NAGINDAS KHANDWALA

COLLEGE

SUB: Regulation of securities markets TOPIC: Companies act 1956

GROUP MEMBERS:

TITHI SANGHAVI 533

FENIL SATIYA 534

ABHAY SHAH 535

ANERI SHAH 536

CHARMI SHAH 537

DHRUVI SHAH 538

DISHA SHAH 539

HARSH SHAH 540

Companies ActWhat is a company…?

A company is a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability.

They can be incorporated under the companies act.Corporations enacted under special enactments.Corporate sole.Any other body corporate notified by the central

government.

Features:-

A company is considered as a separate legal entity from its members, which can conduct business with all powers to contract.

Independent corporate entity. It is independent of its members and shareholders.

Limited liability (either by share or guarantee) It can own property, separate from its members. The

property is vested with the company, as it is a body corporate.

The income of the members are different from the income of the company.

Perpetual succession: death of the members is not the death of the company until it is wound up.

As it is a legal entity or a juristic person or artificial person it can sue and be sued.

The company enjoys rights and liabilities which are not as that of the members of the company.

MEMORANDUM OF ASSOCIATION (MOA)

MOA is the First step in formation of the company, MOA is the Charter of the

company. MOA contains the fundamental conditions upon which company can be

incorporated. MOA Contains the objects of company's formation. MOA defines as

well as confines the Powers of the company. MOA is prepared according to the

provisions of companies act, 1956. MOA is printed & divided into paragraphs

numbered serially. Most stable & semi-permanent document of the company.

- DEFINATION:

Sec (28) of companies act, 1956:-

"Memorandum means memorandum of Association of company, as originally

framed and as altered from time to time in pursuance of any previous company

law or this Act"

FEATURES OF MOA

MOA states the nature & scope of business activities. MOA is prepared by

promoters & signed by at least 7 & 2 members in case of public & private company

respectively. Submitted to Registrar of Companies. All companies prepare their

own MOA.MOA defines relationship between the company & outsiders MOA is

almost unalterable document because change is made with great difficulties. MOA

is a public document, hence can be inspected by any individual as & when

necessary. Anything done beyond objects specified in MOA is ultra-vires &

considered null & void.

CONTENTS OF MOA:-

1. The name clause

2. The domicile clause

3. The object clause

4. The liability clause

5. The capital clause

6. The subscription clause

ARTICLES OF ASSOCIATION (AOA)

AOA is the Second important document in the formation of a company. Filed with

the Registrar at the time of registration of the company. Deals with rights of

members of the company. A private company has to prepare AOA compulsorily.

But a public may or may not prepare AOA. The company may adopt 'TABLE A' of

the companies act. AOA is signed by the subscribers of MOA.

- DEFINATION:

Sec 2(2) of companies act, 1956:-

"Article means the articles of association of a company originally framed or as

altered from time to time in pursuance of any previous company law or this act".

FEATURES OF AOA

AOA is subordinate to MOA.AOA defines how the business should be carried on.

AOA allows flexibility to the persons who form the company. AOA is by Governed

by MOA.AOA are the rules & regulations made for internal management of by the

company. AOA deals with the rights of the company.

CONTENTS OF AOA

1. Share capital.

2. Call on shares.

3. Transfer, transmission of shares.

4. Conversion of shares into stock.

5. Share warrants.

6. General meetings.

7. Voting by members.

8 Directors, their qualification shares, appointment, remuneration, etc.

9. Board meetings.

10. Managers, MD's & secretary, their appointment, remuneration, removal etc.

11. Common seal.

12. Dividend & Reserves.

13. Books of A/C's & Audit.

14. Capitalisation of profits.

15. Borrowing power of the company

16. Notices.

17. Winding up.

18. Company investments.

DISCUSS THE PROVISION RELATING TO SHELF PROPECTUS & INFORMATION MEMORANDUM UNDER COMPANIES ACT, 1956

1. Every issuer is required to file a Prospectus with Registrar of Companies before making a public issue. To enable frequent issuers to raise money, without undergoing the procedure for filing Prospectus for every issuance, the concept of Shelf Prospectus was introduced in Companies Act. In FY 2011-12, 7 companies have filed Shelf Prospectus for their debt issuances, while in FY 2012-13, 5 companies have filed Shelf Prospectus.

2. Under Section 60A of the Companies Act, 1956, any public financial institution, public sector bank or scheduled bank, whose main object is financing, was allowed to file a shelf prospectus. As per the said section, company filing a shelf prospectus with the Registrar is not required to file prospectus afresh at every stage of offer of securities, within a period of validity of such shelf prospectus.

3. In this regard, it may be noted that recently Companies Act, 2013 has been enacted and Section 31 of the said Act has been notified. As per the said section, any class or classes of companies, as SEBI may provide by regulations in this behalf, may file a shelf prospectus with the Registrar of Companies. The Shelf Prospectus shall be filed at stage of the first offer of securities. It shall indicate a period of validity, which shall not exceed one year commencing from the date of opening of the first offer of securities under that prospectus. In respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required to be filed.

4. However, a company filing a shelf prospectus is required to file an information memorandum, containing all material facts relating to new charges created, changes in the financial position of the company, and such other changes as may be prescribed by Central Government in this regard, with the Registrar of Companies, prior to subsequent offer of securities under the shelf prospectus. Where an information memorandum is filed, every time an offer of securities is made under such memorandum together with the shelf prospectus shall be deemed to be a prospectus. Ministry

of Corporate Affairs has already placed draft disclosure requirements for information memorandum for public comments. Securities and Exchange Board of India 5. Thus, as per the Section 31 of Companies Act, 2013, SEBI may allow such classes of companies eligible to file a shelf prospectus, by providing the same in its regulations. The matter relating to allowing the frequent issuers to file Shelf Prospectus was taken before the Corporate Bonds & Securitization Advisory Committee.

INFORMATION MEMORANDUM

(1) A public company making an issue of securities may circulate information memorandum to the public prior to filing of a prospectus.

(2) A company inviting subscription by an information memorandum shall be bound to file a prospectus prior to the opening of the subscription lists and the offer as a red-herring prospectus, at least three days before the opening of the offer.

(3) The information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of a prospectus.

(4) Any variation between the information memorandum and the red-herring prospectus shall be highlighted as variations by the issuing company.

Explanation - For the purposes of sub-sections (2), (3) and (4), "red-herring prospectus" means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered.

(5) Every variation as made and highlighted in accordance with sub-section (4) above shall be individually intimated to the persons invited to subscribe to the issue of securities;

(6) In the event of the issuing company or the underwriters to the issue have invited or received advance subscription by way of cash or post-dated cheques or stock-invest, the company or such underwriters or bankers to the issue shall not encash such subscription moneys or post-dated cheques or stock-invest before the date of opening of the issue, without having individually intimated the prospective subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid.

Q. Discuss the provision of the Companies Act, 1956 relating to the Issue of prospectus.

Ans: - The act consists of 13 parts and 14 schedules. The important provision pertaining to Indian capital market/financial market are given below:-

It is relevant to capital market. It relates to a company’s:

Issue of capital Issue of prospectus Allotment and other matter relating to

the issue of shares and debentures.

These section stipulates that misstatements in prospectus is subject to civil liability in terms of compensation to persons aggrieved, who subscribe to the issue in good faith and has sustained a loss.

Prospectus:-

A prospectus means any document described or issued as 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 or debentures of a body corporate.

Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A document shall be called a prospectus if it satisfies two things:

A. It invites subscription to shares or debentures or invites deposits.

B. The aforesaid invitation is made to the public.

What constitutes Invitations to Public?

Invitation to public includes:

Invitation to any of the public howsoever selected provided the invitation is made to all the members of public indiscriminately.

Invitation calculated to be made available even to those who do not receive the same.

Mis statements in prospectus

Untrue statements Statement which create wrong impression Statement which are misleadingOmission of facts

Who are liable for mis-statements in prospectus?

Every person who is-Director of the company at the time of issue of

prospectusPromoters of the companyAny other person who has authorized the issue of the

prospectus

There are two types of consequences of misstatement in a prospectus-

Civil liabilityCriminal liability

Civil liability-

The Act incorporates the provision relating to the civil liability for misstatement in prospectus. It provides very clearly that where a prospectus invites persons to subscribe for shares in or debentures of a company liability accrues to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement included therein. Every person who, becomes liable to make any payment by virtue of such misrepresentation may recover contribution as in cases of contract from any other person who, if sued separately would have been liable to make the same payment unless the former person was and the latter person was not guilty of fraudulent misrepresentation. The measure of damages for the loss suffered by reason of the untrue statement, omission etc. is the difference between the value which the shares would have had but for such statement or omission and the true value of the shares at the time of allotment. In applying the correct measure of damages to be awarded to compensate a person who has been fraudulently induced to purchase shares, the crucial criterion is the difference

between the purchase price and their actual value. It may be appropriate to use the subsequent market price of the shares after the fraud has come to light and the market has settled.

Criminal liability-

The Act incorporates the provision relating to the criminal liability for misstatement in prospectus. It provides that where a prospectus includes any untrue statement, every person who authorized the issue of prospectus shall be punishable with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs 50,000 or with both. The offence is compoundable under Section 621A. It has to be noted that under such cases, once the prosecution establishes the falsity of statement in a prospectus signed by a director, etc., the onus is shifted to the defendant of proving either that the statement was immaterial or that he believed it to be true

Q) What are the important provisions pertaining to the Indian capital markets under the companies act, 1956?

Ans: Companies act 1956, is one of the most important LAW in Indian Corporate Legislature.

It has a far reaching effect on the Indian industry. It was enacted with the Objective of controlling and regulating every conceivable facet of the corporate sector. The Company's Act 1956 was drafted retaining certain section of the earlier act. It was in-cooperated as a whole new spectrum of legislation that would correspondence to independent India's socialistic ideals and policy.

The act consists of 13 parts and fourteen schedules.

The important provision pertaining to Indian capital market/financial market are given below:-

PART 3:-

It is relevant to capital market. It relates to company's:

• Issue of capital.

• Issue of Prospectus.

• Allotment and other matter relating to the issue of shares and debentures.

Section 55 and 58 deals with this matter. These section stipulates that misstatements in prospectus 8s subject to civil liability in terms of compensation to persons aggrieved, who subscribe to the issue in good faith and has sustained a loss.

There are sufficient numbers of provisions to enable the unscrupulous or officers of company evading any regulation and undertaking fraudulent activities. Section 63 relates to the criminal liability for miss presentation in the prospectus. Section 63 relates to penalty for

fraudulently including person to invest money; this section also deals with speculation in shares and debentures in secondary market.

1. Buy - Back of Shares:-

Section 77 of the companies' Act 1956 (amended) provides for the purchases of its own shares by a company. Buyback of shares is legal and common practice in USA. It is done to reward the shareholders. The price paid is usually higher than the market rate which is given as an incentive to shareholders. The company wants to bring down the paid up capital to reduce the dividend servicing the outflow.

2. Insider trading:-

Insiders are those who have an access to the confidential information of the company. By virtue of the position occupied by them in the said company and thereby are in a position to manipulate the share prices to the own advantage with a view to make windfall profits. The action caused wide fluctuations in the prices of the securities and undermining the trust of investors in

capital market. The provision of the act, section 307 and 308 require full disclosures by board of directors of the company, regarding purchase and sale of security by any director, statutory auditor ,cost auditor, financial accountant, cost accountant, tax and management consultant, advisor, solicitors and others who prove to be effective in controlling such trading.

3. Prospectus:-

Prospectus serves as publicly for corporate enterprises to solicit public subscription of capital.

The companies Act 1956 contains elaborated details of these documents. The prospectus usually contains information relating to the proposed offer about the company. Separate prospectus should be drafted upon the issue.

A regular prospectus contains:

(a) Information about the capital structure.

(b) Terms of issue.

(c) Company management and project risk perception.

(d) Promoters contribution, financial information etc.

4. Financial disclosure:-

The company's Act 1956 has a number of norms requiring information disclosure about company’s information on market which sound capital structure is built.

The efficiency of market is greatly determined by the free flow of unbiased and reliable market information. Unfortunately, there is no dearth (shortage) of market information but the quality of reliable information for the investors to make right and timely decisions.

PART 4:-

It relates to the share capital and debentures with regard to type, number, certificate of shares, capital etc.

Dividend Mandate.

The shareholders who desire that their dividends be credited direct to their bank account have to make the request in prescribed form supplied by the company, the

form when duly filled & send to the company is known as “DIVIDEND MANDATE”.

The shareholder fills the form & puts his signature authorizing the company to pay dividends direct to his banker. This form is also used for similar requests for payment of interest or debentures or other types of securities.

Unpaid or Unclaimed dividends.

When a dividend has been declared by the company but has not been paid or claimed within 30 days from the date of declaration to any shareholder entitled to the payment of dividends, the company shall, within the period of seven days from the expiry of said period of 30 days, shall transfer the total amount if dividends which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called as UNPAIS DIVIDEND ACCOUNT.

The company shall within a period of 90 days of making any transfer of any amount to the UNPAID DIVIDEND ACCOUNT, shall prepare a statement containing the

names, their last known address & the amount of unpaid dividend to be paid to each person at least & place it on the website of the company, if any, and also on any other website approved by the central government.

If any default is made in transferring the total amount or any part thereof to the UNPAID DIVIDEND ACCOUNT of the company, it shall pay from the date of default, interest on the amount which has not been transferred (i.e. the remaining amount) to the account at the rate of 12% interest per annum & the interest accruing on such amount shall ensure benefits of the members of the company.

Any money transferred to the unpaid dividend account of the company which remains unpaid or unclaimed for a period of 7 years from the date of transfer shall be transferred by the company along with the accrued interest, if any, shall be transferred in the name of “Investor Education & Protection Fund” or any other such fund and the fund authority shall issue a receipt to the company as an evidence of transfer. Also a detailed document about the fund has to be preserved by the company.

Payment of Unpaid or Unclaimed dividends:

No claim shall lie against the fund or the company in respect of individual amounts which are unclaimed or unpaid for a period of seven years from the dates they just became due payment.

Penalty:

If the company fails to comply with any of the above explained requirements, the company and every officer of the company who is in default shall be punishable with a fine of Rs.5000 for every day during which the failure continues. The fine may also increase if the situation continues for a long time then the fine charged to the COMPANY may range between Rs.500,000 - Rs.25,00,000 & every officer of the company who is in default shall be punishable for the fine not less than Rs.100,000 to an extent of Rs.500,000.

Investor’s education and protection fund

Investor Education and Protection Fund (IEPF) has been set-up under Section 205C of the Companies Act, 1956 by way of the Companies (Amendment) Act, 1999.

As per the Act, the following amounts which have remained unclaimed and unpaid for a period of seven years from the date they became due for payment shall be credited to the IEPF:-

(a) Unpaid dividend accounts of the companies

(b) The application moneys received and due for refund

(c) Matured deposits

(d) Matured debentures

(e) Grants and donations by the Central Govt., State Govt., companies or any other institutions

(f) The interest or other income received out of the investments made from the Fund.

The Fund has been established with a view to support the activities relating to investor education, awareness and protection. Following are the objectives/ activities of the Fund:

A) Educating investors about market operations

B) Equipping investors to analyze information to take informed decisions

C) Making investors aware about market volatilities

D) Empowering the investors by making them aware of their rights and responsibilities under various laws

Major initiatives:-

The various initiatives for increasing the investors’ awareness and education undertaken in the year 2008-09, under the aegis of IEPF were as follows:

1) Series of advertisement on investor education were issued in national as well as regional language newspapers. Through these advertisements, efforts have been made to educate investors for investing in IPOs, market instruments, Mutual Funds etc.

2)Media campaigns were launched in various newspapers, wherein besides the above said educative message, NGOs/VOs involved in investor education and protection activities, especially those with a rural

outreach, were been invited to apply for financial assistance under IEPF schemes. Further, organizations, which were keen to carry out the research on the subjects of investor education/protection, related issues were also invited to submit their proposals to the IEPF.

3) Investor Education message was aired on All India Radio through Prasar Bharati to create awareness on the issues concerning investors and about the IEPF.

4) An “Investor Helpline” www.investorhelpline.in project which had been launched under IEPF through Midas Touch Investors Association to provide a mechanism for redressal of grievances and to create investor awareness has been rendering effective service to the investors. The redressal rate has been around 46 percent.