Module2 : Company Laws Companies Act 2013 JK Prospectus A public company, but not a private company is entitled, by issuing a prospectus, to invite applications for its shares or debentures. “Prospectus” is defined by Section 2 (70) ―prospectus means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of body corporate Contents of a prospectus (1) Every prospectus issued by or on behalf of a public company either with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or interested in the formation of a public company, shall be dated and signed and shall— (a) state the following information, namely:— (i) names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters and such other persons as may be prescribed; (ii) dates of the opening and closing of the issue, and declaration about the issue of allotment letters and refunds within the prescribed time; (iii) a statement by the Board of Directors about the separate bank account where all monies received out of the issue are to be transferred and disclosure of details of all monies including utilised and unutilised monies out of the previous issue in the prescribed manner; (iv) details about underwriting of the issue; (v) consent of the directors, auditors, bankers to the issue, expert‘s opinion, if any, and of such other persons, as may be prescribed; (vi) the authority for the issue and the details of the resolution passed therefor; (vii) procedure and time schedule for allotment and issue of securities; (viii) capital structure of the company in the prescribed manner; (ix) main objects of public offer, terms of the present issue and such other particulars as may be prescribed; (x) main objects and present business of the company and its location, schedule of implementation of the project; (xi) particulars relating to— (A) management perception of risk factors specific to the project; (B) gestation period of the project; (C) extent of progress made in the project; (D) deadlines for completion of the project; and (E) any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company; (xii) minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash; (xiii) details of directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company as may be prescribed; and ( xiv) disclosures in such manner as may be prescribed about sources of promoter‘s contribution; (b) set out the following reports for the purposes of the financial information, namely:— (i) reports by the auditors of the company with respect to its profits and losses and assets and liabilities and such other matters as may be prescribed; (ii) reports relating to profits and losses for each of the five financial years immediately preceding the financial year of the issue of prospectus including such reports of its subsidiaries and in such manner as may be prescribed: Shelf Prospectus 31. Shelf prospectus.— (1) Any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding one year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required. (2) A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus: Provided that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within fifteen days thereof. (3) Where an information memorandum is filed, every time an offer of securities is made under subsection (2), such memorandum together with the shelf prospectus shall be deemed to be a prospectus. Explanation.—For the purposes of this section, the expression "shelf prospectus" means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus. Red herring prospectus 32. Red herring prospectus.— (1) A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus. (2) A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least three days prior to the opening of the subscription list and the offer. (3) A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus. (4) Upon the closing of the offer of securities under this section, the 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 are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board. Explanation.—For the purposes of this section, the expression "red herring prospectus" means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. Abridged, Deemed Punishment Section 26 (9) If a prospectus is issued in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both. Remedies for misrepresentation ★ ★ ★ Damages for deceit fraudulent statements- Derry v Peek- authorised to use steam power in moving tramsCompensation under Section 35 Rescission for misrepresentation Contract shall be rescinded and refunded ○ By affirmation ■ Cannot rescind the contract. ○ By unreasonable delay: Any man who claims to retire from a company on the ground that he was induced to become a member should take action at the earliest. ○ By winding up Shareholder/ Member Sec 2 (55) ―member in relation to a company, means— (i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members; (ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; (iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository; Shareholder ❏ ❏ ❏ ❏ By subscribing to memorandum By allotment By transfer By transmission Share Capital ➢ Share Capital ○ Issued ○ Subscribed ○ Paid up ○ Kinds of Share Capital ○ Equity (ordinary) ○ Preference (preferential) Refer to the definition of Securities Difference between Equity and Preference Shares 1) Rate of Dividend: Preference shares are entitled to a fixed rate of dividend. The rate of dividend on equity shares depends upon (a) the amount of profit available (b) funds requirements of the company for future expansion etc. 2) Preference in Dividend payment: Dividend on the preference shares is paid in preference to the equity shares. The dividend on equity shares is paid only after the preference dividend has been paid. 3) Repayment of Capital: In case of winding up of company, preference share holders get preference over equity share holders as to the payment of capital. 4) Nature of Dividend: Dividend on preference share may be cumulative. It is not in case of equity shares. 5) Voting Right: The voting rights of preference shareholders are restricted. An equity shareholder can vote on all matters affecting the company. 6) Bonus/Right Issue: No bonus shares/right shares are issued to preference share holders while the same are issued to the company’s existing equity shareholders. 7) Redemption: Redeemable preference shares may be redeemed by the company. Equity shares cannot be redeemed except under a scheme involving reduction of capital or buy back of its own shares. 8) Nature of Voting right: the Voting right of a preference shareholders on a poll shall be in proportion to his share in the paid-up preference share capital of the company. In case of an equity shareholder, it shall be in proportion to his share in the paid up equity share capital of the company. Buy-back of shares ➢ 68. Power of company to purchase its own securities.— (1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2), a company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of— (a) its free reserves; (b) the securities premium account; or (c) the proceeds of the issue of any shares or other specified securities: Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. (2) No company shall purchase its own shares or other specified securities under sub-section (1), unless— (a) the buy-back is authorised by its articles; (b) a special resolution has been passed at a general meeting of the company authorising the buyback: Prohibition of buy back ❏ 70. Prohibition for buy-back in certain circumstances.— (1) No company shall directly or indirectly purchase its own shares or other specified securities— (a) through any subsidiary company including its own subsidiary companies; (b) through any investment company or group of investment companies; or (c) if a default, is made by the company, in the repayment of deposits accepted either before or after the commencement of this Act, interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company: Provided that the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist. Debentures Section 71 (1) A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption: Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting. Director ➢ ➢ ➢ ➢ Chapter XI of Companies Act Appointment and Qualification of Directors Section 179 Powers of directors Duties and Liabilities Appointment and Qualification In prescribed class or classes of companies, there should be atleast 1 woman director. (Second Proviso to Section 149(1)) Every Company to have at least one director who has stayed in India for one hundred and eighty-two days or more in the previous calendar year. (Section 149) A company can have a maximum number of 15 directors. However, a company may appoint more than 15 directors by passing a special resolution. No Central Government approval required. Every listed public company shall have at least one-third of the total number of directors as independent directors and Central Government may prescribe the minimum number of independent directors in case of any class or classes of public company. (Section 149(4)) An independent director shall not be entitled to any remuneration, other than sitting fee, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members. The provisions in respect of the tenure and liability of the Independent director have been provided. The Code for Independent Directors provided in a Schedule IV to the Act. The Schedule to the Act provides the following in respect of an Independent Director · Professional Conduct · Role & Functions · Duties · Manner of Appointment · Removal & Resignation · Separate meetings · Evaluation mechanism A databank of Independent directors proposed to be maintained by a body/ institute notified by the Central Government to facilitate appointment of Independent directors. A person cannot become directors in more than 20 companies instead of 15 as provided in the Companies Act 1956 and out of this 20, he cannot be director of more than 10 public companies. For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included. The members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors. A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company. A director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed. A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company. A director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed. Duties 166. Duties of directors.— (1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company. (2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. (3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment. (4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. (5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company. (6) A director of a company shall not assign his office and any assignment so made shall be void. (7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees. Company Meetings and Procedures ➢ Chapter VII ➢ ➢ ➢ ➢ ➢ Management and Administration Section 96 (annual General Meeting) Section 103 (quorum) Section 173 (Board Meetings) Not more than 120 days gap between two Board Meetings A notice of not less than seven days in writing is required to call a board meeting and notice of meeting to all directors shall be given, whether he is in India or outside India by hand delivery or by post or by electronic means. A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting. In case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any. (Section 173) Reconstruction, Merger and Amalgamation ➢ ➢ ➢ Chapter XV Section 232 Section 233 prescribes simplified procedure for Merger or amalgamation of • two or more small companies or • between a holding company and its wholly-owned subsidiary company or • such other class or classes of companies as may be prescribed; REASON OF M&A TERMS · Expansion and Diversification Amalgamation – means combination of two or more independent · Optimum Economic Benefit business corporations into a single enterprise · De-risking Strategy Demerger– means transfer and vesting of an undertaking of a · Scaling up of operation for competitive advantages company into another company · Increase the Market capitalization Reconstruction- means re-organization of share capital in any · Cost reduction by reducing overheads manner; varying the rights of shareholders and/or creditors · Increasing the efficiencies of operations Arrangement- All modes of reorganizing the share capital, including · Tax benefits interference with preferential and other special rights attached to · Access foreign markets shares Winding up ➢ ➢ ➢ Chapter XX Winding Up Section 270 (1) The winding up of a company may be either— (a) by the Tribunal; or (b) voluntary Winding Up ➢ ➢ ➢ ➢ ➢ ➢ ➢ Inability to pay debts Special Resolution Acts against Sovereignty Sick Company Fraudulent conduct of affairs Default in financial statements Just and equitable grounds ○ Deadlock ○ Loss of substratum ○ Losses ○ Oppression of minority ○ Fraudulent purposes ○ Incorporated or qausi partnership ○ Public interest
