Stock Market and Prospectus

Chapter 5 PROSPECTUS DEFINITION [SECTION 2(36)] • Any document inviting deposits from the public for the subscription or purchase of any securities of a body corporate. Following types of documents are prospectus: – ? Any document described or issued as prospectus; including ? any notice, ? circular, ? advertisement or ? other document • Ingredient to constitute a “prospectus” i) There must be an “invitation to the public”; i) The invitation must be made by or on behalf of the company or in relation to an intended company; iii) The invitation must be “to subscribe or purchase “ iv) The invitation must relate to securities or such other instrument. • Invitation to public means An offer or invitation shall be treated as made to the public; keeping in view all circumstances as calculated to result directly or indirectly, it may properly be regarded, the securities of the company become available for subscription or purchase by persons other than those receiving the offer or invitation. The word “calculated” in suggests design, forethought or intention to accomplish a purpose. ] • The test is not who receives the offer but who accepts the offer. CASE EXAMPLES In Pramatha Nath Sanyal Vs Kali Kumar Dutt, an advertisement was inserted in a newspaper stating, “Some shares are still available for sale according to the terms of the prospectus of the company which can be obtained on application”. This was held to be a prospectus as it invited the public to purchase the shares. The prosecution was accordingly launched on the Directors for non-compliance. Public” is a general word, and includes any section of the public. This means that if a document inviting persons to buy shares is issued for example to all advocates or to all doctors, or to all foreigners living in India or to all Indian citizens or to all shareholders in a particular company, it will still be deemed to be issued to the public with in the meaning of the Act (In re: South of England Natural Gas and Petroleum Co. Ltd). In this case, 3000 copies of a document in the form of a prospectus were sent out and distributed among the members of certain gas companies only.

It was held that it was prospectus issued to the public. When prospectus is not required to be issued • The issue of a prospectus is not necessary in the following cases: 1. When shares/debentures are offered to 50 or less persons. 2. When shares or debentures are offered to existing holders of shares or debentures. (Rights Issue) 3. Where a person is bona fide invited to enter into an underwriting agreement. 4. Where shares are not offered to the public e. g. when shares are placed privately.

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EXCLUSIVE AUTHORITY TO SEBI’S TO DEAL WITH MARKET RELATED MATTERS (SECTION 55A) • Section 55A confers power on SEBI to deal exclusively in respect of listed/to be listed companies in the following areas relating to issue and transfer of securities and non-payment of dividend: ? Sections 55 to 84 (other than sections 68A, 77, 77 A, 77B, 79A, 80A) ? Matters relating to prospectus, and other matters relating to issue of shares or debentures; allotment of shares and further issue of capital; public deposits. ? Section 68A – Personation for acquisition etc. of shares. ? Section 77 – Restriction on purchase by company, etc. of its own or holding company’s shares. ? Section 77A – Power of company to buy its own shares. ? Section 77B – Prohibition for buy-back in certain circumstances. ? Section 79A – Issue of sweat equity shares. ? Section 80A – Redemption of irredeemable preference shares etc. ? Sections 108 to 110 – Transfer of shares. ? Section 112 – Certification of transfers. ? Section 113 – Limitation of time for issue of certificates. ? Section 116 – Penalty for personation of shareholder. ? Sections 117 to 122 – Provisions relating to Debentures. ? Sections 206, 206A and 207 – Matters relating to dividends. CONTENTS OF PROSPECTUS [SECTION 56} Every public company issuing a prospectus has to comply with: – ? Companies Act 1956 ? SEBI (Disclosure and Investors Protection) Guidelines 2000 read with SEBI Act 1992. It must be noted that by virtue of powers under the SEBI Act 1992, every company making a public issue has also to get the Prospectus approval/vetted and obtain in-principal approval of the Central Listing Authority and subsequently obtain approval of the Stock Exchange where at the securities are proposed to be listed. • Section 56 mandates that every prospectus shall be as per Schedule II: – ? Part I of Schedule II – the matters specified in and ?

Part II of Schedule II – the reports therein ? Part III of Schedule III – provisions effecting Part I and Part II • SEBI (DIP) Guidelines 2000 also contains provisions, which shall have to be complied with by every company making a public issue. The accountability and responsibility of the Abridged Prospectus is with the SEBI Registered Category I Merchant Banker. • Statements in prospectus should be true, accurate and fair. The Act as well as the SEBI Act 1992 prescribes stringent penal actions on untrue or misrepresentation in the prospectus. • The salient features of such requirements are given below: – Companies Act 1956 |SEBI (DIP) Guidelines 2000 | |Cover page |Cover Pages | | |Front Outer Cover Page | | |The name and address of the registered office of the company, telephone, fax | | number and E. mail address. | | |The nature, number, price and amount of the instruments offered. |No provision |The ‘Risks in relation to the first issue’ | | |‘Issuer’s Absolute Responsibility’ | | |The name and address of the Registrar to the issue | | |Issue Opening Date | | |Credit Rating, if applicable | | |Name/s of stock exchanges where listing of the securities is proposed and the| | |details of in-principle approval for listing obtained from these stock | | |exchanges | | |Front Inside Cover Page | | |Index of the contents | | |Inner Cover Pages | | |The other risk factors | | |Back Cover Pages | | |PART I | |General Information |General Information | |No provision re Disclaimer/Compliance Officer |Disclaimer Clause (from SEBI, Merch.

Banker) | | |Filing of offer document with the Board and RoC | | |Intermediaries and auditors | | |Compliance Officer | |Capital structure of the company |Capital Structure of the company | |Terms of the present issue |Notes to Capital Structure | |No provision re: Promoters` Contribution/lock in period |Promoters’ contribution and lock-in period | | |Details regarding major shareholders | | |Terms of payments | | |Project Cost | | |Means of financing | | |Appraisal | | |History and main objects and present business of the company | |Company management and project |Promoters and their Background | |No provision re Key personnel |Key Managerial Personnel | | |Names, address, occupation of manager, directors (their directorships in | | |other companies) | | |Location of the Project | | Collaboration, any performance guarantee or assistance in marketing by the | | |collaborators | | |Schedule of implementation of the project and progress made so far | | |Future prospects | | |Stock Market Data | | |Management Discussion and Analysis of the Financial Condition and Results of | | |the Operations as Reflected in the Financial Statements. |Management perception of risk factors |Financial of Group Companies | | |Promise vis-a-vis Performance – Issuer Company | | |Listed Ventures of Promoters | | |Basis for Issue Price | | |Outstanding litigations or Defaults | | |Risk factors and management perception | | |Disclosure on Investor Grievances and Redressal System | | |PART II | |PART II |General Information | |General information |Consent of directors, auditors, solicitors/ advocates etc | |Consent of directors, auditors, solicitors/advocates etc |Financial Information |Financial information |A report by the auditors | | |Statutory and other information | |Statutory and other information |Revaluation of assets, if any (during last five years) | | |Material contracts and inspection of documents | |Material contracts and inspection of documents | | ABRIDGED PROSPECTUS [SECTION 56 [3)] Every set of two applications should accompany the memorandum containing salient features of Abridged Prospectus (Form No. 2A). • This memorandum is required to be signed by all the directors who have signed the main prospectus and is not required to be filed with Registrar of Companies. • SEBI (Disclosure and Investor Protection) Guidelines, 2000 prescribes the guidelines for Abridged Prospectus. The accountability and responsibility of the Abridged Prospectus is with the SEBI Registered Category I Merchant Banker. GOLDEN RULE OR GOLDEN LEGACY • The “golden rule “ as to framing a prospectus was laid down by Kindersley VC in New Brunswick etc. Co. Vs.

Muggeridge Those who issue a prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking and inviting them to take shares of the faith of the representationsc therein contained are bound to state every thing with strict an scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one act within their knowledge the existence of which might in any degree affect the nature, or extent or quality of the privilege and advantages which the prospectus holds out as inducements to take shares. The public is at the mercy of company promoters. Everything must, therefore, be stated with strict and scrupulous accuracy.

Nothing should be stated as a fact which is not so and no fact should be omitted, the existence of which might in any degree affect the nature or quality of privileges and advantages which the prospectus holds out as inducement to take shares. In short, the true nature of the company venture should be “disclosed”. If concealment of any material fact has prevented an adequate appreciation of what was stated, it would amount to misrepresentation. Thus, even if every specific statement is literally true, the prospectus may be false if by reason of the suppression of other material facts, it conveys a false impression. OTHER STATUROTY PROVISIONS RELATING TO PROSPECTUS Dating of prospectus [Section 55]

A prospectus issued by or on behalf of a company or in relation to an intended company shall be dated, and the date of publication of the prospectus shall be the date of the prospectus. The expression ‘expert’ includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him Reports/Statements of Experts contained in the Prospectus [Section 57 and 58] • A person whose name appears in the prospectus, as an expert should not be engaged in the formation, promotion or in the management of the company. However, this prohibition does not apply to a professional such as a chartered accountant, company secretary or a solicitor. A statement should also appear in the prospectus itself that the expert has given his consent and has not withdrawn it before the delivery of the copy the prospectus for registration with the Registrar. Penalty for violation of above provisions [Section 59] • If any prospectus is issued in contravention of above provisions, the company, and every person, who is knowingly a party to the issue thereof, shall be punishable with fine, which may extend to five thousand rupees. Registration of prospectus (Section 60) • No prospectus shall be issued unless on or before the date of its publication, it is delivered to the Registrar of Companies for its registration. It must be noted that after insertion of Section 55A, every company making a public issue, has to submit the draft prospectus to the concerned office of SEBI through Merchant Banker.

Upon receipt of the Acknowledgment Card/Observation Letter from SEBI, the company may file the final prospectus with ROC for registration. • Prospectus is to be issued within 90 days after the date on which a copy thereof was delivered for registration to the Registrar of Companies. • For registration, a copy of the prospectus duly signed by every director’ or his authorised agent is required to be given to Registrar along with the following: 1. Consent of expert(s) along with a copy of their Report. 2. Issue price (price band is mentioned in the draft prospectus submitted to SEBI) 3. A copy of every Material Contract and Material Documents. 4. A copy of latest duly audited Annual Report.

The accounts should be made upto a date not later than 6 months from the date of opening of the issue. 5. Consent in writing of auditor, legal adviser, attorney, solicitor, banker, broker, Directors, Compliance Officer, Company Secretary or any other person whose name is mentioned in the prospectus. 6. Observation Letter/Acknowledgment Letter issued by SEBI together with Compliance confirmation letter from Merchant Banker. • The documents submitted to ROC should be signed as true by Company Secretary or Compliance Officer. ROC at the time of registration shall ensure that the company has duly complied with relevant provisions of Companies Act 1956 and SEBI Act 1992. Registration is a condition precedent. A copy of the Prospectus as registered with ROC together with copies of all the documents enclosed thereto is also available for inspection at ROC and the Registered Office of the Company. SHELF PROSPECTUS (SECTION 60A) • ‘Shelf prospectus’ means a prospectus issued by any financial institution or bank (Example – ICICI, IDBI, SBI, Indian Bank) for one or more issues of the securities or class of securities specified in that prospectus. Here the financial institution or bank due to size of the funds requirements is permitted to tap the market in trenches during a period of one year. • 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 (one year).

In its stead, the company is required to file an information memorandum on all material facts relating to new charges created, changes in the financial position as have occurred between the first offer of securities, previous offer of securities and the succeeding offer of securities within such time as may be prescribed by the Central Government, prior to making of a second or subsequent offer of securities under the shelf prospectus. • An information memorandum shall be issued to the public along with shelf prospectus filed at the stage of the first offer of securities and such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus. Where an update of information memorandum is filed every time an offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus. • This procedure helps to reduce the expenses of preparation and issue of prospectus on the part of the issuer and inform the investors’ up-to-date position of the issue work because of updation of information. INFORMATION MEMORANDUM [SECTION 60B) • It 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.

This is done by means of a notice, circular advertisement or document. • A Red herring Prospectus is a prospectus, which does not have complete particulars on the price of securities offered and/or quantum of securities offered. A red-herring prospectus will have to be filed with the Registrar of Companies and must contain all the features of a prospectus as per Schedule II of the Companies Act. All the directors of the company or their constituted attorneys should sign it. • The red-herring prospectus shall also be filed with the SEBI and SEBI’s observations will have to be complied with. The red-herring prospectus should be filed with the ROC at least three days before the opening of the offer. The information memorandum and Red herring prospectus shall carry same obligation as are applicable in the prospectus. GREEN SHOE OPTION • It means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism through a Stabilising Agent. This may be done in accordance with the SEBI DIP Guidelines. TERMS OF CONTRACT MENTIONED IN PROSPECTUS – NOT TO BE VARIED [SECTION 61] The terms of contract mentioned in the prospectus shall not be varied except with the approval of the shareholders in the general meeting. STATEMENT IN LIEU OF PROSPECTUS [SECTION 70] A company having a share capital may file Statement in Lieu of Prospectus (SLP) in the following circumstances: – 1. here it does not issue a prospectus (because it feels that it can raise enough capital without inviting the subscription from the public); or 2. where the company had issued prospectus but does not proceed to allot any of the shares because the issue has a failure and the minimum subscription has not been received. • The SLP shall be filed with the ROC at least 3 days before any allotment of shares of debentures is made. MISSTATEMENTS IN PROSPECTUS [SECTION 62] LIABILITY FOR MISSTATMENTS IN A PROSPECTUS Civil Liability Criminal Liability Against the company Against the PromotersAgainst the Company Against the Promoters, Directors, Other Offs, Experts Directors,OtherOffs, Experts Recession of Claim for

Contract damages Fine upto Rs. 50,000 Damages Compensation Imprisonment Fine Both Upto 2 years PERSONATION FOR ACQUISITION, ETC. , OF SHARES (SECTION 68A) • Any person who – (a)makes in a fictitious name an application to a company for acquiring, or subscribing for, any shares therein, or (b)otherwise induces a company to allot, or register any transfer of, shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years. • Every Prospectus/application form should prominently display this statement.



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