Business Environment - Company Prospectus - Notes - Business Management, Study notes of Business Accounting

Download Business Environment - Company Prospectus - Notes - Business Management and more Study notes Business Accounting in PDF only on Docsity! PROSPECTUS AND STATEMENT IN LIEU OF 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 in 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 it satisfies two things: 1. It invites subscriptions to shares or debentures or invites deposits. 2. The aforesaid invitation is made to the public. The Board attends to the following matters: 1. Appointment of various expert agencies such as bankers, auditors, secretary, etc. 2. Entering into underwriting contract, brokerage contracts. 3. Making arrangements for the listing of shares on stock exchanges. 4. Drafting a prospectus for the purpose of issue to the public. UNDERWRITING Underwriting, in its simplest form, consists of an undertaking by some person or persons that if the public fails to take up the issue, he or they will do so. In return for this undertaking, the company agrees to pay the underwriter a commission on all shares or debentures, whether taken up by the public or by he underwriters. SUB-UNDERWRITING The underwriters usually choose to spread their risk by using sub-underwriters who agree to take a certain number of shares for which they accept responsibility and for which they receive a commission out of the commission received by the underwriters. The difference between the commission paid by the company to the principal underwriters and the commission paid by them to the sub-underwriters is known as overriding commission. BROKERAGE CONTRACTS There must be authority in the articles to pay brokerage, and the brokerage must be disclosed in the prospectus, or statement in lieu of prospectus, as the case may be, and it should pay a reasonable brokerage. (Sec. 76) LISTING OF SHARES ON A STOCK EXCHANGE he eligibility criteria for listing of securities of a company are: (i) Minimum issued equity capital of a company should be Rs. 5 crores [Rs. 3 crores where trading is screen-based], and (ii) The minimum public offer of equity capital shall be not less than 25 per cent. Time of Floatation: The Board of Directors will decide about the time of issue of prospectus. It is advisable to consider the condition of the capital market, the investors’ mood, fiscal and monetary policies of the Government and the state of business conditions before issuing a prospectus. Dating of Prospectus: Sec. 55 states that every prospectus must be dated and the date is deemed to be the date of publication of the prospectus. Section 56 of the Companies Act lays down that the matters and reports stated in Schedule II to the Companies Act must be included in a prospectus. Abridged Form of Prospectus: In stead of appending full prospectus, now ‘abridged prospectus’ need only be appended to the application form. Form 2-A has been prescribed as a format of abridged prospectus. statutory meeting, or where no such meeting is to be held, within two months of the allotment. Contravention also renders the company and every director liable to a fine up to Rs. 10,000. LIABILITY FOR UNTRUE STATEMENTS IN THE PROSPECTUS (Sections 62-63): The prospective shareholders are entitled to all true disclosures in the prospectus. The persons issuing the prospectus are bound to state everything accurately and not to omit material facts. What is an untrue statement?: According to Section 65(1) if the statement is misleading in the form and context in which it is included; and where the omission form a prospectus of any matter is calculated to mislead, to be a prospectus in which an untrue statement is included. Civil Liability (Section 62): The following persons shall be liable to pay compensation to every subscriber for loss or damage (1) director of the company at the time of the issue of the prospectus; (2) person who has authorized himself to be named and is named in the prospectus as a director, (3) every promoter of the company; and (4) who has authorized the issue of the prospectus. Remedies against the Company: Any person who, takes shares from the company may 1. rescind the contract to take the shares (2)claim damages. He must, however, take action to rescind the contract: (a) within a reasonable time, (b) before proceedings to wind up the company have commenced, and (c) before he does anything. which is inconsistent with the right to repudiate, e.g., to accept dividends. Remedies against Directors or Promoters: A shareholder who had been induced to take shares may claim : (i) damages for fraudulent misrepresentation’ (ii) compensation under Section 62; (iii) damages for non- compliance with the requirements of Section 56 regarding contents of the prospectus. Damages for Fraudulent Misrepresentation: An allottee of shares may bring an action for deceit, i.e., fraudulent misrepresentation. Compensation for untrue Statement [Sec. 62]: File a suit for compensation under Section 62. A claim can be made, whether the statements are fraudulent or innocent. Remedies against Experts : The allottee of the shares is entitled to claim from the expert: (i) damages, (ii) compensation under Section 62. Liability under Section 56: An omission from a prospectus of a matter required to be stated under Section 56(i.e., as per Sch.II) may give rise to an action for damages at the instance of a subscriber for shares, who has suffered loss. Criminal Liability for Misstatement in Prospectus (Section 63): Every person authorizing its issue is punishable: (i) with imprisonment for a term up to two years, or (ii) with fine up to Rs. 50.000, or (iii) With both imprisonment and fine. Liability under Section 68: Every person authorizing its issue. shall be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend to Rs. 1,00,000 or with both. Golden Rule for framing of Prospectus : The ‘Golden Rule’ for framing of a prospectus was laid down by Justice Kindersely in New Brunswick & Canada Rly. & Land Co. V. Muggeridge (1860). Briefly, the rule is: Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Thus, the persons issuing the prospectus must not include in the prospectus all the relevant particulars specified in Parts I & II of Schedule II of the Act, which are required to be stated compulsorily but should also voluntarily disclose any other information within their knowledge which might in any way affect the decision of the prospective investor to invest in the company.