unit 2 company law - part i
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Companies Act, 1956
Came into force on 1st April 1956
Consists of 658 sections and 12 schedules and
based largely on the recommendations of the
Company Law Committee (Bhabha
Committee)
It was amended several times since 1956;
latest were effected from 2000, 2001 and
2002
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Company
According to Sec 3 (1) A Company formed
and registered under this Act or an existing
company
Existing company means company formed and
registered under any of the previous
Companies Law
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Company - Definition
A Company may be defined as an
incorporated association, which is an artificial
person, having an independent legal entity,
with a perpetual succession, a common seal, a
common stock capital comprised of
transferable shares and carrying limited
liability in relation to its members
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Characteristics of a company
Separate Legal Entity
Perpetual Succession
Limited Liability Common Seal
Transferability of shares
Capacity to sue and be sued Companys actions are limited
Separate property
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Consequences of the principle of
Separate Corporate Personality
Shareholders shall have no insurable interest in theproperty of the company
The persons who own its capital may also be itscreditors or employees
When shareholder dies, company continues to exist.Shares and not assets vest with legal heir
Property of company is not the joint property of itsshareholders
Nationality of company does not depend onnationality of shareholders
Company for its wrong doings can be fined and not
imprisoned
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Kinds of Companies
Chartered Companies Crown in exercise of royal
prerogative has power to create a corporation by
grant of a charter to persons assenting to be
incorporated; powers and nature of business are
defined by charter; Eg. Bank of England, East IndiaCompany
Statutory Companies Companies incorporated by
means of a special Act of Parliament or any StateLegislature; also known as Public Corporations; Eg.
RBI, LIC, FCI, TNEB, TN Housing Board, TN Water
Supply and Drainage Board (TWAD), NHAI, AAI
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Kinds of Companies
Registered Companies Registered under
Companies Act, 1956 and it may be
Companies limited by shares
Companies limited by guarantee
Unlimited Companies
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Registered Companies
Companies limited by shares most common
type; liability of members limited to amount
fixed by memorandum of company in case of
unpaid shares; no liability in case of fully paid
shares
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Registered Companies
Companies limited by Guarantee liability ofmembers is limited to such amounts as they may
undertake as fixed by memorandum to contribute
to assets of company in the event of winding up
Company limited by guarantee may or may not
have share capital
If it has share capital liability is two-fold one to
pay for share amount and two the amount
guaranteed
Eg. Madras Stock Exchange
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Registered Companies
Unlimited Companies liability of members is
not limited; liability extends to whole amount
of the companys debts and liabilities; rateable
contribution from all members
May be converted into a limited company
either limited by shares or limited by
guarantee
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Public Company
It is not a private company and has a
minimum paid-up capital of five lakh rupees
or such higher paid-up capital, as may be
prescribed;
Minimum 7 persons to form; no maximum
limit
Shares of public company are dealt in a stock
exchange
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Distinction between Public and
Private Company
Minimum number of members Public : 7;
Private : 2
Maximum number of members Public : no limit;
Private :50
Commencement of Business - Public : not until
certificate of commencement of business is
granted; Private : immediately after incorporation
Invitation to Public Public : by issuing prospectus
invite public to subscribe its shares / debentures;
Private : cannot do
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Distinction between Public and
Private Company
Transferability of Shares Public : Not
restricted; Private : Restricted
Number of Directors Public : Atleast 3; Private
: Atleast 2
Statutory Meeting Public : Must hold and file a
report with the Registrar; Private : no such
obligations
Managerial remuneration Public : cannot
exceed 11% of net profits and minimum 50,000;
Private : No restrictions
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Distinction between Public and
Private Company
Restrictions on appointment of directors -
Public : Registrar has to consent appointment;
shall sign the Memorandum; cannot vote or
take part in discussion on a contract in whichhe is interested; two-thirds of directors must
retire by rotation; Private : No such
restrictions Further issue of capital Public : must offer
them to existing members; Private : Free to
allot new issues to outsiders
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Conversion of Private Company
into Public Company
Conversion by Choice : by passing a special
resolution; within 30 days of becoming a
public company, it shall file a prospectus with
the Registrar
Conversion by Default : when default made in
complying with the provisions (restriction on
transfer of shares, limitation of the number ofmembers to 50 and prohibition of invitation to
public to buy shares and debentures)
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Conversion of Private Company
into Public Company
Conversion by Operation of Law :
Where it invites public deposits through
advertisement
It holds 25% or more of the paid up share capital
of a public company
It has public company as its shareholders holding
in aggregate 25% or more of its paid up sharecapital
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Conversion of Public Company into
Private Company
Can be converted by altering the Articles of
Association;
Alteration will be made by a special resolution
and approval of the Central Government;
Such resolution, approval of the Central
Government and printed copy of altered
articles has to be submitted to Registrar
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Holding Company & Subsidiary
Company
Holding Company : Company which controls
another Company
Controls composition of board of directors of
another company
Holds more than half of nominal value of equity
share capital of another company
Holds more than half of the total voting power ofanother company
Subsidiary Company : Company which is
controlled by another Company
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Government Company
Company in which not less than 51% share
capital is held by the Central Government, or
State Government or partly by Central and
partly by one or more State Governments
Also includes a company which is a subsidiary
of a Government Company
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Government Company
Special provisions laid in the Act regarding a
Government Company Auditor : appointed by Central Govt. on advice of
Comptroller and Auditor General (CAG) of India
Auditor to submit a copy of audit report to CAG; Auditreport and comments or supplementary report given by
CAG on audit report to be placed before Annual General
Meeting
Annual report on working and affairs of the company to
be prepared and laid before houses of Parliament along
with audit report and comments in case of Central Govt
being a member; in case of State Govt being a member
should be laid before State Legislature
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Government Company
Ownership or Capital : Not less that 51% heldby Central or one or more State Governments
Auditing of Accounts : Audited by auditors
appointed by Government and reportscommented by CAG of India
Annual report : Submitted to Parliament
Modification : Central Government withapproval of Parliament may declare certain
provisions as not applicable with certain
modifications, exceptions and adaptations.
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Foreign Company
Company incorporated outside India and having
a place of business in India
Documents :
Within 30 days of establishment of business, foreign
company shall furnish a certified copy of statute,memorandum and articles containing the
constitution of the company if it is not in English a
certified translation
Full address of registered or principal office
List of directors and secretary of the company
Names and address of any person in India authorized
to accept service of legal processes and notices
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Foreign Company
Accounts : File three copies of its Balance
Sheet and P&L account to Registrar
Names : Every foreign company shall exhibit
on the outside of every office or place of
business its name and country of
incorporation in English
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Incorporation of a Company Application for registration + Documents to be
filed for Registration -> Registrar of Companies ofthe State in which the business office of company
is to be located
Documents
Memorandum of Association
Articles of Association
Statement of authorized capital
Notice of address of registered office of company
List of Directors, their consent and undertaking in writing
signed by each of them
Declaration that all requirements of Companies Act is
complied
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Incorporation of Company
If Registrar is satisfied, he shall register
Memorandum and Articles
Provisions of Act have been complied with
Object of the Company is lawful
Number of persons required under the Act have
subscribed and duly signed
Memorandum and Articles comply with theprovisions of the Act
Name of Company is acceptable
Statutory declaration has been properly made
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Certificate of Incorporation
Registrar will issue Certificate of Incorporation
From the date of incorporation, Company is a
legal person
It is the birth certificate of the company
Private company can commence businessimmediately after receiving certificate of
incorporation
Certificate of Commencement of
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Certificate of Commencement ofBusiness
Also known as Trading Certificate Issued by Registrar after
Shares payable in cash has been allotted to extent of
minimum subscription
Every director has paid in cash the application and
allotment money for shares taken by him
Statutory declaration duly verified by one of the
directors or secretary in prescribed form
Conclusive evidence that the company is entitled
Company is bound to commence business within
a year of its incorporation
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Promoter
One who undertakes to form a company with
reference to a given object and to set it goingand who takes the necessary steps to accomplish
that purpose
Work of Promoters Decide scope of business
Instruct solicitors to prepare necessary documents
and secure the services of directors
Provide registration fees and carry out other duties
involved in formation of a company
Make arrangements for advertising and circulating
prospectus and placing the capital
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Promoter
He is not an agent for the company because
the company is not in existence at that time
Liability of Promoters
Hand over any secret profit
For Untrue statement in prospectus to a person
who has subscribed for shares on faith of it
Remuneration of Promoters
No right against the company for his remuneration
unless there is a contract to that effect
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Preliminary or Pre-Incorporation
Contracts
Contracts made on behalf of a company
before its incorporation
Not binding on the company since a person
(legal or artificial) cannot enter into contract
before his/her existence
Provisional Contracts : Contracts entered after
incorporation but before entitlement to
commence business is also provisional and are
not binding until trading certificate is issued
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Memorandum of Association
Document which sets out the constitution of
the company
Foundation on which the structure of the
company is based
Purpose : To enable the shareholders,
creditors and those who deal with the
company to know what is the permitted range
of activities of the enterprise
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Contents of Memorandum
Name of the Company (with Limited in case
of public company; with Private Limited in
case of private company)
State in which the registered office of the
company is to be situated
Objects of the company classified as main
objects (to be pursued by the company and
objects incidental to attainment of main
objects) and other objects not included in
main
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Contents of Memorandum
Liability of members is limited if company is
limited by shares or by guarantee
Amount of share capital
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Name Clause
A company may be registered with any name
it likes
Central Govt. should approve
Cannot be identical to or resemble the name of
existing company
Must not violate provisions of Emblems and
Names Act 1950. Should contain Limited or Private Limited at
the end of its name
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Name Clause
Company should display its name outside its
registered office and every place where its
carries on business
Engrave it on a seal
Have its name on all business letters, bill
heads, notices and other official publications
of the company
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Registered Office Clause
States the name of the State where the
registered office of the company is situated
Ascertains the domicile and nationality of a
company
Is the place where various registers relating to
the company must be kept and to which all
communications and notice must be sent
Obj t Cl
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Objects Clause
Purpose :
Gives an idea to prospective shareholders the
purposes for which their money will be utilized
Enables the persons dealing with the company to
ascertain its powers Main Objects
Main objects to be pursued by the company on its
incorporation and objects incidental to attainment ofthe main objects
Other Objects
Objects not included in main objects clause
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Liability Clause
States the liability of the members of thecompany
Limited by shares : liable only to the amount
unpaid on the shares taken by him Limited by guarantee : liable to the amount
undertaken to be contributed by them to the
assets of the company in the event of its beingwound up
This Clause is omitted in case of unlimited
companies
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Capital Clause
Company limited by shares must state the
Authorized share capital,
Different kinds of shares and
Nominal value of each share
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Association or Subscription Clause
This clause provides that those who have agreed
to subscribe to the memorandum, must signify
their willingness to associate and form a
company
Atleast 7 persons in case of Public company and
atleast 2 persons in case of Private company are
required to sign the Memorandum in the
presence of atleast one witness who must attestthe signatures
Number of shares taken by the person must be
written against his name
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Alteration of Memorandum
Company shall not alter its memorandum
except in certain cases
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Alteration in Memorandum
Company doesnt have right to alter the
contents
Change of Name
Pass a special resolution
Obtain approval of Central Government in writing
No such approval is required for deleting or
including the word Private in converting a publiccompany to a private company and vice versa.
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Alteration in Memorandum
Change of Registered Office
Notice of change to be given to Registrar within 30
days of such change (If change is within the same
city or town) Pass a special resolution and only after
confirmation from Company Law Board on
petition. Notice of such change to be given to
Registrar within 30 days of the change
These 2 changes does not involve alteration of
Memorandum
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Alteration in Memorandum
Change in Objects Clause
Change is possible only if it enables
To carry on business more economically and efficiently
Attain main object by new or improved means
Enlarge or change local area of operation
Restrict or abandon any of the objects specified in the
memorandum
Sell or dispose the whole or any part of the undertaking
of the company
Amalgamate with any other company
Al i i M d
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Alteration in Memorandum
Change in Objects Clause
Pass a special resolution, sanctioning the alteration
Copy shall be filed with the Registrar within 30 days of
passing
But it takes effect only after confirmation by theCompany Law Board (CLB) on petition
Before confirming CLB sees that notice has been given
to all interested persons; It may confirm either wholly
or in part or with some terms and conditions
A certified copy of the order of CLB together with
printed copy of altered memorandum must be filed to
Registrar within 3 months of order
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Alteration in Memorandum
Change in Liability Clause
Cannot be altered to make the liability unlimited
But enhancing of liability if agreed by members in
writing can be changed
A company, if authorized by its articles can by
special memorandum to make liability of directors
or managers unlimited, but it holds good forfuture appointed directors or managers only
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Alteration in Memorandum
Change of Capital Clause
Can alter subject to provisions of the Articles by a
resolution in general meeting.
Confirmation from court is not required if Change is to increase share capital
Consolidate shares into larger amount
Subdivide shares to smaller amount
Cancel its shares
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Doctrine of Ultra Vires
An act is said to be ultra-vires (beyond the
powers) when it is performed but not
authorized by the Objects Clause in
Memorandum of Association
Such an act is void and cannot be ratifiedeven
by an unanimous resolution of all the share
holders.
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Effects of Ultra-Vires Acts
Company is not bound by and cannot enforce anultra-vires contract
Injunction : Company maybe restrained to do anact if it is ultra-vires of its objects
Subrogation : If the borrowed money is applied inpaying off lawful debts of the company, thelender can claim a right of subrogation andconsequently, he will stand in the shoes of the
creditor who has paid off with his money and cansue the company to the extent the moneyadvanced by him has been so applied
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Effects of Ultra-Vires Acts
Tracing Order : Lender can identify his money orother property purchased with it, he is entitled towhat is known as a tracing order and can recover.
Personal Liability of Directors : Lender can hold the
directors personally liable for an ultra-vires loan ofthe company
Ultra-vires contract cannot become intra-vires byreason of estoppel, lapse of time, ratification ordelay.
Company will be liable for torts or crimescommitted in the pursuit of its stated objectives.
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Articles of Association
The Articles of Association are the rules andregulations of a Company framed for thepurpose of internal management of its affairs
and for carrying out the aims and objects of theMemorandum of Association.
It deals with the rights of the members of theCompany
Articles of Association of a Company aresubordinate to and are controlled by theMemorandum of Association.
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Articles of Association
Not Obligatory to register Articles in case of aPublic Company Limited by Shares (Model Articlescontained in Table A of Schedule 1 of the Act willapply)
Unlimited Company, Limited by Guarantee andPrivate Company must register along withMemorandum
Unlimited Company : Number of Members, Share
Capital, amount with which it is to be registered Company Limited by Guarantee : Number of
members with which the company is to beregistered
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Articles of Association (Contents)
Exclusion wholly or in partof Table A
Adoption of preliminarycontracts
Number and value ofshares
Calls on shares
Lien on shares
Transfer and Transmissionof shares
Forfeiture of shares
Alteration of share capital
Share certificates
Conversion of share intostock
Voting rights and proxies
Rules of conductingMeetings
Directors, their
appointment, etc. Borrowing powers
Accounts and Audit
Dividends and Reserves
Winding up
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Difference between share and stock
A share in a company in one of the units into which thecapital is divided. On the other hand, a stock is anaggregate of fully paid shares of a member merged intoone fund of equal value. This fund can be divided intofractions of any amount and can be transferred. Only acompany limited by shares may, if authorized by Articlesby resolution passed in general meeting, convert all or anyof its fully paid up shares into stock.
Also a share can be transferred only in its entirely or in itsmultiple only. However a stock may be transferred in anyfraction. Shares are issued originally by the co. However aco cannot make an original issue of stock. Only fully paidshares can be converted into stock
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Alteration of Articles
Companies have wide powers to alter their
Articles
Can be altered by passing a special resolution
Is binding on the members the same way as
the original Articles
Must file with the Registrar a copy of special
resolution within 1 month from the date of
passing
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Alteration of Articles
Limitations for alteration of Articles
Must not exceed powers of Memorandum
Must not be inconsistent with any provisions of
Companies Act or Memorandum or an order ofthe Court
Must not be illegal
Any irregular alterations which have been madeand acted upon for many years are binding
Distinction between Memorandum(M)
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Distinction between Memorandum(M)
and Articles (A)
Contents and Scope : Defines the charter ofthe company and the scope of its activities(M); Regulates the internal management of
the company and rules made for carrying outthe objects set out in Memorandum (A)
Relationship between company, members andoutsiders : M defines relation of company with
outside world; A deals with the rights of themembers of the company and established therelationship of company with the members
Distinction between Memorandum(M)
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Distinction between Memorandum(M)
and Articles (A)
Alteration : Cannot be altered except in mannerand extent provided by the Act (M); Can bealtered by a special resolution as these are just
bye-laws (A) Supremacy : Memorandum is supreme
document of the Company; Articles aresubordinate to Memorandum
Adoption : Every Company must have its ownMemorandum; But a company limited by sharesneed not register its Articles. Table A applies
Constructive Notice of Memorandum
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Constructive Notice of Memorandum
and Articles of Association
Registering Memorandum and Articles of
Association with the Registrar of Companies
makes the documents as public documents
and everyone dealing with the companywhether share holder or outsider is presumed
to have read the two documents. This deemed
knowledge of the two documents and theircontents is known as the constructive notice
of Memorandum and Articles of Association.
Doctrine of Indoor Management
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Doctrine of Indoor Management Exception to the rule of Constructive Notice. Also
known as Turquand Rule
Constructive notice protects the company against
Outsiders; Doctrine of Indoor Management protects
the outsiders against the company.
While persons are contracting with the company
are presumed to know the provisions of the
contents of the Memorandum and Articles, they are
entitled to assume that the officers of the company
have observed the provisions of the Articles. It is no
part of duty of outsider to see that the company
carries out its own internal regulations
Exceptions to Doctrine of Indoor
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Exceptions to Doctrine of Indoor
Management
Knowledge of irregularity : A person who deals
with the company and has knowledge in its
internal management cannot claim
Negligence : In circumstances under which hewould have discovered the irregularity had he
made proper inquiries.
In cases of Forgery
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Prospectus - Definition
Any document described or issued as a
Prospectus and includes any notice, circular,
advertisement or other document inviting
deposits from the public or inviting offer fromthe public for the subscription or purchase of
any shares in, or debentures of, a body
corporate. Sec 2 (36)
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Formalities in issuing a Prospectus
Prospectus is issued by or on behalf of a
company; must be dated; that date is the date
of publication
A copy of Prospectus signed by every directoror proposed director or by his agent must be
delivered to the Registrar on or before the
date of publication. Prospectus issued topublic should have mention that a copy has
been filed with the Registrar.
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Formalities in issuing a Prospectus
SEBIs consent or authorization
Every Application form for subscription should
be accompanied by Prospectus
Prospectus must contain the necessary
information for the public to decide whether
to subscribe or not
Contents of Prospectus
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Contents of Prospectus
General information
Name and Address of Registered Office
Details of letter of intent or Industrial License
Name of stock exchanges listed for issue
Provisions of Sec 68 A (1) of Companies Act regardingfictitious applications
Declaration regarding minimum subscription and
refund of application money
Dates of opening, closing and earliest closing of the
issue
Names and Addresses of managers, trustees, legal
advisors, auditors, bankers to the issue and secretary
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Contents of Prospectus
Capital Structure of the company and issue
details
Authorized, issued, subscribed and paid-up capital
of the company Reservation for preferential allotment to
promoters, financial institutions and mutual funds
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Contents of Prospectus
Details of the issue Authority for the issue and details of resolutions
passed for the issue
Terms of payment Rights of Instrument holders
Object of the issue
Tax benefits available to the company and its
shareholders
Justification for the premium on the issue, if any,
disclosure of net asset value on the basis of the last
audited results
Contents of Prospectus
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Contents of Prospectus
Details about the project Cost of project and means of financing
Location of the project
Plant and machinery for the project, technology
adopted and process of manufacture
Infra structure facilities for raw materials
Utilities like water, power, etc
Schedule of implementation of project
Expected date of trial production
Expected year when the company would be able to
earn profits
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Additional disclosures made in
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Additional disclosures made in
Prospectus
Deployment of proceeds of issue : Avenues of
investment
Stock market data
Statement in Lieu of Prospectus
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p If a company is able to raise the original capital
without inviting public for subscription, Statement
in Lieu of Prospectus has to be submitted to
Registrar atleast 3 days before first allotment of
shares; If allotment is made then it is voidable.
It has to be signed by every director
Fine upto Rs. 1000 for every director who has
knowledge of it.
If an untrue statement is given then imprisonment
for 2 years and fine of Rs.5000 to every person
authorized to deliver the statement and has
knowledge of it
Offer for Sale
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Offer for Sale
Companies allot the whole issue of shares or
debentures to an Issuing House at a certainprice; because provisions relating to prospectus,
preparing and filing in accordance with law are a
highly time-consuming task Issuing company publishes an ad in the nature of
offer of sale inviting public to buy the share
Issuing House renounces its interest afterreceiving application.
Allotment in made in favor of the applicant by
the Company
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Shelf Prospectus
A Public financial institution or bank whose
object is financing shall file Shelf Prospectus
They need not file prospectus afresh at every
stage of offer within the period of validity
Such company shall file information
memorandum on all material facts on changes
made in company after the first issue
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Abridged form of Prospectus
Application form for issue of shares or
debentures of a company has to be
accompanied by abridged form of Prospectus
Features of Abridged Prospectus as per Form2A according to Rule 4cc, Companies (Central
Government) General Rules and Forms, 1956
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Liability for mis-statement or
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Liability for mis statement or
omission in a prospectus Defenses available to a Director and he can escape
liability if he proves
Prospectus was issued without his knowledge
Withdrew his consent and gave reasonable publicnotice of withdrawal and reasons for it
He had reasonable grounds to believe that the
statement was true
The statement was a correct and true copy of an
official document
Liability for mis-statement or
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Liability for mis statement or
omission in a prospectus
Criminal Liability
Every person who authorized the issue of
prospectus : Imprisonment extendable to 2 years
or fine of Rs.5000 or both Accused person may not be liable if he proves
Statement was immaterial
He had reasonable ground to believe the statement as
true
Punishment for issuing application not
accompanied by prospectus : Fine upto Rs.5000
Minimum Subscription
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Minimum Subscription
Company cannot allot shares until minimum
amount stated in prospectus has been
subscribed
Minimum amount stated which is in the opinion
of directors must be raised in order to provide for Purchase price of any property purchased or to be purchased
Preliminary expenses and any underwriting commission
payable
Repayment of money borrowed by the company
Working capital
Any other expenditure stating nature and purpose and the
estimated amount
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U d i i C i i
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Underwriting Commission
Company wants the whole issue taken up
when it offers its shares to the public and it is
willing to pay commission on all shares offered
to public to anyone who undertakes to take upall the shares which the public do not take
It is in the nature of an insurance against the
possibility of inadequate subscription
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Government prescribed max.
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Go e e t p esc bed a
ceiling rates
U d iti C i i
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Underwriting Commission
Commission will not be paid for securitiestaken up by promoters group, employees,
directors.
Amount paid by way of underwritingcommission shall be shown in the Balance
Sheet under the head Miscellaneous
Expenditure In case of non-compliance, the company and
every officer shall be liable to pay a fine upto
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