B.com(H/P) | CH-8 Prospectus | Company law | Sem-2nd |Sol Du NEP | Company law |Lesson 8-Prospectus

Introduction to Company Law and Prospectus

Overview of the Topic

The speaker introduces the topic of the video, which is about Company Law, specifically focusing on Chapter 8 concerning "Prospectus."

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Understanding Prospectus

Definition and Purpose

A prospectus is defined as a document that invites public deposits and offers from the public to buy shares and debentures of a company.

It serves as an invitation for potential investors, indicating that a company is seeking investment in its shares or debentures.

Issuance of Prospectus

Only public companies can issue a prospectus; private companies cannot invite public investments through this method.

Public companies may also engage in private placements or rights issues but primarily use prospectuses for broader public offerings.

Characteristics and Functions of Prospectus

Key Features

The prospectus acts as an invitation card for potential investors, similar to how one would invite guests with an invitation card.

It functions as an advertisement tool, informing the public about the company's operations and investment opportunities.

Importance in Investment Decisions

The prospectus contains authentic records about the company's financial health, helping investors assess risks before investing.

Types of Prospectuses

Overview of Prospectuses

The discussion begins with an introduction to the types of prospectuses, stating that there are four main types.

1. Abbreviated Prospectus

The first type mentioned is the Abbreviated Prospectus, which is described as a memorandum issued under Section 33.

It serves as a summary containing all essential features related to the company and its offerings.

This prospectus includes all specified features mandated by SEBI (Securities and Exchange Board of India).

It can be issued alongside any application or report regarding the company's details, making it versatile for various communications.

2. Self Prospectus

The next type discussed is the Self Prospectus, defined under Section 31.

This type is used when a company requires large amounts of capital for significant projects, such as constructing bridges or buildings.

It highlights that funding needs may arise in stages over several years rather than all at once.

Issuing shares repeatedly would incur high costs; thus, companies prefer issuing a Self Prospectus to manage capital requirements efficiently.

Key Features of Self Prospectus

A Self Prospectus allows companies to raise funds in portions through applications and allotments over time.

Validity for this prospectus lasts up to one year if funds are needed within that timeframe.

Information Memorandum

When issuing a Self Prospectus, companies must provide an information memorandum to inform the Registrar of Companies (ROC).

3. Deemed Prospectus

Understanding Prospectuses in Financial Issuance

The Role of Agencies in Issuing Prospectuses

When issuing a prospectus, companies often engage an agency rather than doing it themselves. This agency handles advertising and incurs expenses on behalf of the company.

The agency, referred to as a "deemed house," is authorized by the company to issue the prospectus, making the process easier for the issuer.

Introduction to Red Herring Prospectus

A red herring prospectus serves as a preliminary document that explores demand for shares before actual issuance. It allows companies to gauge interest from potential investors.

Companies may want to raise funds from various sources without discrimination; thus, they need to ensure their prospectus is appealing enough to attract investments.

Purpose and Functionality of Red Herring Prospectus

A red herring prospectus helps assess whether there is sufficient interest in the company's offerings (shares or debentures). If initial responses are poor, adjustments can be made before final issuance.

This type of prospectus acts as a dummy version that precedes the actual one, allowing companies to test market reactions and adjust pricing or details accordingly.

Adjustments Post Red Herring Prospectus

If demand appears low after issuing a red herring prospectus, companies may modify aspects like pricing before releasing the final version.

Any changes made must be communicated clearly in the actual prospectus. Incomplete information must be highlighted for transparency with regulatory bodies.

Legal Requirements for Issuing Prospectuses

Companies must fulfill legal requirements when issuing a prospectus, including notifying relevant authorities about publication dates and registration details.

Key legal elements include specifying when the prospectus will be published and ensuring compliance with regulations set by governing bodies like ROC (Registrar of Companies).

Registration Process for Prospectuses

Before issuing a prospectus, it needs registration with ROC. This involves providing detailed information about its nature and ensuring no illegal activities are associated with it.

Prospectus Issuance Process

Overview of Prospectus Details

The prospectus issued by the company is accurate and contains essential details about the company's operations.

It should include information on the company's directors, managers, and future goals, as well as specifics about the shares being issued.

Enclosures and consent from relevant parties (lawyers, bankers) must be included to validate the accuracy of the provided details.

Registration Requirements

Registration must occur within 90 days after issuing the prospectus; otherwise, it will be considered canceled.

Notification to the Registrar of Companies (ROC) is required within 19 days post-prospectus issuance for compliance.

Failure to register within this timeframe may result in penalties ranging from ₹0 to ₹1 lakh.

Penalties for Non-compliance

Penalties can arise from delays or errors in the prospectus; fines range from ₹50,000 to ₹3 lakh based on severity.

Each error identified in the prospectus incurs a penalty of ₹50,000.

Disclosure Obligations

Full disclosure regarding company details is mandatory under Schedule II of accounting regulations.

The ROC has authority to refuse registration if prescribed dates are not met or if discrepancies exist in submitted information.

Consent Requirements

Consent from auditors and legal advisors is crucial; lack of consent can lead to refusal of prospectus issuance.

Content Requirements for Prospectus

Essential Information Included

The prospectus must list all key personnel including directors and employees involved with detailed roles specified.

Important dates such as opening and closing dates for share applications need clear mention in the document.

Money Transfer and Statement Requirements

Importance of Money Transfer Statements

A clear statement is necessary for money transfers, detailing how public investments will be managed.

The consent of directors is essential; their signatures must be included to validate the process.

Procedures for issuing shares or debentures should be outlined, including whether funds will be collected in one go or through multiple calls.

Objectives and Reporting

The main objective behind issuing shares or debentures must be clearly stated, explaining the necessity for raising funds.

Reports from auditors are required to verify the accuracy of information provided in the prospectus, ensuring transparency.

Legal Compliance and Declarations

Declaration Requirements

Companies must declare that all statements comply with relevant laws such as the Companies Act 2013 and Securities Contracts Act 1956.

Any additional matters important for public knowledge must also be disclosed in the prospectus.

Liability for Misstatements

If there are misstatements in the prospectus, liability issues arise regarding who is responsible for losses incurred by investors due to incorrect information.

Understanding Civil and Criminal Liability

Civil Liability Insights

Investors suffering losses from misleading statements can claim damages; understanding their rights is crucial.

The company may bear responsibility for compensating affected individuals based on inaccurate information presented.

Criminal Liability Considerations

Individuals involved in issuing misleading information may face penalties under criminal law provisions if found guilty of negligence or fraud.

Understanding Company Liabilities and Shareholder Rights

Company Responsibilities and Shareholder Actions

A company can be held accountable for losses incurred by shareholders due to misinformation or fraud. If a shareholder believes they were misled, they have the right to cancel their shares and claim damages.

Shareholders can request refunds for their shares if they feel deceived by the company's information. They also have the option to file a loss claim based on the damages suffered.

Grounds for Cancellation and Claims

If a false statement is found in the company's prospectus that influenced an investment decision, shareholders can either cancel their shares or file a damage claim against the company.

An example is provided where investors may realize that promoters hold most of the shares, leading them to believe they were misinformed about share availability. This realization allows them to take action against the company.

True vs. False Statements

A distinction is made between statements that were true at one time but later became false. Shareholders can claim damages if they invested based on outdated or incorrect information.

Conversely, if a statement was initially false but later became true (e.g., changes in shareholding), shareholders cannot pursue claims based on those statements.

Misperception and Immediate Action

Misleading information from companies can lead to significant investor losses. If shareholders discover they've been deceived, immediate cancellation of shares is necessary to recover funds.

Delaying action until a company faces liquidation limits recovery options; claims must be made before such events occur.

Liability of Directors and Promoters

Investors may seek compensation not only from companies but also from directors, promoters, and experts involved in misleading practices.

If intent to defraud is established during prospectus issuance, liability becomes unlimited for these individuals, allowing investors to reclaim substantial losses.

Criminal Liability Considerations

The discussion shifts towards criminal liability under Section 34 regarding fraudulent activities within companies. Charges may arise against individuals responsible for causing financial harm through deceitful actions.

Legal Consequences and Types of Prospectus

Legal Penalties for Misconduct

A person may face imprisonment ranging from six to ten years if found guilty of causing financial loss, along with a penalty amounting to the loss incurred, which can be up to three times that amount.

Both jail time and monetary penalties can be imposed simultaneously for serious offenses.

Understanding Prospectus

A prospectus is a document issued by companies when they offer debentures or shares, inviting the public to invest in their offerings.

Only public companies can issue a prospectus; private companies are not permitted to do so as they do not invite public investment.

Objectives and Types of Prospectus

The primary objective of a prospectus is to provide comprehensive information about the company’s operations and instill confidence in potential investors.

There are four main types of prospectuses:

Abridged Prospectus: Contains all essential information concisely.

Self Prospectus: Issued when large amounts are needed over time, allowing installment payments within one year.

Deemed Prospectus: Issued by an entity other than the company itself (e.g., an issuing house).

Red Herring Prospectus: A preliminary document used to gauge demand without offering actual securities.

Legal Requirements for Registration

Companies must fulfill specific legal requirements when registering a prospectus, including providing accurate dates and necessary content as mandated by regulatory authorities like SEBI (Securities and Exchange Board of India).

Registration must occur within 90 days, with penalties ranging from ₹500,000 to ₹3 million for non-compliance or inaccuracies.

Disclosure Obligations

The prospectus must disclose all relevant information as outlined in Schedule II, ensuring transparency regarding financial conditions and operational details.

Registrars have the authority to refuse registration if critical conditions such as date omissions or fraudulent intentions are detected.

Content Requirements in a Prospectus

Essential elements include names, dates, underwriter statements, consent from auditors/legal advisors/directors/members, detailed reports on financial performance (profit & loss statements), and declarations fulfilling provisions set forth since 2013.

Liability for Misstatements

If misstatements occur in the prospectus leading to claims against the company or its directors/promoters/experts involved in its preparation, liability may arise.

Understanding Claims and Liabilities in Corporate Fraud

Claim Process and Timing

If a company acknowledges its mistake, immediate claims can be filed for cancellation or compensation. Delaying the claim may complicate the process.

Claims must be submitted before winding up; otherwise, they will not be honored post-winding up.

Director's Liability

Directors can be held liable if their intention was to commit fraud. Their liability is considered unlimited, meaning they could potentially pay any amount related to the claim.

Criminal Liability for Fraud

Individuals committing fraud face criminal liabilities under section 447, with potential imprisonment ranging from a minimum of six years to a maximum of ten years.

Victims of fraud are entitled to compensation equivalent to their losses, with a maximum payout being three times the loss amount.

Conclusion and Engagement

The chapter concludes with an invitation for viewers to like, share, and subscribe for more content related to semester studies.