Registration of Prospectus

Section 60 of the 1956 Act, which deals with registration of prospectus also corresponds to section 26 of the 2013 Act. The need for company registration is explained by the company law committee: ” This section deals with the registration of prospectus and follow section 41 of the English Act in important respects. We have also made certain additions by providing that where a prospectus names any person as auditor, attorney, solicitor, banker or broker of the company, the written consent of those person should be filed at the time of company registration. We would point out that the mere giving of this consent would not subject such persons to any liability unless any of them is acting as an expert. The need for the above provisions arises out of the necessary for circumspection on the part of these persons before they permit their names to be cited in a prospectus. They should be remember that the public attaches importance to the presence of well known and respected names on the face of a prospectus and they should be careful not to allow themselves to be associated with the enterprises about whose merits they have not made some serious enquiry. Sub-section (4) prohibits the issue of a prospectus more than 90 days after it had been filed with the Registrar. The English Act contains no such restriction, but we think it is desirable to insert such a provision of the company. If the issue is too long delayed, conditions may alter and what appears in the prospectus when registered may no longer be valid at the end of such a long period.

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Section 60(3) of the 1956 Act was amended by the Companies (Amendment) Act, 1960 for reasons explained thus “Section 60 provides that no prospectus shall be issued unless, on or before the date of its publication, there has been delivered to the registrar for Company registration of a copy thereof signed by the persons named therein as directors or proposed directors of the company. It may not always be possible for companies to file the prospectus with the Registrar on the same date as it bears. In practice, it appears that prospectus are prepared and printed a few days previous to the date they bear. There is nothing objectionable in a prospectus bearing a date posterior to its presentation for company registration.

It appears that in some cases Registrars have refused to register prospectuses on grounds other than those referred to in section 60(3)(a) and (b). In our opinion, it should not be within the province of the Registrar to refuse registration of a prospectus on the ground that the company is directly or indirectly contravening the policy of the Act of that its business is sought to be carried on in a manner contrary to law thought it will be in order for him to point out the defects in the documents on security.”

Section 60(6) of the 1956 Act was amended and penalty was enhanced by the Companies (Amendment) Act, 2000. The Companies (Amendment) Act, 2000 also empowered SEBI to administer the provisions of section 55 of the 1956 Act in relation to listed companies and those which intended to get listed; However, the provision relating to all other companies were to be administered by the Central Government. The Companies (Amendment) Act, 2000 also vested in SEBI the power to inspect books of account and other books and papers with respect to listed companies and the companies which intended to get listed. SEBI was also authorized to file complaints under section 621 of the 1956 Act for offences relating to issue and transfer of securities and non-payment of dividend.

Companies Act,2013 : section 26

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Section 26 of the 2013 Act corresponds to sections 55,56,57,58,59 and 60 and schedule 2 of the 1956 Act though the notes on clauses do not explicitly mention the same and provide that section 26 of the 2013 act corresponds only to section 56 and Schedule 2 of the 1956 Act. It must be noted that the contents of the prospectus earlier set out in Schedule 2 to the 1956 Act, have now been brought into the main provision of the company into section 26 of the 2013 Act. It is settled law that Schedule do not carry less weight or more weight than the provisions  in the main  section, since arranging some requirements in a schedule is only a tool of drafting convenience and arrangement of provisions.

Disclosure in prospectus

Sub-section (1) of section 26 of the 2013 Act sets outs the heads of various disclosures to be contained in the prospectus of the company. The detailed heads of disclosures have been brought in line with the requirements widely followed in the market in relation to public offers of securities. Clause (c) of sub-section (1) of section 26 of the 2013 Act requires the prospectus to explicitly require that nothing contained in it is contrary to the provisions of the 2013 Act, the Securities Contracts (Regulation) Act and the SEBI Act and rules and regulations made there under. It is noteworthy that section 2(95) of the 2013 Act, in fact, imports definitions from the Securities Contracts (Regulation) Act, 1956, the SEBI Act and the Depositors Act in respect of words and  expressions not defined in the 2013 Act. Consequently, the 2013 Act, is now the cognate legislation of the SCRA and the SEBI Act. This was not the case earlier under the 1956 Act, and in fact while interpreting the provisions relating to prospectus and the  need for the public offer.

Exemption to disclosure requirements in prospectus

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Sub-section (2) of the section 26 of the 2013 Act, makes it clear that the provisions of sub-section (1) of section 26 of the 2013 Act would not be applicable to right issues where the offer is made only to existing members or debenture holders even if the right of such offeree is capable of being renounced. Clause (b) of sub-section (2) of section 26 of the 2013 Act to prospectuses by which securities that are being issues rank with securities that are already issued and are traded on a recognized Stock Exchange of the company. Since, those would be securities  about which a substantial portion of information would already be in the public domain and therefore available to the market at large, the legislative intent is that same rigor and extent of disclosures  would not be applicable for such issuance.  

Prospectus to be duly signed

Sub-section (2) of section 26 of the 2013 act requires the prospectus to be signed by every director of the company or by its duly authorized signatory. This provision would need to be read harmoniously with sub-section (4) of section 25 of the 2013 Act, which requires at least two directors of a company to personally sign the prospectus (the ability to sign through an authorized agent available in the 1956 Act has been dropped in that provision). This position would translate into every director having to sign the prospectus with at least two directors signing personally, while the others may sign through an authorized signatory.

Shelf life of prospectus

Sub-section (8) of section 26 of the 2013 Act now provides for a shelf life of 90 days for the prospectus, to be computed from the date on which the prospectus of the company is delivered to the Registrar under sub-section (4) of section 26 of the 2013 Act. The exception to this general requirement would be pursuant to section 31 of the 2013 Act.

Penalty for contravention

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Sub-section 9 of section 26 of the 2013 Act prescribes a criminal penalty of not less than Rs-50,000/- and not more than Rs-3,00,000/- payable by the company whose prospectus contravenes section 26 of the 2013 Act. Every person who is “knowingly a party” to the issue of such non-complaint prospectus is liable for imprisonment of upto three years, or with fine of at least Rs. 50,000 subject to a capacity Rs.3,00,000/-, or both. For individual criminal liability to be established under section 26 , the person accused ought have knowledge that the prospectus is being issued in the contravention of section 26 of the Companies Act, 2013. Being a criminal penalty, it would be necessary to prove the knowledge of the accused beyond reasonable doubt one would have to show that there was participation by the accused in the contravention with knowledge. In short, the state of mind of the person accused would be central to bringing home a charge of violation under this section.

Issue  of prospectus

It is obligatory to issue a prospectus, containing the prescribed particulars, except when the shares are not offered to the public , or when the shares are offered to existing shareholders as rights issue, or when the issue relates to shares which are in all respects uniform with shares previously issued and quoted in a stock exchange. In the  case of rights issue without any rights to renounce and in which the shares remaining unsubscribed by the existing shareholders of the company, are  not to be offered to the public, having regard to the provisions of section 67 (3) of the 1956 Act. Offer of shares to the public without complying with the provisions of section 59 of the 1956 Act is  a violation.

When prospectus is not required to be issued

It would appear that the issue of a prospectus is not necessary in the following cases:

·         When shares or debentures are provided to already existing shareholders or debenture holders  of the company.

·         When the issue with respect to shares or debentures uniform in all respects with shares or debentures previously issued and dealt in or quoted in a recognized stock exchange .

·         Where a person is invited to enter into an underwriting agreement.

·         Where shares are not offered to the public, for example when shares are placed privately to less than 50 persons.

Contents of prospectus

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A prospectus issued by or on behalf of a public company must contain the matters specified in Part 1 of Schedule 2 and set out the reports specified in part 2 of that Schedule. Parts 1 and 2 of the Schedule 2 have to be read in conjunction with the clarifications etc., given in Part 3 of the said Schedule. In addition, the contents of the prospectus are also laid down in SEBI Regulations, 2009. In case of issue of non-convertible debt securities, the contents of the offer documents are laid down in Issue and Listing of Debt Securities Regulations, 2008. Under the 2013 Act, the provisions relating to matters or information to be stated in the prospectus are covered under section 26 of the 2013 act and Rules 3,4 and 5 of the 2014 Act.

Statements in prospectus should be true and accurate

A prospectus is required to give to the persons to whom it is addressed a  full, accurate and fair picture of the state and prospects of the company. In framing the prospectus the following rules must be borne in mind:

·         The prospectus should not contain any misrepresentation of any material fact, or any deceptive or misleading statement, or any ambiguous statement which is not true in every sense in which it might be reasonably understood.

·         It should disclose every  material fact and contract, subject to qualifications mentioned below.

·         The provisions of section 62 of the 1956 Act(civil liability for mis-statement in prospectus, now converted under section 35 of the 2013 Act) and section 63 of the 1956 Act (criminal liability for mis-statement in prospectus now converted under section 34 of the 2013 Act should also be borne in mind, and all the precautions taken accordingly.

·         The right to repudiate the contract to take shares and to claim refund of the money paid by him;

·         The right to sue those for damages or compensation who have issued the prospectus of the company and others who are, by statue or common law, responsible.

Prospectus published as newspaper advertisement

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Section 66 of the 1956 Act provides that where any prospectus is published as a newspaper advertisement, it shall not be necessary in the advertisement to specify the contents of the memorandum of association of the company or the signatories thereto or the number of shares subscribed by them. Subject to the provisions of section 66 of the 1956 Act, the announcement of issue of capital to the public in newspapers and other publications, without complying with the requirements of Schedule 2 to the 1956 Act, will amount to contravention of section 56 of the 1956 Act. In case the prospectus is issued in two or more languages, a copy in each language should be filed with the Registrar.

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