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COMPANIES ACT 2013 > CHAPTER III - PROSPECTUS AND ALLOTMENT OF SECURITIES > Flashcards

CHAPTER III - PROSPECTUS AND ALLOTMENT OF SECURITIES Flashcards

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1
Q

Section 23, Companies Act, 2013

A

Outlines the methods by which companies can issue securities to raise capital

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2
Q

What options does a public company have for issuing securities? (Section 23(1))

A

Public Offer: Issuing securities to the public via a prospectus.
Private Placement: Issuing securities to a select group of investors.
Rights Issue: Offering existing shareholders the right to buy additional shares.
Bonus Issue: Issuing free shares to existing shareholders.

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3
Q

Can listed or soon-to-be-listed public companies issue securities through rights issues or bonus issues? (Section 23(1))

A

Yes, but they must comply with both the Companies Act, 2013, and regulations of the Securities and Exchange Board of India (SEBI).

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4
Q

How can a private company issue securities? (Section 23(2))

A

Rights Issue or Bonus Issue: In accordance with the Companies Act, 2013.
Private Placement: By following Part II of Chapter III of the Companies Act, 2013.

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5
Q

What does the term “public offer” include? (Explanation to Section 23)

A

Initial Public Offer (IPO): A company’s first sale of shares to the public.
Further Public Offer (FPO): Subsequent issuance of shares after the company is already listed.
Offer for Sale: Existing shareholders offering to sell their existing shares to the public via a prospectus.

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6
Q

Section 24, Companies Act, 2013

A

Defines the scope of the Securities and Exchange Board of India’s (SEBI) powers in regulating the issue and transfer of securities and addresses other related matters.

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7
Q

When does SEBI regulate the issue and transfer of securities? (Section 24(1)(a))

A

SEBI has authority in these matters if the company is:
Listed on a recognized stock exchange in India
Intends to get its securities listed on a recognized stock exchange in India

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8
Q

What other matters related to securities does SEBI regulate for listed or soon-to-be-listed companies? (Section 24(1)(a))

A

Non-payment of dividends (unless otherwise specified in the Companies Act).

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9
Q

Who regulates the issue and transfer of securities for companies that are not listed or intending to be listed? (Section 24(1)(b))

A

The Central Government.

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10
Q

What powers does SEBI have to regulate securities matters? (Section 24(2))

A

SEBI can exercise powers granted under specific sections of the Securities and Exchange Board of India Act, 1992. These powers relate to investigations, inquiries, and the ability to issue directions.

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11
Q

What does the Explanation to Section 24 clarify?

For the removal of doubts, it is hereby declared that all powers relating to all other matters relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be.

A

It explicitly states that matters such as prospectuses, return of allotment, redemption of preference shares, and other specifically mentioned aspects of the Companies Act fall under the purview of:
The Central Government
The National Company Law Tribunal (NCLT)
The Registrar of Companies

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12
Q

Section 25, Companies Act, 2013

A

Defines when a document offering securities for sale to the public will be considered a prospectus, even if it’s not explicitly labeled as such.

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13
Q

Under what circumstances is a document offering securities for sale deemed a prospectus? (Section 25(1))

A

When a company allots (assigns) or agrees to allot securities with the intention of those securities being offered to the public.

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14
Q

: What are the implications of a sales offer document being deemed a prospectus? (Section 25(1))

A

All laws and regulations regarding the following become applicable:
The required contents of a prospectus
Liability for misstatements or omissions within a prospectus

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15
Q

When is it presumed that securities were allotted with the intent to be offered to the public? (Section 25(2))

A

If an offer for sale to the public is made within 6 months of allotment.
If the company hasn’t received full payment for the securities at the time the offer is made.

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16
Q

What additional disclosures are required in a sales offer document that’s considered a prospectus? (Section 25(3))

A

Net amount the company has received or will receive from the securities sale.
Where and when the contract for allotment can be viewed.

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17
Q

Who must sign a sales offer document that’s deemed a prospectus when the offeror is a company or firm? (Section 25(4))

A

Company: Two directors
Firm: At least half of the partners

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18
Q

What must be disclosed in a sales offer document (deemed a prospectus) under Section 25(3)(ii)?

A

The names of those individuals making the offer for sale must be disclosed as if they were named as directors of a company within a traditional prospectus.

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19
Q

Section 26, Companies Act, 2013

A

Outlines the mandatory disclosures and reports required in a prospectus issued by or on behalf of a public company.

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20
Q

What general company information must be stated in a prospectus? [Section 26(1)(a)

A

Company details: Registered office address, key personnel (Company Secretary, CFO, auditors, etc.), bankers, trustees, and underwriters.
Issue Logistics: Opening/closing dates, deadlines for allotment letters/refunds.
Bank Account: Statement about a separate bank account for issue proceeds and details of previous issue’s funds.
Underwriting details.
Consents: From directors, auditors, bankers, experts (if any).
Authorization details: Board resolution authorizing the share issue.
Allotment: Procedure and timeframe.
Capital Structure: Details of the company’s shareholding pattern.

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21
Q

What information about the offer itself must be included in the prospectus? [Section 26(1)(a)]

A

Main purpose of the public offer and terms of the current issue.
Company Overview: Main objects, present business, locations, project implementation schedule if applicable.
Risk Factors: Management’s view of project-specific risks, gestation period, progress, completion deadlines, and any pending litigation in the past 5 years.
Subscription Details: Minimum subscription, premium, non-cash issue details.
Director Details: Appointments, remuneration, interests in the company.
Promoter’s Funding: Disclosure of how promoters will contribute to the issue.

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22
Q

What financial reports must be included in a prospectus? [Section 26(1)(b)]

A

Auditor Reports on P&L and assets/liabilities for the past 5 years (or from incorporation if the company is younger). This includes subsidiaries.
Auditor Reports on business financials if the sale proceeds are for acquiring a business, including P&L of the business.

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23
Q

What declarations and other information must a prospectus include? [Section 26(1)(c) & (d)]*

A

Compliance declaration: That the prospectus complies with the Companies Act, SCRA, SEBI Act, and related rules.
Any other prescribed matters/reports.

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24
Q

Auditor’s Report on Business Financials [Sec 26 (1)(b)(iii)]

A

Focus: If the issue proceeds are to acquire a business, this report focuses on THAT business’s financials.
Content: Similar to Report #1, covers P&L and assets/liabilities of the acquired business.
Timeframe: 5 years prior (or all years if the company is younger) up to a date within 180 days before the prospectus issue.

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25
Q

Section 26(2), Companies Act, 2013

A

Outlines specific situations where the detailed prospectus requirements of Section 26(1) DO NOT apply.

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26
Q

When does Section 26(1) NOT apply? - Scenario #1 [Section 26(2)(a)]

A

When a company issues a prospectus or application form to its existing shareholders or debenture holders. This includes rights issues where shares can be renounced in favour of someone else.

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27
Q

When does Section 26(1) NOT apply? - Scenario #2 [Section 26(2)(b)]

A

When a company issues a prospectus regarding shares or debentures that are identical to those already issued and actively traded on a recognized stock exchange.

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28
Q

When do the prospectus requirements of Section 26(1) always apply? [Section 26(3)]

A

In all other cases, subject to the exceptions in Section 26(2).
Formation of a company: When shares are first offered to the public.
Subsequent issuances: Any later share offerings by the company.

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29
Q

What is the publication date of a prospectus? [Section 26(3), Explanation]

A

It’s the date indicated on the prospectus itself.

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30
Q

Prospectus Filing & Registration Requirement [Section 26(4)]

A

No prospectus can be issued until a signed copy is filed with the Registrar of Companies.
Signatures: Required from every current or proposed director, or their authorized attorney.

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31
Q

When can a prospectus include an expert statement?

A

ONLY if the expert meets these criteria:
Independence: The expert cannot be involved in the formation, promotion, or management of the company.
Written Consent: The expert must provide written consent for their statement to be included in the prospectus.
Consent Not Withdrawn: The expert cannot withdraw consent before the prospectus is filed with the Registrar.

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32
Q

What disclosure is needed if an expert statement is used? [Section 26(5)]

A

The prospectus must explicitly state that:
The statement is made by an expert
The expert has given consent
The expert has not withdrawn consent prior to filing the prospectus with the Registrar.

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33
Q

What must be disclosed on the face of the prospectus? [Section 26(6)]

A

Confirmation that a copy has been filed with the Registrar.
Details of any required attached documents OR references to where these details are found within the prospectus itself.

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34
Q

Requirements for the Registrar to register a prospectus [Section 26(7)]

A

Compliance: The prospectus must meet all the requirements laid out in Section 26.
Consent: Written consent must be provided by all individuals named in the prospectus.

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35
Q

Validity Period of a Prospectus [Section 26(8)]

A

A prospectus becomes invalid if it is NOT issued within 90 days of the date a copy is filed with the Registrar.

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36
Q

Penalties for violating prospectus rules [Section 26(9)]

A

Company: Can be fined between 50,000 to 3 lakh rupees.
Individuals: If individuals knowingly participate in issuing a non-compliant prospectus, they can face:
Imprisonment of up to 3 years
Fines between 50,000 to 3 lakh rupees
Potentially both imprisonment and fines

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37
Q

Section 27, Companies Act, 2013

A

Defines restrictions and safeguards in place when a company wants to change contractual terms or the core objectives outlined in a prospectus.

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38
Q

When can a company change a contract or its objects after issuing a prospectus? [Section 27(1)]

A

Only if approved in the following ways:
Special Resolution: Passed by shareholders in a general meeting.
Pre-Authorization: If the company’s general meeting has given authority in advance for such changes.

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39
Q

What additional requirements exist when changing contractual terms or objects? [Section 27(1)]

A

Public Notice: Details of the proposed changes and their justification must be published in newspapers (English and local language) where the company’s registered office is located.
Restriction on Use of Funds: Money raised through a prospectus cannot be used to buy, trade, or deal in shares of other listed companies.

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40
Q

What protections exist for dissenting shareholders? [Section 27(2)]

A

Dissenting shareholders (those who disagree with the change) must be offered an exit option by the promoters or controlling shareholders.

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41
Q

How is the exit price for dissenting shareholders determined? [Section 27(2)]

A

SEBI (Securities and Exchange Board of India) will create regulations defining the exit price calculation, the process, and other terms and conditions of the exit offer.

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42
Q

Section 28, Companies Act, 2013

A

Outlines the process for existing members of a company to offer their shares to the public and highlights how offers for sale are considered prospectuses.

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43
Q

When can existing shareholders offer a portion of their shares to the public? [Section 28(1)]

A

In Consultation with the Board: They must discuss their plans with the company’s Board of Directors.
Compliance With Laws: The process must follow relevant laws and regulations.
Prescribed Procedure: Any specific procedures outlined by law must be followed

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44
Q

How is an offer for sale document treated? [Section 28(2)]

A

It is considered a prospectus issued by the company itself. This means it is subject to all the following:
* Content Requirements: Must include all mandatory information as in a regular prospectus.
* Liability: Sellers can be held liable for misstatements or omissions like in a regular prospectus.

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45
Q

What are the responsibilities of the shareholders making the offer for sale? [Section 28(3)]

A

Authorization: They must collectively authorize the company to act on their behalf throughout the offer for sale process.
Reimbursement: They must reimburse the company for any expenses arising from the offer for sale process.

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46
Q

Section 29, Companies Act, 2013

A

Emphasizes that companies making certain types of public offerings must issue securities in electronic (dematerialized) form.

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47
Q

When must securities be issued in dematerialized form? [Section 29(1)]

A

Mandatory:
Any company making a public offering of securities.
Other specific classes of public companies as prescribed by law.

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48
Q

How must dematerialized securities be issued? [Section 29(1)]

A

In compliance with:
The Depositories Act of 1996
Relevant regulations created under that Act.

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49
Q

Can companies not covered by the mandatory rule issue securities in dematerialized form? [Section 29(2)]

A

Yes! They have the option to:
Convert existing securities into dematerialized form
Issue new securities either:
In physical form (as per the Companies Act, 2013)
In dematerialized form (as per the Depositories Act of 1996)

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50
Q

Section 30, Companies Act, 2013

A

Outlines specific information that must be included whenever a company’s prospectus is advertised.

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51
Q

What must be included in a prospectus advertisement?

A

Details about the Company’s Memorandum of Association, specifically:
Objects: The company’s core purpose and activities.
Liability of Members: Whether the liability of shareholders is limited or unlimited.
Share Capital: The total authorized share capital of the company.
Founders:
Names of the signatories of the Memorandum of Association.
Number of shares they have subscribed to.
Capital Structure: A general overview of the company’s shareholding pattern.

52
Q

Section 31, Companies Act, 2013

A

Allows certain types of companies to file a shelf prospectus, a unique type of prospectus with extended validity, simplifying future securities issuances.

53
Q

What is a shelf prospectus? [Section 31, Explanation]

A

A single prospectus used for multiple securities offerings over a specified period.
It eliminates the need to file a new prospectus for each subsequent offering.

54
Q

Which companies can file a shelf prospectus? [Section 31(1)]

A

Specific classes of companies as determined by regulations issued by the Securities and Exchange Board of India (SEBI).

55
Q

What are the key features of a shelf prospectus? [Section 31(1)]

A

Initial Filing with the Registrar: A shelf prospectus is filed at the time of the first securities offering.
Validity Period: It is valid for up to one year from the opening date of the first securities offer.

56
Q

What is required for subsequent offers under a shelf prospectus? [Section 31(2)]

A

Information Memorandum: Companies must file a document outlining updates on:
New Charges Created
Changes in Financial Position
Other Prescribed Changes
Submission Timeline: The memorandum must be filed with the Registrar before each subsequent offer.

57
Q

Protections for Investors who Applied Before Changes [Section 31(2), Proviso]

A

Obligation to Inform: If a company receives subscription applications (with advance payments) before a significant change occurs, they must inform those applicants about the changes.
Right to Withdraw: Applicants have the right to withdraw their applications if they choose.
Refund: If the application is withdrawn, the company must refund the subscription money within 15 days.

58
Q

How is a shelf prospectus used along with an information memorandum? [Section 31(3)]

A

Together, they are considered the prospectus for each subsequent securities issuance

59
Q

Section 32, Companies Act, 2013

A

Introduces the option for a company to issue a “red herring prospectus” before the final prospectus in certain securities offerings.

60
Q

What is a red herring prospectus? [Section 32, Explanation]

A

A preliminary prospectus with incomplete details, specifically:
It does NOT include the final price or the exact quantity of securities being offered.

61
Q

Why would a company use a red herring prospectus?

A

Test Market Interest: To gauge investor demand and determine the appropriate pricing of the securities.
Start Early: To start the marketing and promotion process of the securities offering before finalizing the offer details.

62
Q

Filing Requirements of a red herring prospectus [Section 32(2)]

A

Registrar of Companies: It must be filed with the Registrar.
Timeline: At least 3 days before the subscription list for the securities offering opens.

63
Q

Are there any limitations on a red herring prospectus? [Section 32(3)]

A

Yes! It carries the same legal obligations as a final prospectus.
Any changes between the red herring prospectus and the final prospectus must be clearly highlighted to investors.

64
Q

What happens after the securities offering closes? [Section 32(4)]

A

A final prospectus must be filed with the Registrar of Companies and SEBI, including:
Total capital raised (debt and equity)
Final closing price of the securities
Any missing details from the red herring prospectus

65
Q

Section 33, Companies Act, 2013

A

Mandates that application forms for securities must be accompanied by an abridged prospectus and outlines penalties for non-compliance.

66
Q

What is the main requirement of Section 33(1)?

A

Every application form for purchasing a company’s securities MUST be accompanied by an abridged prospectus.

67
Q

What is an abridged prospectus?

A

A concise version of the full prospectus, containing the essential information investors need to make a decision.

68
Q

Are there any exceptions to the abridged prospectus requirement? [Section 33(1), Proviso]

A

Yes, in specific situations:
Underwriting Agreements: When inviting someone to become an underwriter for the securities.
Non-Public Offerings: When the securities are not being offered to the public.

69
Q

Investor’s Right to a Full Prospectus [Section 33(2)]

A

Any person requesting a copy of the full prospectus before the offer closes must be provided with one.

70
Q

Consequences of Non-Compliance [Section 33(3)]

A

A company failing to comply with these provisions can be fined Rs. 50,000 for each instance of non-compliance.

71
Q

Section 34, Companies Act, 2013

A

Defines criminal liability for individuals who authorize a prospectus containing false, misleading, or incomplete information.

72
Q

What kind of misstatements can lead to criminal liability?

A

Untrue statements: Statements that are factually incorrect.
Misleading statements: Statements that, even if technically true, are presented in a way that deceives investors.
Material Omissions: Leaving out crucial information that could affect an investor’s decision.

73
Q

Who is held responsible under Section 34?

A

Anyone who authorizes the issuance of the misleading prospectus. This could include:
Directors
Promoters
Experts who provided statements for the prospectus

74
Q

What are the consequences of violating Section 34?

A

The individual(s) responsible can be held liable under Section 447 of the Companies Act, 2013. This refers to fraud, and the penalties can include:
Imprisonment
Fines

75
Q

Are there any defenses an individual can use? [Section 34, Proviso]

A

Yes, but the burden of proof lies on the accused. They can escape liability if they can PROVE either:
Immateriality: The misstatement or omission was not significant enough to impact investment decisions.
Reasonable Belief: They had reasonable grounds to believe the statement was true or the omission was necessary, and they maintained this belief up to the time the prospectus was issued.

76
Q

Section 447, Companies Act, 2013

A

Outlines the definition of fraud and the severe punishment it carries.

77
Q

What constitutes fraud under Section 447?

A

Any act, omission, concealment of facts, OR abuse of position committed by a person or group of persons with the intent to:
Deceive
Gain undue advantage from
Injure the interests of the company, its shareholders, or other stakeholders.

78
Q

Isn’t fraud a general criminal offense? Why is it specifically mentioned in the Companies Act?

A

Emphasis on Corporate Context: Section 447 highlights the severe implications of fraud committed within or against a company.
Protection of Stakeholders: It aims to strongly deter and punish actions that undermine the integrity of a company and harm its investors, creditors and other stakeholders.

79
Q

What are the penalties for fraud under Section 447?

A

: The punishment is severe and can include:
Imprisonment: A term of not less than 6 months, extendable up to 10 years. Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years
Fines: An amount equal to the loss caused by the fraud OR three times the amount of unlawful gain, whichever is higher.

80
Q

Section 35, Companies Act, 2013

A

Outlines who is liable to compensate investors for losses incurred due to misleading or false information within a prospectus.

81
Q

When does civil liability for misstatements in a prospectus arise?

A

Misleading Prospectus: The prospectus contains false, misleading statements, or significant omissions.
Investor Relies on Prospectus: An investor subscribes to the securities based on the information in the prospectus.
Investor Suffers Loss: The investor incurs a financial loss as a direct result of the misstatements.

82
Q

Who can be held liable under Section 35(1)?

A

Directors (current at the time of issuance)
Named Directors: Those listed in the prospectus as directors or having agreed to become directors.
Promoters
Those who authorized the prospectus issuance
Experts: Individuals whose expert statements were included in the prospectus.

83
Q

Are there any defenses available? [Section 35(2)]

A

Yes, but limited. Individuals can escape liability if they prove:
Withdrawal of Consent (Directors): They withdrew consent to be a director BEFORE the prospectus was issued, and it was issued without their authority.
Lack of Knowledge and Public Notice: The prospectus was issued without their knowledge, AND upon realizing this, they immediately gave public notice disavowing it.

84
Q

Fraudulent Intent [Section 35(3)]

A

If it’s proven that the prospectus was issued with the intent to defraud investors: * Unlimited Liability: Individuals responsible incur unlimited personal liability for all losses suffered by investors.

85
Q

Section 36, Companies Act, 2013

A

Outlines the offense of intentionally misleading individuals to invest money and links the punishment to the fraud provisions established in Section 447.

86
Q

What actions constitute fraudulent inducement under Section 36?

A

False, deceptive, or misleading statements, promises, or forecasts.
Deliberate concealment of crucial information.
The INTENT of these actions is to induce someone to:
Engage in a securities transaction (buying, selling, subscribing, underwriting).
Enter an agreement designed to profit from fluctuations in securities prices.
Obtain credit facilities from a financial institution.

87
Q

What are the consequences of fraudulent inducement?

A

The offender is liable for action under Section 447. This means:
Imprisonment: A term of not less than six months, extendable up to 10 years.
Fines: An amount equal to the loss caused by the fraud OR three times the amount of unlawful gain, whichever is higher.

88
Q

Section 37, Companies Act, 2013

A

Grants individuals and groups affected by misleading prospectuses the right to take legal action.

89
Q

Who can take legal action under Section 37?

A

Individual Investors: Any single investor who has been harmed by a misleading prospectus.
Group of Investors: Multiple investors who have collectively suffered due to the same misleading prospectus.
Associations: Associations representing investors or other affected parties.

90
Q

What legal actions are available under Section 37

A

Affected parties can pursue remedies outlined in earlier sections of the Companies Act:
Section 34: Criminal liability for those who authorize a misleading prospectus
Section 35: Civil liability, including compensation for investors who suffer losses due to a misleading prospectus.
Section 36: Addressing fraudulent inducement of investments, linked to the severe penalties under Section 447.

91
Q

Section 38, Companies Act, 2013

A

Defines the offense of personation for the acquisition of securities and establishes associated punishments.

92
Q

What actions constitute punishable personation under Section 38(1)?

A

Fictitious Applications: Using a false identity to apply for or subscribe to a company’s securities.
Multiple Applications: Submitting several applications using variations of your name to acquire or subscribe to securities.
Fraudulent Inducement: Manipulating or deceiving a company into allotting or transferring securities to you or someone else under a false name.

93
Q

What are the consequences of personation under this section?

A

Liability under Section 447: The offender can face the severe penalties for fraud, including imprisonment and fines.

94
Q

: What additional actions can the Court take? [Section 38(3)]

A

Disgorgement of Gains: The court can order the offender to surrender any profits made from the fraudulent activity.
Seizure and Disposal of Securities: The court can seize and dispose of securities involved in the fraud.

95
Q

Where do the proceeds from disgorgement or disposal go? [Section 38(4)]

A

The money goes to the Investor Education and Protection Fund (IEPF), a government initiative for investor protection and awareness.

96
Q

Mandatory Disclosure [Section 38(2)]

A

Companies must prominently include the provisions of Section 38(1) in:
Every Prospectus
Every Securities Application Form

97
Q

Section 39, Companies Act, 2013

A

Outlines the rules and conditions a company must follow when allotting securities offered to the public

98
Q

Key Condition for Allotment [Section 39(1)]

A

A company can ONLY allot securities if:
Minimum Subscription: The minimum amount of subscription specified in the prospectus has been received.
Payment Received: The money due on application for the subscribed securities has been paid via valid methods (like a cheque).

99
Q

Minimum Application Amount [Section 39(2)]

A

The application money payable for each security cannot be less than:
5% of the security’s nominal value OR
A different percentage or amount specified by SEBI regulations.

100
Q

What happens if the minimum subscription is not met? [Section 39(3)]

A

Time Limit: If the minimum subscription is not reached within 30 days of the prospectus issue (or SEBI-stipulated timeline), the collected application money must be refunded.
Refund Procedure: The refund must be made according to prescribed timelines and processes.

101
Q

Filing Requirement after Allotment [Section 39(4)]

A

Whenever a company allots securities, it MUST file a “return of allotment” with the Registrar of Companies in the prescribed format.

102
Q

Penalties for Non-Compliance [Section 39(5)]

A

Failure to refund application money or file the return of allotment results in a penalty for the company and its responsible officers:
Daily Fine: Rs. 1000 per day of continuing default OR
Maximum Fine: Rs. 1 Lakh, whichever is less.
[BOTH COMPANY AND ITS OFFICERS]

103
Q

Section 40, Companies Act, 2013

A

Mandates that companies making a public offer of securities must obtain listing permission from a recognized stock exchange and outlines rules for handling application money.

104
Q

What must a company do before making a public securities offer? [Section 40(1)]

A

Application to Stock Exchange(s): Apply to at least one recognized stock exchange for permission to trade the offered securities.
Obtain Permission: Secure the necessary permission for the securities to be listed.

105
Q

Prospectus Disclosure Requirement [Section 40(2)]

A

If the prospectus mentions that an application to a stock exchange has been made, it MUST also include the names of the exchange(s) where the securities will be listed.

106
Q

Safeguarding Application Money [Section 40(3)]

A

Separate Bank Account: All application monies for the securities must be held in a separate scheduled bank account.
Restricted Use: This money can ONLY be used for two purposes:
Allotment: After the securities are allotted and listing permission is granted.
Refund: If the company cannot allot securities, the money must be refunded within a SEBI-specified timeline.

107
Q

Non-Waivable Requirement [Section 40(4)]

A

Any contract term that tries to make an applicant waive their rights under Section 40 is void and unenforceable.

108
Q

Penalties for Non-Compliance [Section 40(5)]

A

Failure to comply with Section 40 results in:

Company Fine: Minimum of Rs. 5 lakhs, up to Rs. 50 lakhs.

Officer Liability: Officers in default can face:
Imprisonment: Up to 1 year.
Fine: Between Rs. 50,000 to Rs. 3 lakhs.
Potentially both imprisonment and a fine.

109
Q

Paying Commission [Section 40(6)]

A

Companies can pay commission to individuals for securing subscriptions, provided prescribed conditions are met.

110
Q

Section 41, Companies Act, 2013

A

Empowers Indian companies to issue Global Depository Receipts (GDRs) in foreign countries, subject to certain conditions.

111
Q

What are Global Depository Receipts (GDRs)?

A

GDRs are financial instruments that represent ownership of a certain number of a company’s shares. However, GDRs are:
Issued outside of India
Traded on foreign stock exchanges.

112
Q

Requirements for Issuing GDRs [Section 41]

A

Special Resolution: A company must pass a special resolution at its general meeting to approve the issuance of GDRs.
Prescribed Conditions: The issuance must comply with any rules and regulations set by relevant authorities (e.g., SEBI, RBI).

113
Q

Section 42, Companies Act, 2013

A

Outlines the framework and restrictions for companies in India to raise capital through the private placement of securities.

114
Q

What is a private placement? [Section 42(2), Explanation II]

A

A private placement involves:
Offering securities to a SELECT group of persons
Issuance of a private placement offer letter
NOT a public offer of securities

115
Q

Key Limitations on Private Placement [Section 42(2)]

A

Limit on Number of Offerees: A private placement can be made to a maximum of 50 persons (or a higher prescribed limit) per financial year. This excludes qualified institutional buyers and employees offered securities under an ESOP.
Prescribed Conditions: Companies must follow any rules established by SEBI regarding the form and manner of a private placement.

116
Q

Consequences of exceeding offeree limits [Section 42, Explanation I]

A

If a company extends a private placement offer to MORE than the allowed number of people, it will be considered a public offer, even if:
Payment hasn’t been received yet
The company has no plans to list on a stock exchange

117
Q

Sequencing of Private Placements [Section 42(3)]

A

A company cannot launch a new private placement until the allotment process for any previous private placement has been completed, withdrawn, or abandoned.

118
Q

Penalties and Public Offer Conversion [Section 42(4)]

A

Non-compliance with Section 42 results in:
The offer being treated as a public offer
All relevant laws related to public offers become applicable

119
Q

How must subscription monies be paid? [Section 42(5)]

A

Only through:
Cheques
Demand Drafts
Other banking channels
Cash payments are NOT allowed

120
Q

Allotment and Refund Rules [Section 42(6)]

A

Allotment Timeline: Securities must be allotted within 60 days of receiving application money.
Refund Timeline: If allotment isn’t possible, the money must be refunded within 15 days after the 60-day allotment period ends.
Penalty for Late Refund: 12% interest per annum is charged on the delayed refund amount.

121
Q

Safeguarding application funds [Section 42(6), Proviso]

A

Separate Bank Account: Required for application monies.
Restricted Use: Funds can ONLY be used for
Allotment of securities
Refund (if allotment is not possible)

122
Q

Record-Keeping and Disclosure of private placement [Section 42(7)]

A

Pre-Invitation List: Companies must maintain a list of potential offerees BEFORE issuing the invitation to subscribe.
Offeree Details: Offers must be made by name, and complete records of offers made must be kept.
Filing with Registrar: Within 30 days of circulating the private placement offer letter, relevant information about the offer must be filed with the Registrar of Companies.

123
Q

No Public Advertisements [Section 42(8)]

A

Companies cannot use public advertisements, media, or agents to broadly promote a private placement offer.

124
Q

Return of Allotment Filing [Section 42(9)]

A

After any allotment under a private placement, the company must file a return of allotment with the Registrar, containing:
List of all security holders
Full names and addresses
Number of securities allotted
Other prescribed information

125
Q

Penalties for Non-Compliance in Private placement [Section 42(10)]

A

Violating Section 42 can result in:
Penalty: Up to the amount raised through the offer OR two crore rupees (whichever is higher).
Mandatory Refund: The company must refund all subscription monies to investors within 30 days from the date the penalty order is issued.

COMPANIES ACT 2013 (3 decks)

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