The Companies Act of 2013 marked a significant transformation in the realm of corporate legislation, replacing the outdated Companies Act of 1965. This change was driven by the need to align the legal framework with the contemporary business landscape, ensuring its relevance in a dynamic corporate world.
Compared to its predecessor, the new Companies Act is notably more streamlined, comprising just 29 chapters and 484 sections, making it a more concise and focused legal document. It also includes seven schedules, which provide additional guidance on various aspects of corporate governance.
This comprehensive legislation received presidential assent on August 29, 2013, heralding a new corporate governance and management era. Its enforcement, however, occurred in stages, commencing on September 12, 2013, and finalising on April 1, 2014. These phased implementation dates allowed a smoother transition into the new legal framework, ensuring that businesses and regulatory bodies could adapt effectively to the revised provisions.
The primary objective of this new Act is to streamline the processes involved in establishing and maintaining a business, making it more attuned to the demands of the contemporary business environment. This strategic move is aimed at fostering economic growth and development, creating a conducive environment for businesses to thrive.
It’s worth noting that India’s journey in corporate governance regulation began in 1956 when the first Companies Act was introduced shortly after gaining independence. The recommendations of the Bhabha Committee provided the initial framework for the 1956 Act. Over the years, various amendments were made to this legislation, with significant revisions culminating in the comprehensive Companies Act of 2013.
Crucial Requirements for a Document to Qualify as a Prospectus
In order for a document to qualify as a prospectus, it must meet two essential criteria:
- The document should extend an invitation to the public for the subscription of shares, debentures, or the acceptance of deposits.
- This invitation should be directed towards the general public.
In addition, the invitation must be issued by the company or on behalf of the company, and it should pertain to shares, debentures, or similar financial instruments.
Defining a Prospectus in the Companies Act, 2013
Within the Companies Act, 2013, a prospectus is given its legal definition in Section 2(70). It encompasses any document explicitly identified or presented as a prospectus. Additionally, the definition encompasses any form of communication, including notices, circulars, advertisements, or any other document that serves as an invitation to solicit offers from the general public.
This solicitation, or invitation to offer, should be directed toward the purchase of securities issued by a corporate entity. Notably, both shelf prospectuses and red herring prospectuses are included within the broad scope of what constitutes a prospectus.
In essence, the Companies Act casts a wide net in its definition of a prospectus, ensuring that any document or communication with the purpose of enticing public participation in the acquisition of corporate securities is subject to relevant regulatory provisions. Section 31 of the Companies Act further states provisions for shelf prospectus.
Shelf Prospectus
A shelf prospectus is a unique document issued by public financial institutions, companies, or banks to facilitate offering one or more securities classes, as outlined in the prospectus. The distinctive feature of a shelf prospectus is that it grants the issuer the flexibility to sell these securities without the need to create a separate prospectus for each offering.
It’s important to note that when filing for a shelf prospectus, a company must also submit an information memorandum, which provides additional details about the securities and the offering. This approach streamlines the process and offers greater efficiency in the issuance of securities.
Utilising Shelf Prospectus for Offer of Securities- Sub-section (1) of Section 31 of the Companies Act
As per sub-section (1) of Section 31 of the Companies Act, the provision for shelf prospectus stands as:
- Eligible Company Classes:
Companies, as defined by regulations established by the Securities and Exchange Board, can make use of a shelf prospectus.
- Filing during Initial Offering:
The shelf prospectus should be submitted to the Registrar at the time of the initial securities offering it encompasses.
- Validity Period:
The shelf prospectus must clearly specify a period of validity, not exceeding one year, which commences from the date of the first securities offering covered by the prospectus.
- Subsequent Offerings:
During the validity period of the shelf prospectus, companies are allowed to make additional offers of the same securities without the necessity of creating a new prospectus.
Simplified Explanation of Information Memorandum -Sub-section (2) of Section 31 of the Companies Act
In the context of filing a shelf prospectus, a crucial requirement is the submission of an information memorandum, as outlined in Sub-section (2) of Section 31 of the Companies Act. This document serves to provide comprehensive information about any new charges created and details any changes in the company’s financial position that have occurred since the initial offer of the security or between subsequent offers.
As per Rule 4CCA of Section 60A (3) in the Companies (Central Government’s) General Rules and Forms, 1956, the information memorandum must be filed with the registrar within three months before the commencement of the second or any subsequent offer conducted under the shelf prospectus.
Furthermore, if a company or individual has received applications for security allotment with advance subscription payments before any changes have been implemented, it is essential to notify them of the alterations promptly. Should an applicant choose to withdraw their application within 15 days, a refund of their funds must be initiated.
Once the information memorandum is filed and any offer of securities is made, the memorandum, combined with the shelf prospectus, is legally considered a prospectus. This combination serves as a comprehensive document that provides investors with the necessary information for making informed decisions as stated in sub-section (2) of Section 31 of the Companies Act.
Sub-section (3) of Section 31 of the Companies Act
Upon filing an information memorandum, for each securities offering carried out in accordance with subsection (2) of Section 31 of the Companies Act, both the information memorandum and the shelf prospectus will collectively be regarded as a prospectus as per sub-section (3) of Section 31 of the Companies Act.
Statement in Lieu of Prospectus: Obligations for Public Companies
In the corporate landscape, every public company must adhere to a specific requirement – issuing a prospectus or submitting a statement in lieu of a prospectus. This obligation does not apply to private companies as a mandatory requirement. However, it becomes imperative when a private company transitions into a public company. In such a scenario, the company must either file a prospectus if it was issued previously or file a statement in lieu of a prospectus, ensuring compliance with the legal framework.
Shelf Prospectus and Information Memorandum: A Closer Look
Within the provisions of the Act, specific classes of companies, as determined by the Securities and Exchange Board (SEBI) through regulations, have the option to submit a shelf prospectus to the Registrar. This shelf prospectus is to be presented during the initial offering of securities, specifying a validity period not exceeding one year as per Section 31 of the Companies Act. The clock on this validity period begins ticking from the date of the first securities offering under the prospectus. Notably, for any subsequent offerings that fall within the prospectus’s validity period, there’s no need for additional prospectuses.
For a company utilising a shelf prospectus, the Act mandates the submission of an information memorandum. This memorandum must encompass critical information, including details about new charges created, any changes in the company’s financial status occurring between the initial and subsequent securities offerings, and any other prescribed changes. It must be filed with the Registrar within the stipulated time frame, prior to the launch of a second or subsequent securities offering under the shelf prospectus as stated in Section 31 of the Companies Act, 2013.
Compliance with the rules dictates that the information memorandum must be prepared in Form PAS-2 and filed with the Registrar, accompanied by the appropriate fees as outlined in the Companies (Registration Offices and Fees) Rules, 2014. This submission should occur within one month before the initiation of a second or subsequent securities offering under the shelf prospectus. These regulations are designed to ensure transparency and the provision of comprehensive information for the benefit of investors and regulatory oversight.
Enhancing Investor Protection and Disclosure
The Section 31 of the Companies Act also introduces a protective provision for investors. It stipulates that if a company or any other entity has already received applications for securities allotment, accompanied by upfront subscription payments, it must promptly inform these applicants about the alterations before implementing any changes. If these applicants decide to withdraw their applications within fifteen days, the company or entity is obligated to refund the subscription funds.
Form PAS-2, in particular, plays a significant role in ensuring comprehensive disclosure. It necessitates the inclusion of various critical details, such as:
- Changes in the company’s financial position.
- Alterations in the share capital, including the Capitalization Statement.
- Modifications in accounting policies.
- Revisions in risk factors, as previously outlined in the Shelf Prospectus and the information memorandum submitted for the previous offer.
- Economic changes that could impact income from ongoing operations.
- Substantial changes in the company’s activities that could materially affect profit or loss, such as the loss of agencies or markets.
- Changes in the total turnover of each major industry segment in which the issuer operates.
- Significant legal proceedings initiated by or against the company or its directors, with potential adverse consequences.
- Substantial claims made against the company by individuals or authorities.
- Noteworthy shifts in the business environment, whether technological, financial, market-related, or government policy changes, which could negatively impact the company’s present or future operations.
- Material changes in the company’s management or ownership.
- Any other changes that could reasonably influence an investor’s decision.
- A concise overview of proposed objectives related to the current offering, including project plans, financial particulars, timeframes, and other pertinent factors.
- A chronological breakdown of charges created on the company’s assets or properties since the initial or previous securities offering encompasses details such as creation date, purpose, amount, duration, assets involved, charge holder, and terms and conditions.
Moreover, if an information memorandum is filed each time securities are offered, this memorandum, along with the shelf prospectus, is legally considered a prospectus. This comprehensive approach to disclosure ensures that investors have access to vital information to make informed investment choices.
Conclusion
A prospectus serves as a formal and legally binding document issued by a corporate entity, primarily aimed at inviting offers from the public for the subscription or purchase of various securities. Public companies are authorised to issue prospectuses for their shares or debentures, but this requirement does not extend to private companies.
To qualify as a valid prospectus, certain essential requirements must be met, and the document itself must undergo the process of registration. Failure to register a prospectus renders it invalid and in breach of the prescribed regulations, leading to potential penalties as per Section 26(9).
Whenever a prospectus is advertised, it is imperative to include the company’s memorandum. In cases where a company intends to make an offer of securities, it can choose to issue a red herring prospectus before the final prospectus. Additionally, the concept of a shelf prospectus allows a company to offer one or more securities without the necessity of a separate prospectus for each security.
Section 31 of the Companies Act enables eligible companies to use a shelf prospectus for their initial securities offering. The shelf prospectus specifies a validity period of up to one year, starting from the first securities offering date. When combined with an information memorandum, it serves as a prospectus for subsequent offerings, simplifying compliance and promoting efficiency in securities issuance.
Frequently Asked Questions (FAQs)
A prospectus is a crucial document that a company must release when offering investment securities to the public. This formal document offers comprehensive information to potential investors regarding various investment options like mutual funds, bonds, stocks, and other offerings made available to the public.
A shelf prospectus is a document that permits a company to offer securities to the public continuously for a specific duration without the need to file a fresh prospectus on every occasion. This document provides essential details about the company and the securities it presents to potential investors. Such information aids investors in comprehending the company’s financial status and facilitates well-informed investment choices.
A shelf prospectus allows a company to streamline the securities issuance process by specifying a validity period for the prospectus, during which it can be used for subsequent offerings without the need to create a new one.
The shelf prospectus can have a validity period of up to one year, beginning from the date of the first securities offering as outlined in Section 31 of the Companies Act.
No, only specific classes of companies, as defined by the Securities and Exchange Board, have the option to use a shelf prospectus under Section 31 of the Companies Act.
An information memorandum is filed, and it, along with the shelf prospectus, is considered a single prospectus for subsequent securities offerings.
Section 31 of the Companies Act simplifies the securities issuance process for eligible companies, reducing administrative burdens. It also enhances transparency and investor protection by ensuring that crucial information is readily available to potential investors.
Yes, a shelf prospectus can be used for various types of securities issued to the public, including stocks, bonds, mutual funds, and other investment offerings.
Section 31 of the Companies Act does not specify a limit on the number of times a shelf prospectus can be used within its validity period. Companies can make multiple offerings during this time.
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