Companies Bill 2013 -Impact on Capital Markets Practice

Companies Act 2013

Chapter-III

ICSI Study Circle 24.05.2014 Umesh Ved, PCS, Ahmedabad

Chapter III

Prospectus and Allotment of Securities


Abridged Prospectus

S.2(1) : Abridged Prospectus means a memorandum containing such salient features as may be specified by SEBI.

S.33

Every application form issued for securities in a public offer to be accompanied with an abridged prospectus.

As per Act 1956,

S.2(1) The power to specify the content of the abridged prospectus was vested with the Central Govt.

S.56 Similar requirement of issuance of an abridged prospectus in the form as specified in Form 2A.


Prospectus

Section 2(70) defines a ‘prospectus’ to mean ‘any document described or issued as a prospectus and includes a RHP referred to in Section 32 of the 2013

Act or shelf prospectus referred to in Section 31 of the 2013 Act or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate’.


securities

• Section 2 (81) : “securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act,

1956;


Section 2(h) of the Securities Contracts (Regulation) Act, 1956;

“securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]

(id) units or any other such instrument issued to the investors under any mutual fund scheme;]

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;


Public offer and private placement

Section 23:

• A public company may issue securities through three specified modes:

(a)Public offer(include IPO, FPO, or OFS to the public through a prospectus)

(b) private placement through issue of a private placement offer letter

(Sec.42)

(c) rights issue or bonus issue.

• A private company may issue securities (a) by a rights issue or bonus issue, (b) through a private placement.


Powers of SEBI to regulate issue & transfer of securities

Section 24:

• The administration provisions in relation to the listed (and to be listed) companies are to be administered by SEBI, in so far as they relate to

- issue and transfer of securities &

- non-payment of dividend

Remarks:

• Power of SEBI has been extended


Deemed Prospectus

Section 25 & 28:

• any document by which securities are offered to public for sale, shall be considered as deemed prospectus and all the provisions which apply to Prospectus will apply to the deemed Prospectus.

• Selling shareholders may propose to offer their shares to the public, in consultation with the BOD of the company.

• Procedure for OFS has been prescribed by the CG in

Draft Rules.

• Selling shareholders shall reimburse the expenses incurred by the company in undertaking the OFS.


Prospectus

Section 26:

• Every Prospectus issued by /on behalf of company shall be dated and signed.

• Contents of the prospectus have been listed in the section.

• Source of promoters’ Contribution also needs to be disclosed.

• No prospectus to be issued unless delivered to the Registrar for registration.

• Consent of expert required to be obtained.

• RoC not to register the prospectus unless the requirements of Section

26 are complied with.

• No prospectus shall be valid if it is issued more than 90 days after the date on which a copy thereof is delivered to the RoC for registration.


Rule 3

• The prospectus to be issued shall contain the following particulars, namely: -

• (a) the objects of the issue;

• (b) the purpose for which there is a requirement of funds ;

• (c) the funding plan (means of finance);

• (d) the summary of the project appraisal report (if any);

• (e) the schedule of implementation of the project;

• (f) the interim use of funds, if any


Rule 4. Reports to be set out in the Prospectus

• The reports by the auditors with respect to profits and losses and assets and liabilities.

• The reports relating to profits and losses for each of the five financial years or where five financial years have not expired, for each of the financial year immediately preceding the issue of the prospectus

• The reports made by the auditors in respect of the business of the company


Variation in Objects in Prospectus

Section 27

• If a Co., having raised money from public, has not utilized amount so raised, it shall not change its objects for which such monies were raised unless approved by way of a Special Resolution.

• Details of notice shall be published in the newspapers.

• Dissenting shareholders shall be given an opportunity to exit .

• Money cannot be used for buying of listed shares

As per Act 1956:

• No explicit mechanism for changing use of the proceeds of a public offer.


Rule 7: Proposed special resolution shall contain the following particulars, namely:-

• (a) the original purpose or object of the Issue;

• (b) the total money raised;

• (c) the money utilised for the objects of the company stated in the prospectus;

• (d) the extent of achievement of proposed objects(that is fifty percent, sixty percent, etc);

• (e) the unutilised amount out of the money so raised through prospectus,


• (f) the particulars of the proposed variation in the terms of contracts referred to in the prospectus or objects for which prospectus was issued;

• (g) the reason and justification for seeking variation;

• (h) the proposed time limit within which the proposed varied objects would be achieved;


(i) the clause-wise details as specified in sub-rule

(3) of rule 3 as was required with respect to the originally proposed objects of the issue;

• (j) the risk factors pertaining to the new objects; and

• (k) the other relevant information which is necessary for the members to take an informed decision on the proposed resolution


Public Offer of Securities in Dmat form

Section 29:

• Every Co. making public offer shall issue securities only in Dmat form.

As per Act 1956 Section 68B:

• IPO beyond an issue size of Rs. 10 crores was reqd. to be of securities in dematerialized form.


Rule:

9. Dematerialisation of securities

• The promoters of every public company making a public offer of any convertible securities may hold such securities only in dematerialised form:

• Provided that the entire holding of convertible securities of the company by the promoters held in physical form up to the date of the initial public offer shall be converted into dematerialised form before such offer is made and thereafter such promoter shareholding shall be held in dematerialized form only.


Advertisement of prospectus

Section 30

Any advertisement of a prospectus shall contain contents of the memorandum, liability of members; amount of share capital; names of the signatories to the memorandum; number of shares subscribed for by the signatories

& the company’s capital structure.


Shelf Prospectus

Section 31

• Any class of companies, as prescribed by SEBI, may issue a shelf prospectus which shall be valid for 1 year.

• Company filing a shelf prospectus shall file, with the

ROC an Information Memorandum containing all material facts relating to new changes created.

• The Draft Rules mentions that IM shall be filed with

ROC within 1month prior to the issue of a second or subsequent offer of securities under the shelf prospectus.


Rule : 10. Shelf prospectus and Information

Memorandum.-

The information memorandum shall be prepared in Form PAS-2 and filed with the

Registrar along with the fee as provided in the

Companies (Registration Offices and Fees)

Rules, 2014 within one month prior to the issue of a second or subsequent offer of securities under the shelf prospectus.


Red Herring Prospectus

Section 32

• A company proposing to make an offer of securities

may issue a RHP prior to issue of prospectus. RHP to be filed with ROC at least 3 days prior to issue opening date.

• RHP to carry the same obligations as that of a prospectus.

• Any variations between the RHP and the prospectus to be highlighted as variations in the prospectus.


447. Punishment for fraud

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:


Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.


Explanation.—For the purposes of this

section—

(i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;


(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;

(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.


Criminal liability for mis-statements in prospectus

Section 34

•

Criminal liability for Untrue or Misleading statement

equated with criminal liability of ‘fraud’ (u/s 447) & the liability shall be upon the person who authorizes the issue of prospectus.

* Imprisonment for a term of six months but which may extend to ten years and also liable to fine which shall not be less than the amount involved in the fraud, but which m ay

extend to three times the amount involved .


Companies Act 1956

Section 68 : PENALTY FOR FRAUDULENTLY INDUCING PERSONS

TO INVEST MONEY

Any person who, either by knowingly or recklessly making any statement, promise or forecast which is false, deceptive or misleading, or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into, or to offer to enter into -

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting shares or debentures; or

(b) any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of shares or debentures, or by reference to fluctuations in the value of shares or debentures; shall be punishable with imprisonment for a term which may extend to five years, or with the fine which may extend to ten thousand rupees, or with both.


Civil liability for misstatements in prospectus

Section 35 :

• Civil liability shall be attracted for ‘misleading statements’ on the director, promoter, expert or any other authorized person.

• Remain liable to pay compensation to every person who has sustained such loss or damage.


Fraudulently inducing persons to invest

Section 36:

•

Any person who makes any statement, promise or forcast which is false or misleading induce another person to enter into any agreement

– for acquiring, disposing, subscribing, underwriting shares; or

– for securing profit to any parties from the yield of securities;

– to obtain credit facilities from any bank or financial institution shall be liable under section 447 (Fraud).


Action by affected persons

Section 37

•

Person or group of persons or any association of persons affected by any misleading statements in the prospectus may file a suit or take any other action u/s 34 or 35 or 36.


Punishment for personation for acquisition, etc. of Securities

Section 38:

•

Action u/s 447 (Fraud)

if any person makes application under fictitious name, makes multiple applications in different names or otherwise induces a co. to allot or transfer securities in fictitious name.


Disgorgement

Any person who—

• (a) makes or abets making of an application in a fictitious

name for acquiring, or subscribing for, its securities; or

• (b) makes or abets making of multiple applications in different names or in different combinations of his name or surname; or

• (c) otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name, shall be liable for action under section 447.


The amount received through disgorgement or disposal of securities as above shall be credited to the Investor Education and

Protection Fund.


What is disgorgement?

 The concept of disgorgement is well established and applied in the capital markets worldwide.

 The concept was first defined in the order passed by

SEBI after the Initial Public Offering Scam in 2006.

 The dictionary meaning of the word disgorgement is

“to surrender unwillingly”.


 In the financial market, the word ‘disgorgement’ is used to mean “the repayment of ill-gotten gains made by the wrongdoer”.

 Disgorgement as a remedy for violation of securities law is grounded in equity. Funds that were received through unethical business transactions, such as defrauding creditors or cheating investors, are disgorged, with interest to the investors who were harmed by such illegal transactions.


 Disgorged money can be demanded from the entities/individuals who were directly involved in illegal business activities, who attained profits from such activities as well as the violators of security regulations.

 But disgorgement should not be confused as a civil money penalty. Civil money penalties are punitive in nature but disgorgement is not punitive and it is about paying back profits made from violating the securities regulations.

Generally, individuals and companies violating the securities regulations are required to pay both civil money penalties and disgorgement.

 Disgorgement is a way to distribute the amount received as illegal gains.


Allotment of securities by Company

Section 39:

Allotment of Securities in a public offering cannot be made unless

• Minimum subscription, as stated n the prospectus, is received by cheque or any other instrument.

• Minimum application amount cannot be less than 5% of the face value.

• In case minimum subscription application money is not received within 30 days from the date of the issue of prospectus, application money received must be returned, as prescribed.


Rule :

Whenever a company having a share capital makes any allotment of its securities, the company shall, within thirty days thereafter, file with the Registrar a return of allotment in

Form PAS-3


Securities to be dealt with in stock exchanges

Section 40:

• Every Company making public offer will make application to one or more stock exchange(s) and obtain permission for securities to be dealt with in such stock exchanges.

• All monies received on application from the public for subscription to be kept in a separate bank account in a scheduled bank.


Global Depository Receipt (GDR)

Section 2(44):

GDR means any instrument in the form of a depository receipt, by whatever name called , created by a foreign depository outside India & authorized by a co. making an issue of such depository receipts.

Section 41:

Company may issue depository receipts in any foreign country after passing a special resolution in its general meeting and subject to such conditions as may be prescribed.


Private Placement

Section 42:

• Co. may make private placement of securities through private placement offer letter.

• Private Placement offer can be made to maximum 50 persons or such higher numbers (200 as per draft rules) of persons in FY (excluding QIBs and ESOP)

• Private Placement offer made to more than prescribed number of persons will be treated as public offer.

Private placement means any offer of securities to a select group of persons by a co.

(other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section

.


Private Placement

Section 42:

• No fresh private placement unless allotment in respect of previous private placement has been made.

• All payments under the private placement to be made through banking channel and not by cash.

• Private Placement application money to be kept in a separate bank account in a scheduled bank till allotment.

• Allotment to be made within 60 days. If allotment is not made, the application money to be refunded within 15 days from 60 th day failing which interest to be paid @

12%.


Procedure :

Step 1 : Board Meeting

 Amount to be raised by private placement.

 Appointment of valuer for share price valuation

 To consider names of prospective investors

 Authorizing any director to contact prospective investors

 Approving draft letter to be sent to such prospective investors. Letter to expressly mention that the issue / offer will be subject to approval of members by special resolution and the final terms of issue as approved by the members and letter of offer.

 Fixing date, time and venue for another Board meeting


Step 2 :

 Take letter from proposed Allottee expressing the intention to subscribe

 Procure the Valuation Report


Step 3 :


Step 4 :


Step 5 :

Step 5 :


STEP 6 :

 Receive Application form duly signed and the

Cheque of Subscription amount

 Cheque to be deposited in a separate A/c and copy of cheque to be retained as proof that the money has been received from the account of the Allottee only.


STEP 7 :


Companies Act 2013

Chapter-XXIX


Section 454 : Adjudication of

Penalties :

Appointment :

 The Central Government may, by an order published in the Official

Gazette,

• appoint as many officers of the Central Government, not below the rank of

Registrar, as adjudicating officers for adjudging penalty under the provisions of this Act and

• specify their jurisdiction

 The adjudicating officer may

• by an order impose the penalty on the company and the officer who is in default stating any non-compliance or default under the relevant provision of the Act.

• before imposing any penalty, a reasonable opportunity of being heard to such company and the officer who is in default shall be given


Appeal :

 an appeal to the Regional Director having jurisdiction can be made by person aggrieved

 Every appeal shall be filed within sixty days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person

 shall be in such form, manner and be accompanied by such fees as may be prescribed.

 The Regional Director may, after giving the parties to the appeal an opportunity of being heard, pass such order as he thinks fit, confirming, modifying or setting aside the order appealed against.


Punishment :

 Where company does not pay the penalty imposed by the adjudicating officer or the Regional Director within a period of ninety days from the date of the receipt of the copy of the order, the company shall be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees.

 Where an officer of a company who is in default does not pay the penalty within a period of ninety days from the date of the receipt of the copy of the order, such officer shall be punishable with imprisonment which may extend to six

months or with fine which shall not be less than twenty-five

thousand rupees but which may extend to one lakh rupees,

or with both.



Thank you




Companies Bill 2013 -Impact on Capital Markets Practice

Companies Act 2013

Chapter-III

Chapter III

Prospectus and Allotment of Securities

Abridged Prospectus

Prospectus

securities

Public offer and private placement

Powers of SEBI to regulate issue & transfer of securities

Deemed Prospectus

Prospectus

Rule 3

Variation in Objects in Prospectus

Public Offer of Securities in Dmat form

Advertisement of prospectus

Section 30

Shelf Prospectus

Red Herring Prospectus

447. Punishment for fraud

Explanation.—For the purposes of this

Criminal liability for mis-statements in prospectus

Civil liability for misstatements in prospectus

Fraudulently inducing persons to invest

Action by affected persons

Section 37

•

Punishment for personation for acquisition, etc. of Securities

Section 38:

•

if any person makes application under fictitious name, makes multiple applications in different names or otherwise induces a co. to allot or transfer securities in fictitious name.

Disgorgement

What is disgorgement?

Allotment of securities by Company

Rule :

Securities to be dealt with in stock exchanges

Global Depository Receipt (GDR)

Private Placement

Private Placement

Procedure :

Step 1 : Board Meeting

Step 2 :

Step 3 :

Step 4 :

Step 5 :

Step 5 :

STEP 6 :

STEP 7 :

Companies Act 2013

Chapter-XXIX

Section 454 : Adjudication of

Penalties :

Appeal :

Thank you

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