Companies Act, 2013: Prospectus and Allotment

• Chapter focuses on the provisions of Chapter III of the Companies Act, 2013, consisting of sections 23 to 42.
• These sections deal with the prospectus and allotment of securities, considering the differences between public and private companies.

Securities Issuance

• Public companies may issue securities through a public offer (sections 23-41), private placement (section 42), or a rights/bonus issue, adhering to relevant Acts and regulations.
• Public offer includes IPO, FPO, or OFS, facilitated by a prospectus.
• Private companies may issue securities via rights/bonus issues or private placement.
• "Securities" are defined as per section 2(81) of the Companies Act and include shares, bonds, derivatives, units of collective investment schemes, etc (as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956).
• The Central Government can declare instruments as securities.

Overseas Listings

• Section 23(3) allows notified public companies to directly list on foreign stock exchanges, issuing notified securities under prescribed conditions.
• Direct overseas listing, unlike ADRs/GDRs, enables domestic companies to enlist on foreign exchanges without intermediaries, reducing transaction costs and increasing transparency.
• The Central Government can exempt certain public companies from complying with specific sections of the Companies Act, including those related to prospectus and share capital.

SEBI Authority

• Securities and Exchange Board of India administers provisions related to issue and transfer of securities and non-payment of dividends by listed companies or those intending to list on recognized Indian stock exchanges.
• Other matters, including those concerning prospectus, allotment returns, and redemption of preference shares, are managed by the Central Government, Tribunal, or Registrar.

Prospectus

• Prospectus encompasses any document described/issued as such, including a red herring prospectus, shelf prospectus, notice, circular, or advertisement inviting public offers for subscription/purchase of securities (as per section 2 (70) of the Act).
• A "deemed prospectus" applies when a company allots/agrees to allot securities with the intention of offering them for sale to the public.
• This includes any document by which the offer is made by subsection 1 of section 25.
• The purpose of deeming provision is to protect gullible investors from various fraudulent practices.
• A company is presumed to intend to offer securities to the public if the securities are offered within six months of allotment, or if full consideration has not been received by the company when the offer is made by subsection 2 of section 25.
• Requirements for a deemed prospectus include additional statements such as the net amount received/to be received and the time/place for inspecting the underlying contract for allotment (as per subsection 3 of section 25).
• Also, the signing has to be done by two directors as per subsection 4 of section 25.
• A single private communication generally does not construe as a prospectus to attract provisions of the act.
• A prospectus should be dated, signed, and contain information and reports on financial data as specified by SEBI.
• It must affirm compliance with the Companies Act, 2013, Securities Contract (Regulation) Act, 1956, and Securities and Exchange Board of India Act, 1992
• These provisions do not apply if the prospectus is issued to existing members/debenture-holders or relates to uniform shares/debentures already traded on a recognized stock exchange.
• According to the explanation of subsection 3 of section 26, the date on the prospectus is considered the publication date.
• A signed copy must be delivered to the Registrar for filing before the prospectus can be issued as per subsection 4.
• This copy must be signed by every director or proposed director in the prospectus.
• According to subsection 5, a prospectus should not include an expert's statement if they were engaged/interested in the company's formation/promotion/management, or if the expert has not provided written consent.
• A prospectus must state that a copy has been delivered for filing to the Registrar and specify documents required for attachment, as specified in subsection 6 of section 26.
• A prospectus remains valid for issue only if 90 days have not passed since the copy was delivered to the Registrar under section 25(4) as per subsection 8.
• Violations of this rule are punishable with a fine.
• A public company can issue securities to the public only by issuing a prospectus or under section 23(1)(a) of the Act.

Contract or Object Variations

• Terms of a contract/objects stated in the prospectus can be varied only with the company's authority via a special resolution in a general meeting, as well as a notice published in newspapers.
• Companies cannot use proceeds from a prospectus for dealing in equity shares of any other listed company.
• Dissenting shareholders are entitled to an exit offer by promoters/controlling shareholders, with the exit price and conditions specified by SEBI.

Share Sales by Members

• Company members may offer their shares to the public with the board's consultation, following existing legal provisions. (Section 28)
• The document for the offer is treated as a company-issued prospectus.
• Members must authorize the company for necessary actions and reimburse all related expenses.
• Certain requirements are waived, including minimum subscription and application value.

Dematerialization of Securities

• Every company offering securities to the public is mandated to issue these in dematerialized form, adhering to the Depositories Act, 1996. (Section 29)
• Unlisted firms face requirements to hold or transfer their securities this way.

Prospectus Advertising

• Advertisements for a company prospectus must detail the contents of its memorandum, including objects, member liability, capital structure, and names of signatories. (Section 30)

Shelf Prospectus

• A "shelf prospectus" allows for the issuance of securities for subscription in one or more issues over a certain period without needing a new prospectus (section 31).
• Shelf prospectuses need only be valid (on the shelf) during their issue

Red Herring and Abridged Prospectus

• A "red herring" prospectus lacks complete details on the quantity/price of securities, allowing for flexibility amidst market changes (section 32).
• The 'Red Herring Prospectus' must be filed with the Registrar of Companies at least three days prior to the opening of the subscription list and the offer.
• An Abridged Prospectus contains salient features of the full prospectus, cutting costs for public offers (section 33).

Prospectus legal requirements (Section 34-37)

• Prospectus must be with scrupulous accuracy
• Omission or commision of this accurate infomation faces criminal and civil liability

Civil and Criminal Implications of Misstatements

• Liability for misstatements in a prospectus can result in civil or criminal actions for the company and involved individuals.
• A prospectus is misleading if it contains any misstatement or omission by section 34
• Remedies are available to shareholders for misrepresentation.
• Claim for compensation under section 35 (civil liability) of this Act (being special statute where jurisdictional power is vested in NCLT) shall not be moved simultaneously with claim for Damages (under general provisions).
• All statements should be true, with the concealed truth causing material missrepresentation.
• Remedies available - Rescission, damages and deceit are available under indian contract law, while criminal law has to account for intent

Misleading Prospectus

• Person punished for the false statement, should be knowledgeable of the statement being of fraud.
• If misstatement can be discounted as innaccurate by material, evidence, or general knowledge can be used to defend position

Prospectus Offenses

• The court may order disgorgement for person guilty of personation, acquisition etc of securities in fictitious names (Section 38).
• In addition the court may order order disgorgement of any gain made by such person. The order may also include seizure and disposal of securities which may be found in his possession. The amount received through disgorgement or disposal of securities under subsection (3), is to be credited to the Investor Education and Protection Fund. [Sub section (4)].
• Fraud is punishable of section 447 of any company with fraudulent intent.

Allotment (Section 39)

• Accepting shares or being involved in the agreement is liable under section 39.
• Must contain minimum subscription amount, failure to do so should refund applicaiton money (with 15% interest)
• Allotments need to be refunded after 30 days + 15 Days from the day of reciept
• Must be to back registered back
• A return of Allotment and List of Allottee should be supplied to register in PAS-4 (After Fees)

Stock Trading (Section 40)

• Needs to file stock trad and aquire permisson for deal.
• all recpirt of funds for allocation must not be utilized for anything else
• Comission on Stock Trade
• Shoud be under 5%
• Article of Association approved

GDR (Section 41)

• instrument in form of a depository receipt, by whatever name called, created by a foreign depository outside India & authorized by a company making an issue of such depository receipts

Private Placement (Section 42)

• Securities have a restriction on private placement being 200 per year. Has to be serially numberd addressed and sericifcally offered in written form.
• Special resonlution should approve placement offer, prior to issue of letter.