The Companies Act of 2013 has replaced its predecessor, the Companies Act of 1956, with the goal of modernising and adapting corporate regulations to the changing business landscape. The new Act is more concise, comprising 29 chapters and 484 sections, in contrast to the previous Act. It also includes seven schedules. This Act was granted the assent of the President on August 29, 2013, and its implementation occurred in two phases, on September 12, 2013, and April 1, 2014.
The Companies Act of 2013 defines and governs various aspects of corporate entities. It addresses companies’ formation, functioning, management, responsibilities, and dissolution. The Act’s primary objective is to align corporate regulations with the contemporary business environment, making it easier to establish and sustain organisations and promoting economic growth and development.
The original Companies Act of 1956 served as the foundation for India’s corporate sector after gaining independence in 1956, with the recommendations of the Bhabha Committee guiding its creation. Over the years, several amendments were made to the Act, and significant revisions were introduced in 2013 to create the Companies Act of 2013, which is designed better to address the evolving needs of the corporate world.
The provisions of this Act apply to companies incorporated under this Act or any preceding company law, except for insurance companies regulated under the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999. It also covers banking companies, companies involved in electricity generation or supply, and any other companies governed by specific legislation. Additionally, any other corporate body established under existing laws and companies governed by special legislation may also come under the purview of this Act, subject to specific exemptions, amendments, or adjustments as outlined in official notifications.
A prospectus is a regulatory document issued by a public company with the aim of attracting investors and the general public to subscribe to its securities. This document is mandatory and must be submitted to the Securities and Exchange Commission. Its primary purpose is to provide potential investors with critical information about the risks associated with investing. A prospectus is typically released after a company’s establishment and pertains to various financial instruments, including stocks, bonds, and other offerings.
The prospectus plays a crucial role in safeguarding the interests of investors by offering insights into the company’s historical performance and financial data. This disclosure is essential in helping investors make informed decisions and assess the potential risks of investing in a company, especially if it is facing financial challenges.
A prospectus, as per Section 2(70) of the Companies Act, 2013, is defined as any document used for advertising or soliciting offers from the public for the purchase of securities issued by a corporate entity. It invites the general public to buy or subscribe to a company’s shares or debentures. In simpler terms, it’s the document that promotes a company’s shares or debentures. It’s important to note that private limited companies are not permitted to issue prospectuses and cannot invite the public to subscribe to their shares. Only public limited companies can issue prospectuses, making it an open invitation extended to the entire public.
In terms of the distinction between public and private companies, a public company is one that issues shares and has a paid-up share capital of at least five lakh rupees or a larger amount. Public companies can issue a prospectus on the stock exchange. In contrast, a private company cannot issue shares to the general public but can issue shares to individuals. It has a minimum paid-up share capital of one lakh rupees or as prescribed. Private companies are prohibited from inviting the public to subscribe to their securities, except when they transform into a public company. In such cases, they can issue a prospectus to the public.
Section 30 of the Companies Act
Chapter III (Sections 23–42) of the Companies Act, 2013 (CA 2013) is dedicated to provisions concerning prospectus and the allocation of securities. Specifically, Section 30 of the Companies Act, 2013 deals with the advertisement of prospectus. In a previous discussion, we delved into the details of Section 29 (Public offer of securities to be in dematerialized form) of CA 2013. In this discussion, we will explore the provisions outlined in Section 30 of the Companies Act, 2013, in conjunction with the regulations specified in the Companies (Prospectus and Allotment of Securities) Rules, 2014.
It’s worth noting that Section 30 of the Companies Act, 2013, was officially notified by the Ministry of Corporate Affairs (MCA) through Notification No. S.O. 2754(E) issued on 12th September, 2013. Consequently, this section became effective on the same date, marking the commencement of Section 30 of the Companies Act on 12th September, 2013.
Types Of Prospectus
Various types of prospectuses exist in the context of corporate offerings, each with distinct characteristics and purposes:
Red Herring Prospectus
A red herring prospectus is a preliminary prospectus that does not disclose the exact share price. It is typically issued by a company planning a public securities offering, in compliance with Article 31 of the Companies Act. This document must be filed with the registrar at least three days before opening the subscription list or offer. The red herring prospectus carries the same obligations as a full prospectus. Any variations between the red herring prospectus and the final prospectus must be duly noted. Importantly, Section 60B(7) grants applicants or subscribers the right to withdraw their applications within seven days of being notified of any changes, and such withdrawal must be communicated in writing.
A shelf prospectus is issued by a public financial institution, company, or bank for one or more securities issues or classes specified in the prospectus. Issuing a shelf prospectus eliminates the need for separate prospectuses for each offering, allowing the issuer to sell securities without producing a new prospectus. The provisions regarding shelf prospectuses are governed by Section 31 of the Companies Act of 2013. It must be filed with the registrar within three months before the second or subsequent offer mentioned under Rule 4CCA of section 60A(3) of the Companies (Central Government’s) General Rules and Forms, 1956.
An abridged prospectus is a concise summary of a full prospectus submitted to the registrar. It encapsulates all the essential elements of the prospectus in a brief format, ensuring that investors can quickly access crucial information. Section 33(1) of the Companies Act, 2013, mandates that when a form for purchasing a company’s securities is issued, it must be accompanied by an abridged prospectus.
Under Section 25(1) of the Companies Act, 2013, a document can be considered a prospectus. This occurs when a company offers securities to the public, makes allotments, or agrees to allot securities, effectively making the document a prospectus used for selling to the public. In such cases, the document is deemed to be a corporate prospectus, subject to all prospectus-related content and obligations.
These distinct types of prospectuses cater to different stages and needs of public offerings, providing flexibility and compliance with regulatory requirements within the corporate context.
Consequences of Errors in a Prospectus
Invalidity of Prospectus: If a prospectus is not issued within 90 days of delivering a copy to the registrar, it is deemed invalid.
- Civil Liability: Individuals who provide false or misleading information in a prospectus can face civil penalties. In cases of deception, affected parties have the right to void the contract and seek a refund of their investments. Those responsible for the misinformation may also be sued for damages.
- Criminal Liability: Directors who knowingly conceal vital information in a prospectus may face legal consequences. For such actions:
- They can be fined up to Rs. 5,000 and/or imprisoned for up to two years.
- In cases where the offence is categorised as fraud, the penalty may include a fine of Rs. 10,000 and/or imprisonment for up to five years.
These legal provisions are in place to ensure the accuracy and transparency of information in prospectuses, safeguard the interests of investors, and maintain the integrity of the financial market.
A prospectus must meet certain criteria in order to be considered valid, and it must be registered. If a prospectus is not registered, it is regarded invalid and in violation of the provisions for a valid prospectus. Section 26 of the Criminal Code makes such a violation punishable. Whenever a prospectus is advertised, it must include the company’s memorandum as stated in Section 30 of the Companies Act, 2013. As a result, a prospectus is essential for any public business, and it must comply with the provisions of the Companies Act 2013.
Frequently Asked Questions (FAQs)
The salient features of the Companies Act include:
Introduction of “Dormant Companies.”
Establishment of the National Company Law Tribunal (NCLT).
Emphasis on self-regulation and transparency.
Mandatory electronic record-keeping.
Streamlined merger and amalgamation processes.
Requirement for independent directors in public companies.
Inclusion of women directors in certain company categories.
Mandated Corporate Social Responsibility (CSR) committees and disclosures for select companies.
These features aim to modernise corporate governance, enhance transparency, and promote social responsibility.
A prospectus is a legal document that provides information about a company and its securities to potential investors. It is required when a company plans to raise capital by offering its shares or debentures to the public.
A prospectus, when advertised, should include information about the company’s memorandum, its objectives, share capital, details of signatories to the memorandum, and its capital structure, among other essential information as outlined in Section 30 of the Companies Act, 2013.
Yes, a prospectus must be issued within a certain time frame after it is advertised to the public.
False information in a prospectus can lead to both civil and criminal liability for those responsible, with potential penalties and fines.
No, private limited companies are not allowed to issue prospectuses to the public. Only public limited companies have this privilege.
A red herring prospectus is a preliminary prospectus that lacks specific share pricing details. It is relevant to Section 30 of the Companies Act as it is part of the process of issuing a prospectus.
A shelf prospectus covers multiple securities issues or classes and can be used by issuers to offer securities without producing separate prospectuses for each offering.
Several sections of the 1956 Companies Act, such as 106, 107, 80A, 81, 186, 168, 250, 243, and others, remain in force and applicable.
No, Section 30 of the Companies Act specifically deals with the advertisement of prospectuses issued to the public. Private placements are subject to different regulations.
No, as per Section 30 of the Companies Act, a company cannot issue or publish any prospectus or any notice inviting deposits unless a copy of such prospectus has been delivered to the RoC for registration.
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