Company Law-III

PROSPECTUS,
PROMOTER,
SHARE CAPITAL &
SHARES

Prospectus
1) what is
Prospectus is defined as any document described or issued as a
prospectus
and
includes any notice, circular, advertisement or other document
inviting deposits from the public or inviting offers from the public for the
subscription or purchase
of any shares in, or debentures of, a body corporate.
Prospectus must be in writing & it is an invitation to the public

Prospectus-cont.
2) Essentials

Date of publication (S.55)

Signed by director (Proposed director, agent)
Registered with Registrar of Companies
Prospectus must be issued with in 90 days from registration

Prospectus-cont.
3) Contents:
Name and description of director and benefits from their directorship
Profits made by promoters
Required capital, amount received
Cos past financial performance
Details of contractual obligations
Details of voting & dividend rates of each class of shares
Report of auditors about assets/ liabilities
Rate of divided secured declared in preceding 5 years
Experts consent if prospectus includes his statement

Prospectus-cont.
4) What is the advantage
One of the great advantages of promoting a company is that the
necessary capital for business can be raised from the general public by
means of a public issue.
5) Who can issue
However this can be enjoyed only by a public company, which listed
at a recognized stock exchange.

Prospectus-cont.
6) Misrepresentations in prospectus
Golden ruleevery fact must be stated with strict
and scrupulous accuracy. No fact should be omitted which might in
any degree affect the decision of the prospective investors to invest in
the company
If there is any misstatement of a material fact in a prospectus or if the
prospectus is wanting in any material fact, there may arise
i) Civil liability (Section 62)
Rescission of contract
Damages on account of deceit (fraud)
Statutory compensation u/s 62-Director
ii) Criminal liability (Section 63)
Imprisonment -2 years or fine of 5000 Rs or both.

Promoter
1) Who is a promoter-No definition in Companies Act.
Definition
In terms of SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997
- Person/s in control of the co. directly/indirectly
- whether as director or shareholder or otherwise
- Person named as promoter in the offer document

Promoter-cont.
Who is a promoter cont.
Includes-Where the promoter is individual relative of promoter
Any of the following controlled by promoter or relative
Partnership firm (share 50% or >)
Company & HUF
And
Where the promoter is body corporate
Holding or Subsidiary co. of promoter Co.
Any of the following controlled by promoter of such body corporate or his
relative
Partnership firm (share 50% or >)
company & HUF

Promoter cont.
Who is a promoter cont.
Citations defining the term promoter:
In Waycross Vs. Grant it was held that
Promoter is the one who undertakes form a co.
With reference to a given project to set it going
And takes necessary steps to accomplish the object
In Whaley Bridge Calico Printing Co. Vs. Green: it was held that
Promoter is a term of business
Involves a number of business operations
Through which a co. is brought into existence

Promotercont.
2. Promoters contract and ratification thereof:
A fiduciary position, he has to Disclose interest and benefit to the share
holders
Disclosure through Board of directors.
Pre-inc. contracts to be accepted by Co.
Once accepted will be binding on the Co.
Company may refuse to ratify or accept such contracts
In that case, promoters will be personally liable
Secret profits have to be reimbursed to the Co.
3. Legal Position of the Promoter:
Neither an Agent nor Trustee - fiduciary position
Disclosure of profits made by him

Promoter cont.
4. Duties of a Promoter:
Not many duties attached, but liabilities
For un-true statements as per sections 62, 63 & 542
Fiduciary duties:
Shall not make un-disclosed profits
Sale of own property unless all material facts are completely disclosed
5. Remedies available to the co. against Promoter:
Promoter not in fiduciary position
Rescinding the Contract or claim damages for breach of the duty
in fiduciary position
Rescinding the Contract or claim damages for
breach of duty
Retain the property, but cut the profit margin to promoter
Co. may also sue him for misfeasance

Promoter cont.
6. Liabilities of Promoter:
Sec. 56 Prospectus; liability for non-compliance
Sec. 62 - Untrue statement in the prospectus
Consequences:
Allotment of shares may be set aside, Promoter may be sued for damages
May be sued for compensation for mis-repn, Suit by shareholder for loss
suffered, Liable to criminal proceedings
Sec. 203 Court may suspend him for 5 years
Circumstances of suspension:
Offence in connection with promotion/formation ,if fraud is detected at
the time of liquidation
Sec. 63 - Criminal liability for untrue statement
Civil and criminal liability for untrue statement or concealment of
material facts ,Rs. 50,000/- or imprisonment for 2 years or both

Promoter cont.
Grounds of relief:

If the statement was immaterial

He believes that statement was true
The onus of proof lies on the promoter
7. Remuneration of Promoters:
No legal right of remuneration. May be paid through a valid contract
Option for further shares, Purchase of property of promoter, Commission
on the shares sold, A lump sum amount may be paid, may be fixed by AOA

Share Capital
Capital-the specific amount with which business commences
Share Capital-Amount collected upon issued shares
Share capital means the capital raised by a company by the issues of

shares.

Types of Share Capital

Share
capital

Authorized
SC

Issued
SC

Subscribed
Sc

Paid-up
Capital

Reserved
capital

Types-explanation
Authorized SC: nominal value of shares-in MOA, business starts with

this amount.
Issued: capital created by issue of public subscription
Subscribed SC: Total amount subscribed by the public.
Paid-up capital: amount paid or credited
Reserved capital: It is portion of subscribed SC which has not been

called up.

Alteration of SC (S.94(1))
Authorized by Articles of Association alter Memorandum of

Association in general meeting and with in 30 days inform Registrar of

Capital
Increase Share Capital
Consolidate and divide shares into stock
Subdivide shares into smaller amount
Cancel shares that have not been taken

Shares
Share means a share in the share capital of the company.
In India a share is also regarded as goods.
Shares in a company shall be a movable property.
The property in these shares belonged to the registered shareholders

and could not transferred to another except according to the articles of

the company.

Allotment of Shares
1.

Minimum subscription-- When shares are offered to the public the

amount of minimum has to be mentioned in the prospectus.
If Min.sub. has not received within 120 days of issue of
prospectus the money received from the applicants must be repaid
within 10 days without interest.

2. Application Money Shares are not to be allotted unless the

application money ( not less than 5% of nominal value ) has been
received in cash.
3. Statement in lieu of prospectus Where a prospectus has not been
issued ,no allotment shall be made unless at least 3days before a
statement has been filed with the registrar.

Allotment of Shares-cont.
4.

5.

Opening of subscription list shares cannot be allotted until the

beginning of the 5th day from the date of issue of prospectus.
Shares to be dealt in on stock exchange (public company)

Every public company has to make an application

before the issue to any one or more of the recognized stock
exchanges for permission for the shares or debentures to be dealt
with at the exchange.
6. Over subscribed prospectus:
The over subscribed portion of the money must be sent
back to the applicants within eight days from the completion of the
allotment. If not interest not less than 4% and not more than 15%.

Allotment of Shares-cont.
General Principles:
Allotment by proper authority: in the first place an allotment must be

made by a resolution of the board of directors.

Within reasonable time: what is a reasonable time depends on each

case.
Must be communicated : Posting of a properly addressed and stamped

letter of allotment is a sufficient communication.

Absolute and unconditional

Types of Shares
The company may generally issue 2 kinds of shares.
1. Equity shares
2. Preference shares

Equity share means a share with voting rights, & differential rights as
to dividend.

Preference shares means those shares which carry preferential rights

regarding payment of dividend & repayment of capital on winding up.
During the continuance of the company it must be assured of a fixed
preferential dividend(say 50,000 in every year or 5% of nominal
value)
On the winding up of the company it must carry a preferential right
to be paid i.e. the amount paid up on preference share must be paid
back before any thing is paid to the ordinary shareholders.

KINDS OF PREFERENCE SHARES

1.

Cumulative preference shares

2.

Non-cumulative preference shares

3.

Participating preference shares

4.

Non-participating preference shares

5.

Redeemable preference shares

6.

Irredeemable preference shares

Types of shares in detail

i) Cumulative right to claim fixed dividend for past and current years
out of future profits.
ii)

Non-cumulative only from current year profits.

iii) Participating Preference Shares --After fixed amount of dividend has

been paid to the preference shareholders and some amount has by
way of dividend been paid to the ordinary shareholders, there may
be surplus profits which are proposed to be distributed among
shareholders. If preferential shareholders are also entitled to a share
in the surplus they will be known as participating preference
shares.

Types of shares cont.

iv) Redeemable preference shares
if the company has the power to do so in its articles, it may issue
what are called redeemable preference shares. The company can pay
back such shares and this is called redemption of preference shares.
Such shares can be redeemed subject to the following conditions
a) Share to be redeemed must be fully paid up.
b) Redemption should be carried out only out of such profits as would be
otherwise available for dividends.
c) A sum equivalent to the amount paid on redemption shall be
transferred to a reserve fund called capital redemption reserve
account.
v) Irredeemable shares abolished in the year 1980. Redeemable
preference shares cannot now be of longer period than 10 years.

Transfer and Transmission of shares

Transfer of Shares

Transfer deed +share

certificates or the letter of
allotment +verified by Govt
official - presented to the
company.

Transmission of Shares
Passes to a person by operation

of law-death, insolvency,
lunacy of the shareholder or by
acquiring shares by purchase in
a court sale.

executed by both transferor &

Does not require any

transfer must be registered in

evidence -succession certificate,

the transferee

the Companys Register

instrument of transfer to be
lodged with the company.
production of probate or letter
of administration is must

Share certificate
Every member of a company whose name is mentioned in the companys

Register of Members is entitled to receive a share certificate or certificate share.

Share certificates acts as an evidence for the shares of a shareholder in the
company.
The certificates of shares shall bear the company seal, the amount paid, the
name of the shareholder, and must specify the related shares.
It shall also bear the signatures of minimum of two directors and the company
secretary.
Once the company has issued shares in the name of a person, it cannot deny
him the benefits that he is entitled to. Two types of estoppel are created by a
share certificate:
a) as to title -- company actually declares that the person is a shareholder in
the company.
b) as to payment-- it is considered that the amount stated in the certificate has
actually been paid and the same cannot be denied by the company.

Share warrant
A public company may convert its fully paid shares into share
warrants. This requires an authority in the articles and approval of the
Central Government. The Advantage of share warrant is that it can be
transferred by simple delivery of the warrant . Registration of transfer
with the company is not necessary. The name of the member is struck
off the register of members in respect of the shares converted into
warrants. The register should then state the fact of the issue of the
warrant, showing the number of shares included in it, and the date of
issue. The bearer of warrant has subject to the articles the right to
surrender his warrants and to have them converted into shares.

Differences
Share certificate
1.

It is a registered evidence of
title.

Share warrant
1. It is a bearer document of title.
2. It is a negotiable instrument

2.

3.

It is not a negotiable
instrument.
Both Private & Public
Company can issue Share
Certificate.

3. Only Public company can issue

Share Warrant.

Difference cont.
Share certificate

Share warrant

4. Issue of it doesn't require

approval of central Government.

4. Issue of it requires approval of central

Government.

5. Holder of it has full

rights(voting, participation in
management, etc.) in a
company.
6. It is issued in respect of
partly paid or fully paid shares.

5. Holder of it doesn't have has full

rights in a company.

6. It is issued in respect of only fully

paid shares.

31

03/06/15