PROSPECTUS, PROMOTER, SHARE CAPITAL &SHARESCompany Law-III

Prospectuswhat 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 CompaniesProspectus must be issued with in 90 days from registration

Prospectus-cont.3) Contents:

Name and description of director and benefits from their directorshipProfits made by promotersRequired capital, amount receivedCos past financial performanceDetails of contractual obligationsDetails of voting & dividend rates of each class of sharesReport of auditors about assets/ liabilitiesRate 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 companyIf 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 goingAnd takes necessary steps to accomplish the object In Whaley Bridge Calico Printing Co. Vs. Green: it was held that Promoter is a term of businessInvolves a number of business operationsThrough 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 holdersDisclosure 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 contractsIn that case, promoters will be personally liableSecret profits have to be reimbursed to the Co.3. Legal Position of the Promoter:Neither an Agent nor Trustee - fiduciary positionDisclosure of profits made by him

Promoter cont.4. Duties of a Promoter:Not many duties attached, but liabilitiesFor un-true statements as per sections 62, 63 & 542Fiduciary duties:Shall not make un-disclosed profitsSale of own property unless all material facts are completely disclosed5. 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 positionRescinding the Contract or claim damages for breach of duty Retain the property, but cut the profit margin to promoterCo. may also sue him for misfeasance

Promoter cont.6. Liabilities of Promoter:Sec. 56 Prospectus; liability for non-complianceSec. 62 - Untrue statement in the prospectusConsequences:Allotment of shares may be set aside, Promoter may be sued for damagesMay 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 yearsCircumstances of suspension:Offence in connection with promotion/formation ,if fraud is detected at the time of liquidationSec. 63 - Criminal liability for untrue statementCivil 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 immaterialHe believes that statement was trueThe onus of proof lies on the promoter

7. Remuneration of Promoters:

No legal right of remuneration. May be paid through a valid contractOption 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 CapitalCapital-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

Types-explanationAuthorized 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

SharesShare 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 Shares1. 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. Opening of subscription list shares cannot be allotted until the beginning of the 5th day from the date of issue of prospectus.

5. 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 SharesThe company may generally issue 2 kinds of shares.1. Equity shares2. Preference sharesEquity 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 SHARESCumulative preference sharesNon-cumulative preference sharesParticipating preference sharesNon-participating preference sharesRedeemable preference sharesIrredeemable preference shares

Types of shares in detaili) 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 conditionsShare to be redeemed must be fully paid up.Redemption should be carried out only out of such profits as would be otherwise available for dividends. 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 of SharesTransmission of Shares Transfer deed +share certificates or the letter of allotment +verified by Govt official - presented to the company.

executed by both transferor & the transferee

transfer must be registered in the Companys Register

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

Does not require any instrument of transfer to be lodged with the company.

evidence -succession certificate, production of probate or letter of administration is must

Transfer and Transmission of shares

Share certificateEvery 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.

Share certificate Share warrantIt is a registered evidence of title.

It is not a negotiable instrument.

Both Private & Public Company can issue Share Certificate. 1. It is a bearer document of title. 2. It is a negotiable instrument

3. Only Public company can issue Share Warrant. Differences

Share certificate Share warrant4. Issue of it doesn't require 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.

4. Issue of it requires approval of central Government.

5. Holder of it doesn't have has full rights in a company.

6. It is issued in respect of only fully paid shares. Difference cont.

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