Wednesday, September 23, 2015

LAW OF PROSPECTUS IN COMPANY LAW

LAW OF PROSPECTUS IN COMPANY LAW PROSPECTUS

SECTION 2(36): Any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from public or offers from public for subscription of any shares /debentures or a body corporate.
Note: the term ‘issued’ does not include private communication. The term ’public’ is a general term no particular number is prescribed.
Contents:
1)            Every prospectus must be dated S 55
2)            Every prospectus must be registered S 60
3)            If prospectus includes statement purporting to be made by an expert , his consent in writing must be obtained and this fact must be stated in the prospectus. S. 58
4)            Matters and reports in schedule two in Company Act must be disclosed in a prospectus. Disclosure should give a true and fair view of Company position S.56

Golden Rule of Disclosure; Golden legacy- Golden rule of disclosure was laid down in New Brunswick and Canada railway case- And described as golden legacy in Henderson vs lackon case- Everything in the prospectus must be stated with strict scrupulous accuracy. In other words the true nature of Company venture should be disclosed.

Statement in lieu of prospectus: S.70 it requires a public Company having share capital to file with the registrar at least three days before allotment of shares/debentures made a statement in lieu of prospectus in the following cases:
·                     Where it does not issue a prospectus ( promoters confident of raising capital without public subscription) or
·                     Where it does not issue a prospectus but has not proceeded to allot any of shares offered to public for our subscription (issue has been a failure and minimum subscription not need)
Mis-statement meaning S.65(1):
a) Statement deemed to be untrue, if misleading in the form and context in which included; and
b) Omission calculated to mislead, the prospectus in which an untrue statement included.

v  The term ‘included’ means: included in the prospectus itself or contained in any report or memo. Randum appearing on the face. Thereof.
v  The suppression of material facts may render it fraudulent
v  It should be read as a whole to judge its effect.
Liablility for Mis-statements:
(I)  Civil Liability:
                    (i)            Rescission of contract- An original allottee can rescind the contract for purchase of shares if caused by misrepresentation, whether innocent or fraudulent.
Requirements:
1)                  Must be a false representation. False representation must of facts and allottee must have relied not of law acted on it.
Prospectus was issued by or with the authority of Company.
·         False representation means a positive misstatement or concealment of material facts.
·         Non disclosure does not amount to misrepresentation, unless concealment prevented or adequate appreciation.
·         The right to rescind is lost if-
1.       Allottee with knowledge of misrepresentation affirms the contract.
2.       Unreasonable delay in rescinding.
3.       Commencement of winding up of Company
4.       Company has become insolvent , irrespective of commencement of winding up.
2)            Damages for deceit: Deciet is a tort, allottee can sue for fraudulent misstatement. Fraud is proved when false representation has been made= knowingly = without belief in its truth= recklessly and carelessly.
3)            Compensation under section 62(1)-  Following persons liable to compensate
- Every person who is director of Company at the time of issue of prospectus
- Every person who has authorized himself to be naked as director.
-Every promoter who was a party to preparation of prospectus
- Every person who authorized the issue of prospectus

Following defences are available under section 62(2)
a)      Withdrawal of consent
b)      Issue without knowledge
c)       Ignorance of untrue statement
d)      Reasonable ground for relief- statements true and believed to be true.
e)      Statement of expert.
f)       Fair extract from an official document.
Liability u/S. 56- Fine upto Rs. 50,000 subject to defences available.
(II)          Criminal liability – S. 63: imprisonment up to 2 yrs, fine up to Rs. 50,000 or both, subject to defenses available.
Shelf Prospectus : S. 60 A  A prospectus issued by any financial institution or bank for one or more issues of securities specified therein . Any public financial institution, public sector bank or scheduled bank whose main object is financing shall file a shelf prospectus.
A company filing a shelf prospectus with the Registrar shall not be required to file prospectus afresh at every stage of offer of securities by it within a period of validity of such shelf prospectus. The term "financing" means making loans to or subscribing in the capital of, a private industrial enterprise engaged in infrastructural financing or, such other company as the Central Government may notify in this behalf.
Information memorandum Section 2(19), which defines the term `information memorandum'``...means a process undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a company is elicited, and the price and the terms of issue for such securities is assessed, by means of a notice, circular, advertisement or document.''
"Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case the price is not disclosed, the number of shares and the upper and lower price bands are disclosed. Section 60B(3) declares that ``the information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of a prospectus.'
Final prospectus Upon the closing of the offer of securities, a final prospectus stating therein the total capital, raised, whether by way of debt or share capital and the closing price of the securities and any other details as were not complete in the red-herring prospectus shall be filed in a case of a listed public company with the SEBI and the Registrar, and in any other case with the Registrar only
Shares:
Meaning S 2(46) :  Share means share in the share capital of the Company and includes stock except where a distinction between stock and share is expressed or implied.
ü  Share is an interest in the Company  measured in terms of money
ü  It is a right to participate in profits while the Company is a going concern and assets of the Company when it is wound up.

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