Introduction:
According to Section 27 of the Companies Act, 2013[1], a company may change the contract clauses mentioned in the prospectus or the targets issued in the prospectus, except only when it is accepted and permitted at the general meeting of the shareholders by a special resolution. The announcement of the resolution of the general meeting of the shareholders will also be published in the newspaper (one in English and the other in the native language) of the place where the company is registered. These notices must clearly state the reason for the changes. Announcements that are notified of the adoption of resolutions due to changes in the terms of any contract mentioned in the prospectus or changes in the objective of the prospectus must be made on Form PAS 1 and the announcements must be sent to shareholders at the same time as the ballots sent by mail. The notice must be placed on the company’s website (if available). And for the shareholders not according to the suggested changes in the prospectus or the matters described in the prospectus, shall, as per the regulations of the Securities and Exchange Board of India (SEBI), be offered an exit offer by the promoters.
As set forth in subsection 70 of Section 2 of the Companies Act,2013[2], a prospectus may be defined as any document described or furnished or any other notice, circulars, announcements or other documents that invite the general public to subscribe for or purchase securities of corporate legal entities. Shelf prospectus in Section 31 and Red herring prospectus in Section 32 of the Act, are also included. For any document to be considered as a prospectus, it should meet the following necessary conditions –
i) document must invite public investment or deposits in shares and debentures;
ii) invitations made to the general public;
iii) invitations made by the corporate firm or on behalf of the corporate firms;
iv) invitations must be related to stocks, bonds and other similar invoices.
Section 26 of the Companies Act, 2013[3], provides for the matter or subjects to be considered in the prospectus with respect to the formation or setting up of a corporate firm. It includes subjects like –
i) names and addresses of the company secretary, financial controller, auditor, legal advisor and of such other personnel of the company’s registered office;
ii) dates of issuance of allotment letters and reimbursement statements;
iii) Board of Director’s statement on the independent bank account containing all the necessary information relating to funds, information such as where will it be transferred, where is it utilized, etc., including the details of the used and unused funds in the previous issuance;
iv) details of issuance and subscription;
v) consent of the directors, auditors, bankers to the release if required;
vi) authority of the issuance of shares and debentures and details of approved resolution;
vii) procedures and calendars for the grant and issuance of securities;
viii) company’s required capital structure;
ix) main subject of public issuance, terms of issuance and other necessary information;
x) company’s main target, current business location and data relating to project implementation;
xi) management’s awareness about the risk factor; project incubation period; degree of progress of the project; deadlines, etc.;
xii) any pending litigation or legal action against the company’s promoters by and Government department in the past five years prior to the issuance of the prospectus;
xiii) information regarding minimum subscription, payable premium and non-cash stock issuance;
xiv) and lastly, detailed information of the directors and disclosure about the sponsor’s source of funding in the manner as prescribed.
Kinds of Prospectus
Deemed Prospectus
As set forth in section 25 of the Companies Act, 2013[4], when a company offers securities to the public for sale, including stocks and bonds, any document for such sale shall be deemed to be a prospectus as under Section 25 of the Companies Act, 2013. Such a prospectus shall be subject to the same liabilities as provided under sub-section 70 of Section 2 of the Companies Act, 2013.
Shelf Prospectus
As per Section 31 of the Companies Act, 2013[5], a prospectus with a shelf life is a document issued by the Securities and Exchange Board of India that regulates companies to issue securities multiple times over a period of time without issuing more prospectuses. . Financial institutions such as banks, insurance companies tend to engage in fundraising activities at a very frequent rate, in order to reduce the repetitive prospecting registration process, the concept of date of Prospectus expiration is given, so that when the prospectus is published, the issuer will only require the issuance of a separate prospectus of any kind for each offering. The retention period prospectus must include a period of validity of the prospectus not exceeding one year. This period runs from the date of opening of the first offer. In between the publication of the shelf life prospectus and the need to raise funds, the company encounters any material changes or material changes that should be communicated to investors, the same should be done through briefing notes.
Red Herring Prospectus
As provided in Section 32 of the Companies Act, 2013[6], a red herring prospectus means a prospectus that does not include the full details of the quantity or price of the securities it contains.
In addition to this, Section 26 of the Companies Act, 2013, provides the provision for filing of a copy with the registrar, delivering such copy to the registrar, registration of the prospectus, issuance of such prospectus, etc.
A corporate firm or its representative before issuing must be sent a copy of the prospectus to the registrar for registration with the statement mentioning documents submitted to the registrar along with the written consent of the members. All the necessary conditions under Section 26 of this Act must be fulfilled, for it to be registered. In order to be legitimate, the prospectus is issued 90 days prior to the date on which the copy was sent to the registrar. Violations can be penalized under Section 9 of this Act, charging the firm with a fine of not less than Rs.50000 extending to Rs.300000 and a person with imprisonment extending to 3 years or with fine of Rs.50000 but not more than Rs.300000.
Variation in Terms of the Contract and Objects Stated in the Prospectus (Section 27)
Section 27 of the Companies Act, 2013[7], talks about the variation in terms of the contract or the objects in the prospectus. It states that a corporate firm shall do not modify the terms and conditions of the contract mentioned in the prospectus at any time unless it is approved by or authorized by the company at the general meeting of the shareholders by means of a special resolution method. Any such change or variation in the terms and conditions can be approved by mail to vote for a special resolution, containing the following details –
i) details of the change of the terms and conditions of the contract;
ii) details of the suggested changes;
iii) reasons for such changes;
iv) impact of such suggested changes in the financial status of the company; and
v) the consequences pertaining to the new objects.
However, according to the regulations, notification details of the shareholders on the resolution, which clearly states the reasons for such changes, must be also published in the newspaper (one in English and the other in native language) near the locality of the firm’s registered office.
Additionally, it also specifies that the company or the corporate firm, must not use any funds raised through the prospectus which might be used for purposes such as buying and trading of shares and debentures and the capital shares of other publicly traded companies.
Furthermore, conflicting shareholders, i.e., those who have not accepted the proposal to change the terms and conditions of the contract or the subject matter in the prospectus, will receive an exit offer from the major shareholders or promoters at an exit price as per the norms and conditions enumerated by Securities and Exchange Board of India (SEBI) by making by-laws or regulations in this behalf.
Conclusion
A prospectus is basically a lawful document issued by a legal entity., inviting the general public to subscribe to its shares and bonds. All listed companies can issue prospectus for shares or dividends, but private firms are not required to do so. Essential requirements must be fulfilled for a prospectus to be considered legitimate. A public company issuing shares through IPO or FPO must submit the prospectus containing all the necessary information and statements for the people investing before buying the company’s shares. Such prospectus, including deemed and shelf prospectus, must contain truthful information, which the company or the firm is aware of. Hiding or omitting relevant facts must incur liability. Companies that have changed the terms of the contract or the objects mentioned in the prospectus, cannot use the money raised through the prospectus to buy or trade or deal in the transaction of shares of another company. Damage, compensation can be claimed by the aggrieved party in case of fraud and falsification resulting in the termination of the contract. According to the previous Companies Act, 1956 only public financial institutions, public sector banks or designated banks were with the primary grant audience were allowed to issue shelf prospectus, but according to the new law of the Companies Act, 2013, the government must regulate the types of companies or firms that can issue a shelf life prospectus.
References:
[1]The Companies Act, 2013, §27
[2]The Companies Act, 2013, §2(70)
[3]The Companies Act, 2013, §26
[4]The Companies Act, 2013, §25
[5]The Companies Act, 2013, §31
[6]The Companies Act, 2013, §32
[7]The Companies Act, 2013, §27
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