for inviting deposits from the public, or
• for inviting offers from the public for the subscription or
purchase of any shares or debentures of a company

• Ex. An advertisement in news-paper – some shares are available

for sale- held as a prospectus

• Essentials:
• An Invitation
• To subscribe or purchase shares/debentures
• By or on behalf of Company
•A public company issues PROSPECTUS to invite public to
subscribe to its share capital.

•Before issued of a prospectus the following steps are required

• appointment of bankers, auditors, secretary, brokers etc

• arrangements for listing of shares on stock exchanges
 Who decides the time of issue of prospectus?

The Board of directors after considering:

• the conditions of the capital market,

•the investors’ mood,

•the fiscal and monetary policies of the Government and

•state of business conditions.

 What are the Statutory requirements in relation
to issue of prospectus?
It must be dated.
•Consent of the Experts (Engineers, accountants and valuers etc.)-
Express statement , i.e., consent is not withdrawn

A copy of the prospectus should be filed with the Registrar of

Companies on or before its publication.

•appropriate disclosures in prospectus to protect the interests of the

investors as per SEBI guidelines.

•Registrar of Companies shall refuse registration if does not comply with

the requirements of Schedule II of the Companies Act
 Liability for untrue/mis- statement in the Prospectus ( Sec 62-63)

Prospective shareholders are entitled to all true and honest disclosure

in the prospectus

persons issuing the prospectus are bound to state every thing

accurately and not to omit material facts

What mis-statement ?

Statement – Untrue or misleading material facts affecting the privileges

and advantages/
Where omission (from a prospectus of any matter) is calculated to
mislead
 Remedies:

•who subscribes on the faith of any misrepresentation or

omissions in prospectus calculated to deceive

•entitled for remedies against the company,directors,promoters and

the experts.

•Civil liability of person who authorized the issue of prospectus

•Criminal liability of person who authorized the issue of prospectus

•Liability of CO.
 Remedies against the Company

• Parties may cancel/refuse the contract to take the shares

• Get back their money with interest

• Claim for damages (Pecuniary compensation )-compensate

loss suffered so for as money can do.

• In practice:
• claim against company is generally for cancellation of contract
of allotment
• claims against director, promoter , expert or other persons are
for damages .
 Remedies against Directors/Promoters or
persons responsible for issue of prospectus

• An allottee of shares can claim damages for fraudulent misrepresentation/

untrue/misleading statement-

1. Liability for damages under the general law

• Contract/tort/civil wrong of deceit/fraud for fraudulent statement with

intention to deceive

• directors not liable if they honestly believed the statement to be true –up to the
time of allotment

• Derry V. Peek-(1889 ) Prospectus contained - Co. has been authorized to use

steam/ mechanical power for running the train – in fact it was subject to approval
of Board of Trade – No fraud – honestly believed consent of Board of trade
practically included

• Fraud is proved : when false statement is made:

• Knowingly- without belief in its truth- recklessly, carelessly it be true or false
 Liability under Company Law

• Compensation for Untrue Statement under

(Sec 62)

• Claim can be made for misstatement , whether

fraudulent or innocent, if it misleading or untrue-

• allottee need not to prove the fraud or knowledge

on the part of director that statement was untrue.
• Damages for an omission of material facts in
prospectus. Sec.56 (4)

• if prospectus does not include the matters in accordance to the

provisions of Act

• Immaterial –whether or not -omission made is false or misleading

• Exceptions- No knowledge of the facts - not disclosed in the

prospectus, as omission to disclose the particular fact arose from
honest mistake of fact
 Remedies against Expert

•Liable under same principle as a fraudulent statement made by

Directors

•But liable only for his own untrue statement ,Wrong Report
/Wrong valuation which is the part of prospectus

•Not liable , if withdraws consent before delivery of copy of

prospectus for registration

•Expert is not criminally liable for misstatement

 Criminal liability for misstatement in Prospectus u/s 63

Also criminal liability for inducing public to subscribe by making false

statements/Untrue Statement in prospectus

•Every person (Directors/Promoters or

Others ) responsible for issue of the prospectus is punishable:

•With fine up to Rs. 50,000, or

•With imprisonment up to two years ,or

•With both.
 Penalty for inducing public to invest money

Besides the liability for misstatement in the prospectus

•Every person fraudulently inducing the public to invest money

•is punishable:

•with imprisonment for a term upto 5 years or

•with fine upto Rs.1,00,000 (one lac) or

•with both.(Sec 68)

 •LIABILITY FOR INDUCING THE COMPANY TO ALLOT
OR TRANSFER SHARES

•The Companies Act prohibits making of an application under a

fictitious name for acquiring shares of a company or

otherwise inducing the company to allot or transfer any share to

him or to any person in a fictitious name for fraudulent purposes ,
is liable and

•punishable with imprisonment for a term which may extend up to 5

years.(Sec 68 A)

•The provisions should be reproduced in every prospectus and

application forms for share to be issued by the company to any
person
 Share Capital

&
The Membership of A Company
 What is Share?

Paid -up Capital is divided into a number of indivisible units of a fixed

amount known as ‘share’.

A share entitles a shareholder:

• to receive dividends,

•to exercise voting rights,

•to participate in general body meetings, and

•a share in the surplus assets in the event of winding up of company

etc.
•A share represents a ‘bundle of rights and obligations’.

•A shareholder is subjected to the obligations as per the Articles of

association

•A share is, not a negotiable instrument

•The certificate of shares in not “shares” it is only a prima facie

evidence of title to share;

•it gives the shareholder the facility of dealing in the market

 Allotment of shares
Division of share capital into defined shares of a particular value

•It means appropriation (to devote money for special purpose), out of the
previously un-appropriated capital of the company of a certain number
of shares to a person

•An allotment to be valid should be made by proper authority

•The board of directors or a committee authorised by the Board,

•It should be against application in writing,

• should not be in contravention of The Companies Act, 1956 and
any other law,

•It must be made within a very reasonable time and

•It must be communicated to the applicant

 Right of existing shareholders

•Sec 81 grants the rights to existing shareholders,

•Right of pre-emption- the right to be first offered the share before

the general public.

•Right accrues if company proposes to issue further shares after the

expiry of two years from the date of incorporation of the company

•or after one year from the date of the first allotment of shares,
whichever is earlier

•The company, by way of special resolution, may decide to offer shares

to public instead of to the existing shareholders

•A private company stands exempted from the provisions of Sec 81

 Effect of irregular allotment

•Irregularity: if allotment of shares is in contravention of the

provisions of the Act

•In the event of non-compliance with the provisions of section 69

•(non-delivery of prospectus ) and

•Allotment of shares is rendered voidable at the option of the

applicant.

•If irregularity results due to failure to deliver a copy of the

prospectus to the Registrar, the Company and every person (including
expert)who is knowingly a party to the issue of the prospectus -
punishable with fine to be extend to Rs. 50,000..
•Besides, this any Director who has knowledge of the fact of the
irregularity- shall be liable to compensate the company and the
shareholder respectively :

•for any loss, damage or costs which the company or the allottee may
have sustained or incurred

•In case allotment is made before the beginning of the 5th day from the
date of issue of the prospectus-

•the company and every officer of the company shall be punishable with
fine which may extend to Rs. 50,000
 Share certificate
A share certificate is a prima facie evidence of the title of the members
to such shares.

Certificate - serves as estoppels to the payment- If the certificate states that

on each of share’s full amount has been paid -the company is estopped , as against the
bonafide purchaser- from alleging that they are not fully paid.

•Share certificate must be issued under the common seal of the company
affixed in the presence of two directors and the secretary or some other
person appointed by the Board for the purpose
 Share warrant

• A share warrant is a bearer document of title to shares specified

therein

•issued by the company against fully paid shares.

• A share warrant is treated as a negotiable instrument

•Only a public company limited by shares and authorised by articles

are allowed the facility of conversion of share certificate into share
warrants

•Previous approval of the Central Government and the Reserve

Bank of India is required
 Forfeiture of shares
•Articles usually contain a provision to forfeit shares of a member who
fails to pay his calls due -payment of the part of the issue price of the
shares which has not been paid

•Forfeiture to be valid must be in accordance with the articles and

against a proper notice

•Directors must pass a resolution forfeiting shares bona fide in the

interest of company

•A forfeiture has the effect of termination of membership.

•Forfeited member continues to remain liable as a past member in case
liquidation takes place within one year of forfeiture

•Normally, forfeited shares are re-issued

•If forfeited shares are not re-issued it may amount to reduction of

share capital and normally require the approval of the Court

•The Board of directors may, on a request of a shareholder whose

shares have been forfeited, cancel the order of forfeiture
 Transfer of shares
• Shares are freely transferable, but subject to restrictions contained
in Act or any other statute,

•to provisions of Memorandum and Articles of association of the

company

•The Depositories Act, 1996 allows shareholders to opt for more

convenient and speedy mode of effecting transfers

•A valid transfer must be lodged with the company through the

prescribed transfer deed, duly executed and stamped
•It must be lodged with company within prescribed period

•In case a company refuses to register a transfer, an appeal may be made

to the CLB within two months of the receipt of notice of refusal

•within four months from the date the instrument of transfer was
delivered to the company ,where no notice is received
 Transmission of shares
•It is involuntary transfer of shares & it takes place in the event of death
or insolvency of a shareholder.

•A simple letter of request

•accompanied by proof of succession
•entitles the legal representative for registration of the same in his name.

•No stamp duty is accordingly payable on transmission.

 Membership in a Company

•Persons composing the company are members/ shareholders

•The two terms are used interchangeably in the Act

Apart from a few exceptional cases , the terms are synonymous

Cases: A person is a member but not shareholder:

•A person who signs the memo. , immediately becomes member on

registration of memo. Before any share is allotted to him
•A person who transfer his shares, continues to be member until his
name is replaced

•A person who has ceased to be shareholder by reason of forfeiture

,surrender or transfer of shares, may be held liable :

•As member for payment of unpaid amount on the shares in case of

default by the present shareholder
Cases , A person is a shareholder, but not a member

A person having a share warrant is a share holder but he is not a

member.But he may be treated as member for specific purpose if
company’s article so provide

A legal representative of a deceased shareholder becomes a member

only after his name is entered in the register
 Borrowings
&

The Management of a Company

 BORROWINGS
Incidental to Trading Companies

• Trading company has an implied power to borrow- need not

authorisation by Memorandum

•Non-trading company must contain an express power to borrow (how

and by whom ) in Memorandum

•Borrowing powers is exercised through Co’s directors by means of

resolution passed Board of Directors

•Articles provide certain restrictions on Director's powers to borrow

 Unauthorised Borrowings

Money borrowed without any power to borrow

A. Borrowings ultra-vires the Co.

•If No borrowing powers, any borrowing will be ultra-vires

•Borrowings beyond the limit fixed by the Memorandum

shall be ultra vires the Co.

Borrowings for objects not mentioned in Memorandum -ultra vires )

• Null and void, no (legal or equitable) rights against Co. to recover

the loan - not enforceable
 Borrowings ultra-vires the Company

LENDER’S RIGHTS AGAINST THE COMPANY

1. Suit for Injunction- restraining the company- from parting

with the money-

2. can get money if not spent and is in actual possession of Co.

(Ex. No provision for borrowing in Memo.-Dir. Borrowed for

purchasing machinery-

• on knowing the fact-if steps are taken- injunction can be obtained

against Co. to part with money)
2.Subrogation- substitution of one person to another-
If borrowed money (ultra vires the Co.) is used in paying off
company’s lawful debt.

3. Identification and tracing

Lender can claim property purchased or money- if in the hands of Co.in
its original form – or claim proportionate share at winding up .

4.Suit for Recovery of Damages

Against Dir. Personally for recovery of damages for exceeding their
authority to borrow
BORROWING ULTRA VIRES THE DIRECTOR BUT INTRA-
VIRESC THE COMPANY

• Director exceeding the limit

•-ratified - Co liable to pay

•NOT ratified- general principle of agency will apply

•Co liable if used for the benefit or legitimate business use of the
company

•Borrowing within powers of company but Director misappropriate-

or apply for unauthorised activities -

•Co. liable, if Director has sanction to borrow and lender does not
know about intended misuse of money

•company not liable if lender knows borrowing is for business –

not covered by Co.’s objects
 Methods of borrowing

•Company may borrow money in the same manner as a

natural person

•As a loans from financial institutions and banks or by

debentures, bonds (fixed amount of debentures ), public deposits
•See, Sec 2(12)

•The borrowing may be secured or unsecured

(with or without security ) .

•Secured Borrowing creates a charge on the assets of the

the company
 Creation of charge on the assets of the Company

•If money lender insist on some security

•Company can give by creating a charge on its assets

•Thus, Charge means transfer of an interest (right ) to

lender in the assets of the company for the purpose of
securing repayment of loan

•Company has power to create charge on its assets

•Lender has a right to enforce if amount of loan is not

repaid
•Charges may be :

•Fixed Charge

•( transfer of interest/right in definite and ascertained assets/property

-land and buildings, heavy machines fixed with the land etc- )

• Floating Charge is created on

•assets/ property of a company both present and future –

• property which is constantly changing- stock in trade , raw materials
etc-
•company can deal with such property- without the consent of charge
holder- until some steps are taken to enforce the charge )
 Crystallisation of floating charges

•conversion of floating charge into fixed charge

•floating charge crystalises:

•when the company ceases to carry on business

•when company goes into liquidation- wound up

•when the charge holder brings a legal action to enforce the
security on default to pay interest on due date

•On crystalisation company looses the right to deal with the property
and charge holder can enforce the security charged to him
Thanks