2 Documents of Company

2.1 General

At the time of formation of a company, its promoters are required

to draft certain documents. Memorandum of Association and
Articles of Association happen to be the most important amongst
them. Some documents of vital significance are also drafted after
the company has been incorporated which include a Prospectus. It
would be worthwhile to know their meaning, contents and
importance to a company.

2.2 Memorandum of Association

2.2.1 Meaning

The Companies Act defines a memorandum as memorandum of

association of a company as originally framed or as altered from
time to time in pursuance of any previous company law or of this
Act.

The above definition does not reveal the contents, true nature of
significance of Memorandum of Association. In simple words, it
may be defined as the constitution or charter of a company. It
contains the fundamental conditions on the basis of which the
company is allowed to be incorporated. It defines the relationship
of the company with the outside world and lays down the basic
objects which the company would try to achieve after
incorporation. The basic purpose of a memorandum is to reveal to
the prospective investors the risk that follows their investment and
to enable the third parties dealing with the company determine
whether their contractual relationship with the company would be
valid.

2.2.2 Printing and Signing of Memorandum

The memorandum shall be

(i) printed
(ii) divided into paragraphs numbered consecutively, and
(iii) signed by each subscriber (who shall add his address,
descritption and occupation, if any), in the presence of a least
one witness who shall attest the signature and shall likewise
add his address, description and occupation, if any.
2.23 Contents of Memorandum

The Memorandum of Association of a company must include the

following paragraphs or clauses, called conditions, besides any
other clause which the company may deem important to be
included:
(i) Name clause
(ii) Registered clause
(iii) Objects clause
(iv) Liability clause
(v) Capital clause.

Every memorandum ends with a declaration pertaining to the

intention of the members to form an association and this is
commonly known as the Subscription or Association clause.

2.2.4 Name Clause

This paragraph states the name of the company. A company being

an entity, must have a name by which it can be referred to and may
be identified. A Company can choose and adopt any name subject
to the following rules:
(i) A company cannot adopt a name which is undesirable in the
opinion of the Central Government. A name which is too
identical with or too closely resembles the name of an
existing company may be deemed to be undesirable by the
Central Government. The phrase too closely resembles
means that the names of two companies are similar enough
to suggest that the two are either same or under the same
group.
(ii) The name of a company should not contain those words and
pictures the use of which has been prohibited under the
Emblems and Names (Prevention of Improper Use) Act, 1950,
e.g., U.N.O., W.H.O., pictorial representation of Mahatma
Gandhi, Prime Minister of India, etc.
(iii) The name of a company must end with the word Limited in
case of a public company and with the words Private
Limited in the case of a private company. The Central
Government may, however, allow a company to drop these
words from its name provided it has been formed for the
promotion of art, science or culture, etc., and it has
prohibited the distribution of the profits among its members.
(iv) Every Company must
 (a) paint or affix the name and address of its registered
office, and keep the same painted or affixed, on the
outside of every office or place in which its business is
carried on, in a conspicuous positon, in letters easily
legible.
(b) Have its name engraved in legible characters on its
seal; and
(c) have the name and address of its registered office
mentioned in legible characters on all business letters,
bill heads, notices and other official publications, bills
of exchange, invoices, etc.

Alteration of Name

(i) A company may change its name by passing a special

resolution and obtaining the approval of the Central
Government. However, no such approval is required where
the only change in the name of a company is the addition
thereto or there from the word Private consequent upon
conversion of a private company into a public company or
vice versa.

(ii) If through inadvertence or otherwise, a company adopts a

name, which is identical with or too closely resembles the
name of any other existing company, it may alter its name
by passing an ordinary resolution and with the previous
approval of the Central Government in writing.
(iii) Where the company has received a direction from the
Central Government to change the name within 12 months
of its adoption, it may do so by passing an ordinary
resolution and the previous approval of the Central
Government. The procedure has to be carried out within a
period of 3 months from the date of the direction or such
longer period as the Central Government may allow.

The change of name by a company does not affect the rights and
obligations of the company, or render defective any legal
proceeding by or against it.

2.2.5 Registered Office or Domicile Clause

The registered office clause states the name of the State in

which the registered office of the company shall situate. Every
company is required to have a registered office from the date on
which it begins to carry on its businessu or within 30 days of the
date on which it is entitled to commence business, whichever is
earlier. The registered office determines the domicile of the
company and the authorities having jurisdiction over it. All
communications and notice in respect of a company are to be
addressed to its registered office.

Change of Registered Office

(i) Where registered office is sought to be shifted from one
locality to another, the Board of Directors should pass a
resolution to this effect; and the notice of change of
registered office should be given to the Registrar of
Companies within 30 days of making the change.
(ii) Where registered office is sought to be shifted from one city
to another but within the same State in which the
registered office is situated, the company should pass a
special resolution to this effect, and the notice of change of
registered office should be given to the Registrar within 30
days of making the change.
(iii) Where registered office is sought to be shifted from one
State to another, the company should pass a special
resolution to this effect and file a copy thereof with the
Registrar of Companies within on months of its date. It
should ensure that the proposed change is required:
(a) To enable it to carry on its business more economically
and more efficiently.
(b) To enable it to attain its main purpose by new or
improved means;
(c) To enable it to enlarge or change the local area of its
operation;
(e) To enable it to carry on some business which under
existing circumstances may conveniently or
advantageously be combined with the objects specified
in the Memorandum;
(f) To enable it to restrict or abandon any of the objects
specified in the Memorandum;
(g) To enable it to sell or dispose of the whole, or any part
of the undertaking, of the company; or
(h) To enable to amalgamate with any other company or
body of persons.

The company should get the proposed alteration confirmed by

the Company Law Board. Before doing so, the said authority
must be satisfied that sufficient notice has been given to all the
creditors whose interest is likely to be adversely affected by
such change. It may insist that the consent of the objecting
creditors has either been obtained or their debts have been
discharged. It may also require that notice of the alteration be
given to Registrar of Companies who would be given an
opportunity to appear before it and state his objectons and
suggestions, if any. The Company Law Board may, then, confirm
the change on such terms and conditions as it may deem fit. A
certified copy of the aforesaid order confirming the change shall
be filed with the Registrar of Companies within three months of
the order who will register the altered memorandum within one
month. The records of the company shall then be transferred to
the Registrar of Companies having jurisdiction over the state
where its registered office is shifted.

2.2.6 Objects Clause

The objects clause of a company highlight the objects for which

has been formed. It stated:

(i) the main objects of the company and objects incidental or

ancillary thereto;

(ii) the other objects of the company; and

(iii) in the case of non-trading companies with objects not

confined to one state, the State of whose territories the
objects extend.

A company can undertake activities only for the attainment of

its objects. Any act which is not within the objects of the
company is beyond its power, i.e., ulta vires. Such an act does
not bind the company and a company cannot ratify it even by
the unanimous consent of all its shareholder. Thus, the objects
clause defines and confines the scope of the activities of the
company.

Alteration of Objects Clause

(i) A company can alter the object clause in its Memorandum

oly for any of the pruposes specified in the Companies Act,
1956 (stated earlier in connection with change of the
registered office from one State to another).

(ii) The company should pass a special resolution in a meeting

of its members, deciding to effect a change in the object
clause. The company must file a copy of the resolution with
the Registrar within one month.
(iii) A printed copy of the altered memorandum must also be
filed with the Registrar.

If the company fails to do so, the alteration becomes void.

2.27 Liability Clause

The liability clause describes the nature of the liability of

members of a company, i.e., whether it is limited by shares or by
guarantee. The Memorandum of Association of a company
limited by guarantee also states that each member undertakes
to contribute to the assets of the company on its winding up,
while he is a member or within one year after he ceases to be
so, such amount as may be required but not exceeding a
specified amount for payment of debts and liabilities of the
company, costs, charges and expenses of winding up and for the
adjustment of the rights of the contributories among
themselves.

Change of Liability Clause

A company can change its memorandum so as to increase the
liability of its members only when they agree to it in writing and
not otherwise. In the case of a non-trading company, however,
the annual or any other periodical subscription amount may be
increased even without the consent of its members.

2.28 Capital Clause

The Memorandum of Association of a company states under

capital clause the amount of share capital with which the
company is to be registered and the division thereof into shares
of fixed amountequity and preference.

Alteration of Capital Clause

A limited company having a share capital may alter its capital
clause only when it authorized by its articles of this effect. This
can be done by passing ar ordinary resolution at its general
meeting and getting the approval of the court to this effect.

2.29 Association Clause

This clause states that the persons subscribing their signatures
to the Memorandum of Association are desirous of forming
themselves into an association in pursuance of the
Memorandum. It shall be signed by at least 7 persons in case of
a public company and by at least 2 persons in case of a private
company. Each subscriber shall state his full name, address,
occupation and shall sign in the presence of a witness who will
attest the signature and give similar particulars about himself. A
subscriber cannot be a witness. Every subscriber is required to
take at least one share in the company and write opposite his
name the number of shares he takes. It may be noted that a
subscriber must be competent to contract that is, he should not
be a minor or a person of unsould mind, etc.

2.2.10 Doctrine of Ultra Vires

The doctrine of ultra vires states that an act which is not stated
in the objects clause of Memorandum of Association or which is
not incidental or ancillary othe attainment of such objects, is
void and does not bind the company.
Any person dealing with the company should ensure beforehand
that the contractual relationship he contemplates with the
company is within its powers. (i.e., intra vires) otherwise, later
on, the courts will not enforce the rights and obligations arising
out of such relationship.
The purpose of the doctrine is to ensure that the investor in a
gold mining company does not find himself holding shares in a
fried fish shop and to give to those who allow credit to a limited
company some assurance that its assets would not be dissipated
in unauthorized enterprises.

Effects of Ultra Vires Transaction

The effects of a transaction which is ultra vires the company
area as follows:
(i) Any member of the company can apply to the Court praying
for issue of an injunction order restraining the company
from proceeding with an ultra vires act.
(ii) Any member of the company may bring an action against
the directors to compel them to restore to the company the
funds that have been spent on ultra vires acts.
(iii) The directors of the company are its agents. Therefore, if
they exceed their authority, i.e., they enter into a
transaction which is ultra vires the company and
consequently, which they cannot do, they will be personally
liable to third parties and will compensate them for losses
accruing to them.
(iv) Where a company acquires certain property for which the
funds of the company have been applied, the company can
 retain such property notwithstanding that such purchase in
ultra vires because it represents corporate capital but in a
different from only.
(v) An ultra vires contract is wholly void and unenforceable in
the Court of Law. It does not bind the company nor the
company can take advantage of any such contract.
(vi) Where the agent of servants of the company, while doing an
act which is ultra vires the company, commit a tort (a civil
wrong), the company shall not be held liable, because it
never authorized the doing of such act expressly or
impliedly.

Can a Company Ratify Ultra Vires Transaction?

An act ultra vires the company, being null and void, is incapable of
ratification even by the unanimous consent of the shareholders.
However, an act ultra vires the Articles can be ratified by the
company by altering its Articles in a manner so as to include the
power of doing such act within it. Similarly, an act which is ultra
vires the directors but intra vires the company, can be ratified by
the majority of the shareholders by passing a resolution.
2.3 Articles of Association

2.3.1 Meaning
Memorandum of Association lays down the objects and powers of a
company. It regulates the relationship of company with the outside
world. It does not legislate about the internal affairs of a company.
This task is taken care of by another important document which is
termed as articles of association. According to the companies Act,
1956, articles means the articles of association of a company as
originally framed or as altered from time to time in pursuance of
any previous company law or of this Act,

The aforesaid statutory definition fails to unfold the contents,

nature or significance of the articles. Simply stated, articles mean
the rules of internal management of a company. They facilitate the
accomplishment of goals as laid down in the Memorandum of
Association. As such, articles are subordinate to the memorandum
and must not contain any thing which contravene, or go beyond,
the provisions of memorandum as well as Companies Act, 1956.

2.3.2 Registration of Articles

Articles of Association, signed by the subscribers of the

memorandum, prescribing the regulations for the company, shall
be registered along with the memorandum in the case of an
unlimited company or a company limited by guarantee or a private
company limited by shares.

In the case of a public company limited by shares, articles of

association may or may not be registered together with the
memorandum. Such a company enjoys the option of adopting all or
any of the regulations contained in Table A appended to the
Companies Act, 1956. In nutshell, such a company may file its own
articles or declare that it would follow Table A, wholly or in part. It
also has to declare whether, in respect of matters on which it does
not frame its own rules, the relevant provisions of Table A would
apply or would remain excluded.

2.3.3 Form and Signature of Articles

Articles shall be
(i) Printed
(ii) divided into paragraphs numbered consecutively; and
(iii) signed by each subscriber of the memorandum of
association (who shall add his address, description and
occupation, if any) in the presence of at least one witness
who shall attest the signature and shall likewise add his
address, description and occupation, it any.

2.3.4 Contents of Articles

Articles of Association, usually, contain the rules relating to calls on

shares, transfer of shares; transmission of shares; forfeiture of
shares; share certificates and share warrants; alteration of share
capital; general meetings; Directors their appointment,
remuneration, qualifications, meetings, etc., Manager; Secretary;
Accounts and Audit; Borrowing powers; Dividends and reserves,
capitalization of profits; and Winding up.

In the case of an unlimited company, the articles shall state the

number of members with which the company is to be registered
and, if the company has a share capital, the amount of share
capital with which the company is to be registered.

In the case of company limited by guarantee, the articles shall

state the number of members with which the company is to be
registered.

In the case of a private company having a share capital, the article

shall contain provisions which:
(i) restrict the right to transfer shares;
(ii) limit the number of members to 50, and
(iii) prohibit and invitation to public to subscribe to its shares or
debentures.

In the case of any other private company, the articles shall contain
provisions relating to the matters specified in the afore said points
(ii) and (iii).

2.3.5 Alteration of Articles

The Companies Act, 1956, provides that a company may alter its
Articles at any time by passing a special resolution. Thus, the law
gives absolute power of alteration of its Articles to a company.
However, the power to alter Articles by a company is subject to
following restrictions:
(i) The alteration of Articles must not contravene the provisions
of the Companies Act, 1956, or the Memorandum of
Association of the company.
(ii) It should not be illegal or opposed to public policy.
(iii) The Articles can be altered by a special resolution only. In no
case they can be altered by an ordinary resolution. Further,
an alteration depriving the company of its right to alter the
Articles in future shall be void.
(iv) An alteration purporting to increase the liability of a member
shall not be binding on him unless agreed to by him in
writing except in case of a club or association where such
alteration provides for subscription or charges at a higher
rate.
(v) Certain provisions cannot be altered except with the approval
of the Central Government, e.g., the conversion of a private
company into a public company.
(vi) The alteration must be made bonafide and for the benefit of
the company as a whole.
(vii) The alteration must not constitute a fraud on the minority
otherwise it will be void being oppressive to them.
(v) Alteration must not cause a breach of contract with third
parties.

2.4 Doctrine of Constructive Notice

At the time of registration of a company, its Memorandum and

Articles are filed with the Registrar of Companies. The office of the
said Registrar is a public office and the documents filed with him
are public documents. Any person can go to his office and inspect
the available documents, of course, subject to the regulations in
this respect and on payment of a nominal amount. The law
presumes that a person dealing with the company would access
these documents, read their contents and understand them
properly before making any contract with the company. The logic
behind such an assumption is that a person purporting to deal with
the company must ensure beforehand that his contractual
relationship with the company would be within its powers and thus,
valid. The law does not provide relief to a person who has suffered
a loss on account of an ultra vires contract made with a company
because he did not care to read the Memorandum and Articles.

2.5 Doctrine of Indoor Management

The doctrine of constructive notice is applicable to matters

connected with public documents available for inspection to the
general public. But, the internal proceedings and several other
documents are neither filed with the Registrar of Companies nor
are made available for inspection by a company. Such documents
are outside the ambit of the doctrine of constructive notice. Even
with respect to public documents, one can only find out whether a
particular act can be validly done by the company. Many a time, the
Memorandum of a company lays down that it can carry out an act
but a particular procedure should be followed. The outsiders
dealing with a company have no means to find out whether such
procedures have been followed. Therefore, the law has laid down
that an outsider dealing with the company is entitled to assume
that the company has complied with the requirements pertaining to
internal proceedings and need not probe into it. This is known as
the doctrine of indoor management.

Exceptions to the Doctrine of Indoor Management

(i) Where a person dealing with a company has actual or
constructive knowledge of the irregularity as regards internal
management, he can not claim the benefit of the doctrine of
indoor management.
(ii) Where a person dealing with the company could have
discovered irregularity provided he had made an enquiry but
which he did not do, such a person cannot avail himself of the
doctrine of indoor management. Sometimes, the
circumstances are such that these arouse suspicion in the
mind of party contracting, it should make enquiry beforehand
to ensure regularity of regulations etc.
(iii) A person cannot take advantage of the doctrine if he has
never read the Articles of Association of the company with
whom he is entering into a contract.
(iv) The doctrine of indoor management does not provide any
relief in those cases where the acts done constitute either
forgery or wich are void ab initio.
(v) Where an officer of the company acts outside his apparent
authority, the company is not bound by his acts.

2.6 Binding effects of Memorandum and Articles

The memorandum and articles shall, when registered, bind the

company and the members thereof to the same extent as if they
respectively had been signed by the company and by each member,
and contained covenants on its and his part of observe all the
provisions of the memorandum and of the articles.

The effects of the above rule may be summed up as under:

(i) Each member is bound to company to comply with the
provisions laid down in Memorandum and Articles. For
example, he must pay calls on shares whenever directors
require him to do so.
(ii) The company is bound to observe the provisions included in
Memorandum and Articles. For example, directors must not
undertak an ultra vires activity.
(iii) The Articles do not constitute any binding contract between
members or company and the outsiders since they are
operative only on insiders and not on the outsiders.
(iv) Articles do not constitute a contract between members
except with respect to their rights and duties as members of
the company.

2.7 Prospectus

2.7.1 Meaning
A company is formed to accomplish certain objectives. This entails,
inter alia, carrying out diverse activities and financing thereof. The
requied finances may be obtained either from personal and private
sources or from the general public According to the provisions of
the Companies Act, 1956, whenever a public company wants to
collect public funds, it is required to issue a document for this
purpose wich is known as a prospectus.

The Companies Act, 1956, defines prospectus as any document

described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting deposits from
the public or offers from the public for the subscription or
purchase of any shares in, or debentures of a body corporate A
prospectus, thus, means a document issued by a company which
seek to invite:
(i) public deposits, or
(ii) offers from the public to subscribe to its shares or
debentures.

It is difficult to point out the exact number of persons that

constitute public. The public is of course a general word. No
particular number is prescribed. Anything from two to infinity may
serve; perhaps even one, if he is intended to be the first of series of
subscribers but makes further proceedings needless by subscribing
the whole. The Companies Act, 1956 provides that an invitation to
public includes any section of the public, whether selected as
members or debenture holders of the company concerned or as
clients of the person issuing the prospectus or in any other
manner. Thus, if an invitation is extended to any section of the
public, however selected it may be, it will be termed as an
invitation to public and the document extending the invitation
shall be a prospectus.
In the following cases, however, the offer cannot be regarded as an
invitation to public:
(i) where it is not being calculated to result, directly or
indirectly, in the shares or debentures becoming available
for subscription or purchases by person other than those
receiving the offer or invitation; or
(ii) where it is a domestic concern of the persons making or
receiving the offer or invitation.

2.7.2 Legal Requirements regarding Prospectus

(i) Must be Dated

A prospectus issued by or on behalf of a company must be dated
and that date, unless the contrary is proved, is taken as the date of
its publication.

(ii) Must be Registered

A prospectus cannot be issued by or on behalf of a company unless,
on or before the date of its publication, a copy of it, signed by every
person named therein as a director, or proposed director of the
company, has been delivered to the Registrar for registration.
The fact of registration must be stated on every prospectus issued
by or on behalf of the company. Further, a company must issue
prospectus to the public within 90 days of its registration.
(iii) Should not include Statement of Experts connected
with Formation or Management
A prospectus must not include a statement purporting to be made
by an expert unless he is a person who is or was not engaged or
interested in the formation or management of the company.
An expert means a person whose profession gives authority to a
statement made by him, e.g., an engineer, a valuer, an accountant,
etc.

(iv) Can be issued after Experts Consent to his Statement

has been obtained
A prospectus including a statement purporting to be made by an
expert shall not be issued unless:
(a) the expert has given his written consent to the issue of the
prospectus with the statement included in the form and
context in which it is intended and has not withdrawn such
consent till registration thereof, and
(b) a statement that he has given and has not withdrawn his
consent as aforesaid appears in the prospectus.

(v) Should accompany Application Form for Shares

A company cannot issue any form of application for shares or

debentures unless the form is accompanied by a copy of
prospectus.

(vi) Must state the Penalty for applying in a Fictitious Name

The following provision shall be prominently reproduced in every

prospectus and every form of application for shares issued by the
company:
Any person who makes in a fictitious name an application to a
company for acquiring or subscribing for any shares therein, shall
be punishable with imprisonment for a period up to 5 years.
(vii) Contents of Prospectus

Every prospectus must state the matters specified and reports set
out in Schedule II to the Companies Act, 1956. The important
contents of the prospectus are as follows:

Part of schedule II

I. General information: (a) Name and address of registered

office of the company (b) Consent of the Central Government
for the present issue and declaration of the Central
 Government about non-responsibility for financial soundness
or correctness of statements (c) Names of Regional Stock Ex-
change and other stock exchanges where application made
for listing of present issue (d) Provisions relating to
punishment of fictitious applications (e) Declaration about
refund of the issue if minimum subscription of 90 per cent is
not received within 90 days from closue of the issue, Date of
opening of the issue, Date of closing of the issue (f) Date of
earliest closing of the issue (g) Name and address of auditors
and lead managers (h) Name and address of trustee under
debenture trust deed (in case of debenture issue) (i) Rating
from CRISIL (Credit Rating information Services of India
Limited) or any rating agency obtained for the proposed
debenture/preference share issue. If no rating has been
obtained, this fact should be stated (j) Underwriting of the
issue (Names and addresses of the underwriters and the
amount underwritten by them).

II. Capital Structure of the Company: (a) Authorized, issued,

subscribed and paid-up capital (b) Size of present issue
giving separately reservation for preferential allotment to
promoters and others (c) Paid-up capital: (i) after the present
issue, (ii) after conversion of debentures (if applicable).

III. Terms of the Present Issue: (a) Terms of payment (b) Rights
of the instrument holders (c) How to apply availability of
forms, prospectus and mode of payment (d) Any special tax
benefits for company and its shareholders.

IV. Particulars of the Issue: (a) Objects (b) Project cost (c) Means
of financing (including contribution of promoters).

V. Company, Management and Project: (a) History and main

objects and present business of the company (b)
Subsidiary(ies) of the company, if any (c) Promoters and their
background (d) Names, addresses and occupations of
manager, managing director and other directors including
nominee-directors, whole-time directors (giving their
directorship in other companies) (e) Location of project (f)
Plant and machinery, technology process, etc (g)
Collaboration agreements (h) Infrastructure facilities for raw
material, water electricity, etc. (i) Schedule of
implementation of the project and progress so far (j) Nature
of product, approach to marketing and export possibilities (k)
Future prospectus expected capacity utilization during the
first 3 years from the date of commencement of production,
and the expected year when the company would be able to
 earn cash profits and net profits, Stock market data for
shares/debentures of the company (high/low price in each of
the last 3 years and monthly high/law during the last 6
months (where applicable)

VI. Particulars in Regard to the Company and other Listed

Companies Under the Same Management which made any
capital issue during the Last 3 year : (a) Name of the
Company (b) Year of the Issue (c) Type of the issue
(Public/Rights/Composite) (d) Amount of Issue (e) Date of
closure of issue (f) Date of completion of delivery of
share/debenture certificates (g) Date of completion of the
project, where object of the issue was financing of the project
(h) Rate of dividend paid.
VII. Outstanding Litigation Pertaining to : (a) Matters likely to
affect operation and finance of the company including
disputed tax liabilities of any nature, and criminal
prosecution launched against the company and the directors
(b) Particulars of default, if any, in meeting statutory dues,
institutional dues, and dues towards debenture-holders, fixed
depositors (c) Any material development after the date of the
latest balance sheet and their likely impact.

VIII. Management Perception of Risk Factors (e.g., sensitivity to

foreign exchange rate fluctuations, difficulty in availability of
raw materials or in marketing of products, cost/time overrun
etc.)

Part II of Schedule II

A. General Information
1. Consent of Directors, Auditors, Solicitors/Adocates,
Manager to Issue, Registrar of Issue, Bankers to the
Company. Bankers to the Issue and Experts.
2. Experts opinion obtained, if any.
3. Change, if any, in directors and auditors during the last 3
years, and reasons thereof.
4. Authority for the issue and details of resolution passed for
the issue.
5. Procedure and time schedule for allotment and issue of
certificates.
6. Name and addresses of the Company Secretary, Legal
Adviser, Lead Managers, Co-Managers, Auditors, Bankers
to the company, Bankers to the issue and Brokers to the
issue.

B. Financial Information
1. Report by the Auditors. A report by the auditors of the
company with respect to (a) its profits and losses
(distinguishing items of non-recurriing nature) and assets
and liabilities; and (b) the rates of dividends paid by the
company during the preceding 5 financial years.

If, however, no accounts have been made up in respect of

any part of the period of 5 yeas ending on a date 3 months
before the issue of the prospectus, the report shall contain
a statement of the fact. If the company has subsidiaries, the
report shall, in addition deal with either the combined
profits and losses and assets and liabilities of its
subsidiaries or each of the subsidiary, so far as they concern
the members of the company.

2. Reports by the Accountants. (a) A report by the accountants

(who shall be qualified under the Act for appointment as
auditor of a company and who shall be named in the
prospectus) on the profits or losses of the business for the
preceding 5 financial years, and on the assets and liabilities
of the business on a date which shall not be more than 120
days before the date of the issue of the prospectus. This
report is required to be given if the proceeds of the issue of
the shares or debentures are to be applied directly in the
purchases of any business.

(b) A similar report on the accounts of a body corporate by

an accountant (who shall be named in the prospectus) if the
proceeds of the issue are to be applied in the purchase of
shares of a body corporate so that body corporate becomes
a subsidiary of the acquiring company.

(c) Principal terms of loans and assets charged as security.

C. Statutory and other Information

(i) Minimum subscription
(ii) Expenses of the issue giving separately fees payable to : (a)
Advisers. (b) Registrars to the issue. (c) Managers to the
issue. (d) Trustees for the debenture-holders.
(iii) Underwriting commission and brokerage.
(iv) Previous issue of cash.
(v) Previous public or rights issue, if any (during last 5 years):
(a) Date of Allotment : Closing Date:
Date of Refunds : Date of listing on the stock exchange:
(b) If the issue is at premium of discount, the amount
thereof.
(c) Premium, if any, on each share which had been issued
within the 2 years preceding the date of the
prospectus.
(vi) Commission or brokerage on previous issue.
(vi) Issue of shares otherwise than for cash.
(vii) Debentures and redeemable preference shares and other
instruments issued by the company outstanding as on the
date of prospectus.
(viii) Option to subscribe.
(ix) Details of purchase of property : If the company proposes to
acquire a business which has been carried on for less than 3
years, the length of time during which the business has been
carried on.
(x) Details of directors, proposed directors, whole-time directors,
their remuneration, appointment and remuneration of
managing directors, interests of directors, their borrowing
powers and qualification shares.
(xi) Rights of members regarding voting, dividend, lien on shares
and the process for modification of such rights and forfeiture
of shares.
(xii) Restrictions, if any, on transfer and transmission of
shares/debentures.
(xiii) Revaluation of assets, if any (during last 5 years).
(xiv) Material contracts and inspection of documents.
2.7.3 Consequences of Mis-statements in Prospectus

The golden rule for framing prospectus may be described as under:

Those who issue 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 on the faith
of the representations therein contained, are bound to state
everything with strict and scrupulous accuracy and not only to
abstain from stating as fact that which is not so, but to omit no one
fact within their knowledge, the existence of which might in any
degree affect the nature of extent and quality of the privileges and
advantages which the prospectus holds as inducement to takes
shares.
Thus, mis-statement includes:
(i) Omission of material facts, and
(ii) Statements which are untrue.
A mis-statement entitles a subscriber of shares of file a suit against

(i) the company, and

(ii) the directors, promoters, experts, etc.

Liability of Company
(i) A subscriber who has purchased shares in the company on
the faith of a prospectus containing mis-statements can
rescind the contract to purchase shares with the company.
He will therefore, surrender the shares to the company and
the company will return his money along with the interest
thereon. He, then ceases to be a member of the company.
But this right can be exercised only if the following
conditions are fulfilled:
(a) There must be omission or misrepresentation of facts in
the prospectus, which is material and can affect the
willingness of a person to purchase shares.
(b) The subscriber was induced to purchase shares on the
faith of the contents of the prospectus.
(c) He must have purchased shares from the company and
not in the open market.
(d) The subscriber should initiate proceedings for
rescission as soon as he comes to know about the mis-
statement in the prospectus. However, it must take
place within a reasonable time and before liquidation of
the company.
(ii) He can sue the company for claiming damages if the mis-
statements amount to fraud. However, damages can be
claimed if:
(a) The prospectus was issued by or on behalf of the
company.
(b) The subscriber has rescinded the contract of shares
with the company.

The right to claim damages can be exercised even if the company

has gone into liquidation.

Liability of Directors, or Rights against Directors

Those who authorize the issue of a prospectus are also liable if it
contains mis-statements. These persons include the directors, the
promoters, experts, etc. The liability of these person is as follows:
(i) Liability for omission of material facts
(ii) Liability for mis-statement of material facts.
(iii) Liability for fraud under General Law.
(iv) Criminal liability

Liability for Omission

If a subscriber suffers any loss because the prospectus does not
contain all the particulars required by the Companies Act, 1956, all
those persons who authorized the issue of prospectus shall be
liable to pay damages to each subscriber at his instance.
But a person can escape liability if he can prove that:
(i) He was ignorant of the omission; or
(ii) The non-disclosure arose from an honest mistake of fact on
his part; or
(iii) The court regards such omission as immaterial and
excusable.

Liability for Mis-statements

Every director, promoter or any other person who authorized the

issue of prospectus containing mis-statements is liable to
compensate the subscribers for any loss sustained by them by
reason of any untrue statement contained in the prospectus. A
statement is deemed to be untrue if it is false in the form and
context in which it is included and an omission which is calculated
to mislead shall also render the prospectus false.
The plaintiff does not have to prove fraud or intent to deceive in
order to claim damages. The measure of damages is the difference
between the value of the shares prevailing in the market on the
date of allotment and the notional value of the shares had the mis-
representations made been true. However, the notional value of a
share shall not exceed the price paid by the subscriber to the
company.

A person can avoid his liability if he can prove that the prospectus
was issued without his consent, or he withdrew his consent and
gave a public notice, or that he gave a public notice on becoming
aware of mis-statement, or that he has reasonable grounds to
believe the statement to be true or it was made on the authority of
some of governments publication or an expert.

Liability under General Law for Fraud

Any person who has been induced to invest money by a fraudulent

statement in the prospectus can recover damages for loss
sustained by him as a result of fraud from person issuing the
prospectus. But the plaintiff has to prove the following points:

(i) There was a fraudulent mis-statement. Fraud is proved

when it can be proved that a false representation has been
made:
(a) knowingly, or
(b) without belief in its truth, or
(c) recklessly, carelessly whether it be false or true.

But if a person makes a statement honestly believing it to be true

he is not guilty of fraud even if the statement is not true.

(ii) Representation related to some existing material facts

which can affect the willingness to purchase shares.
(iii) The allottee must have taken the shares from the company.
A purchaser of shares in the open market has no remedy
against the company or officers of the company even if he
bought shares on the faith of representations made in the
prospectus.
This right of claiming damages is available to the aggrieved party
even if the company goes into liquidation or where he loses his
right to rescind the contract of purchase of shares.

Criminal Liability

Where a prospectus contains untrue statement, ever person

authorizing its issue shall be liable for imprisonment up to 2 years
or fine up to Rs. 5,000 with both.
A person can put forward the following defences in order to avoid
his liability.
(i) That the statement was immaterial; or
(ii) That he had reasonable grounds to believe it to be true till
the time of issue of prospectus.