SUBMITED BY

JULI KUMARI

USER ID -24GSOL1010033

COURSE NAME- CORPORATE LAW

COURSE CODE- JIUA112T

SUBMITED TO

PROF. MR KAMALJEET SINGH

INDEX
1. PROSPECTUS AND ITS TYPES

2. DEBENTURES AND ITS TYPES

3. PROCEDURE OF ISSUING SECURITIES BY PUBLIC COMPANIES

 PROSPECTUS AND ITS TYPES

ABSTRACT

One of the great advantages of promoting a company is that the necessary capital for business can be raised
from the general public by means of the public issue. This advantage is, however, enjoyed only by a public
company which is listed at a recognized stock exchange. After the receipt of certificate of incorporation, if the
promoters of a public limited company wishes to issue shares to the public, he will issue a document called
prospectus.

Prospectus is a document which helps the public company to raising funds. It is an invitation to the public to
subscribe to the share capital of the public company. The prospectus should be prepared according to the law
and issuing procedure also takes place according to the law. In this paper we will try to know about the kinds
and contents of included under the prospectus as per the Companies Act, 2013.

Keyword: Company, Prospectus, Legal person,

1. INTRODUCTION

The word ‘Company’ is derived from the Latin word ‘Com’ and ‘Panies’. ‘Com’ means ‘with’ or
‘together’, ‘Panies’ means ‘bread’ or ‘meals’ i.e. heaving bread or meals together. The word
‘Company’ in terms of the Companies Act, 2013, ‘means a company incorporated under this
Act or under any previous company law.’¹ In common law a company is a “legal person” or
“legal entity” separate from, and capable of surviving beyond the lives of its members.²

Company is an artificial person and company gets its existence only by the law. By fulfilling
the procedure.³ of the Companies Act, 2013 in India, an artificial person takes its birth by
receiving the Certificate of Incorporation from the Registrar of the Companies. In case of
Private Company⁴ they have to start the business immediately after getting the Certificate of
Incorporation from the Registrar of the Companies. But in case of Public Company⁵ has to
issue the Prospectus.

A public company invites public to subscribe towards its share capital or debentures through
the issue of prospectus. A prospective investor would naturally like activities, future
programmes, nature of investment, element of risk involved etc. every investor would like to
receive reasonable but sure returns. Prospectus of a company provides this information
through prospectus an investor is informed of the soundness of the company’s venture.6
Under Chapter III, Part - I Public Offer, from Sections 23 to 35, of the Companies Act, 2013
covers elaborately about the prospectus, their kinds and related provisions for the public
issue.
2. MEANING AND DEFINITION OF PROSPECTUS

A prospectus is any document, which outlines the company’s financial securities for sale to
interested investors. A prospectus can be issued by or on behalf of the public company.

Section 2 (70) of the Companies Act, 2013 defined the prospectus in the following words:
“Prospectus’ means any document described or issued as a prospectus and includes a red
herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or
any notice, circular, advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of body corporate.” In simple words, any
document inviting deposits from the public or inviting offers from the public for the
purchasing shares or debentures of a company is a prospectus.⁷

In Pramatha Nath Sanyal v. Kali Kumar Dutt, case⁸ court held that ‘An advertisement which
stated that some shares are still available for sale according to the terms of the company
which may be obtained on application was held to be a prospectus as it invited the public to
purchase shares’.

On the basis of aforesaid definition, it may be said that a document should have following
ingredients to

constitute a prospectus:

a) There must be an invitation to the public.

b) The invitation must be made “by or on behalf of the company or in relation to an intended
company”.

c) The invitation must be “to subscribe or purchase”.

d) The invitation must relate to any securities of the company.

3. OBJECTIVES OF PROSPECTUS

The object of prospectus is arousing the interest of the potential investors in the company
and induces them to invest in its share or debentures. Prospectus is issued with the following
broad objectives:

a) It is an official and formal notice of formation of a new company.

b) It is also an official record describing the terms and conditions of offer of capital issues to
investors.

c) It serves as written evidence about the terms and conditions of issue of shares or
debentures of a company.

d) It is a means of promotion to promote the marketing of new issues and plays the role of
silent salesman.

e) However, it is a controlled advertisement and seller beware, attitude is honored.

f) It maintains all authentic records on the issue and makes the directors liable for the
misstatement in the prospectus.

The law is very strict regarding the contents of prospectus and wants to give maximum
protection to numerous innocent investors against unscrupulous promoters and directors.

4. TYPES OF PROSPECTUS

According to the nature of public issue and their usefulness to a company and to public,
there are four types of prospectus. They are: Deemed Prospectus, Red Herring Prospectus,
Shelf Prospectus and Abridged Prospectus.

Deemed Prospectus: Section 25 of the Companies Act, 2013 deals with the deemed
prospectus. When a public company allows or agrees to allot any securities of the company
with a view to all or any of those securities being offered for sale to the public, any document
by which the offer for sale to the public is made shall, for all purposes, be deemed to be a
prospectus issued by the company.

The original allotment is presumed to have been made with a view of offering them to the
public where (1) shares are offered to the public within six months of allotment and (2) where
at the date of offer to the public the whole of the consideration has not been received by the
company.⁹

In the case of SEBI v. Kunnamkulam Paper Mills Ltd, ¹⁰ it was held that where a right issue is
made for the existing members with a right to renounce in the favour of the others, it
becomes a deemed prospectus if the number of such others exceeds 50.

Red Herring Prospectus: Section 32 of the Companies Act, 2013 deals with the Red Herring
Prospectus. A company proposing to make an offer of securities may issue a red herring
prospectus prior to the issue of a prospectus. A company proposing to issue a red herring
prospectus shall file it with the Registrar at least three days prior to the opening of the
subscription list and the offer.
A red herring prospectus shall carry the same obligations as are applicable to a prospectus
and any variation between the red herring prospectus and a prospectus shall be highlighted
as variations in the prospectus. The red herring prospectus does not include complete
particulars of the quantum or price of the securities.

Shelf Prospectus: Section 31 of the Companies Act, 2013 deals with the Shelf Prospectus.
Any class or classes of companies, as the Securities and Exchange Board may provide by
regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the
first offer of securities included therein which shall indicate a period not exceeding one year
as the period of validity of such prospectus which shall commence from the date of opening
of the first offer of securities under that prospectus, and in respect of a second or
subsequent offer of such securities issued during the period of validity of that prospectus,
no further prospectus is required. [S.31(1)]

Information memorandum: A company filing a shelf prospectus shall be required to file an

information memorandum containing all material facts relating to new charges created,
changes in the financial position of the company as have occurred between the first offer of
securities or the previous offer of securities and the succeeding offer of securities. [S. 31(2)]

Abridged Prospectus: Abridged prospectus means a memorandum containing such salient

features of a prospectus as may be specified by the Securities and Exchange Board by
making regulations in this behalf.¹¹ It is also called as a Summary of the prospectus. Normally
companies’ prospectus consists of 300 to 500, 600 pages and it is difficult to attaché with
the application form.

Application form¹² for securities cannot be issued unless they are accompanied by a
memorandum containing such salient features of a prospectus as may be prescribed. This is
known as abridged prospectus. The purpose is to reduce the expense-burden of a public
issue. The full “prospectus” has to be maintained in the office of the company.

. CONCLUSION

In simple words prospects is any document inviting deposits from the public or inviting offers
from the public for the purchasing shares or debentures of a company is a prospectus. The
prospectus shall contain all material information which shall be true and adequate so as to
enable the investor to make informed decision on the investments in the issue. The material
facts disclosed in the prospect by the company must be true, it should not be a misleading, if
any statement or the material facts disclosed falls or misleading than the persons who are
directors at the time of issue of prospects, promoters of the company and the person who
are authorized for issue of the prospects were held to be liable. Misleading not only amounts
to a falls statement of the material facts but also omission of the any relevant fact also
amount to the misleading. In case of a misleading liability can arises both criminal and civil.
 DEBENTURES AND ITS TYPES

Meaning:

If a company needs funds for extension and development purpose without increasing its
share capital, it can borrow from the general public by issuing certificates for a fixed period of
time and at a fixed rate of interest. Such a loan certificate is called adebenture. Debentures
are offered to the public for subscrip-tion in the same way as for issue of equity shares.
Debenture is issued under the common seal of the company acknowledging the receipt of
money.

Features of Debentures:

The important features of debentures are as follows:

1. Debenture holders are the creditors of the company carrying a fixed rate of interest.

2. Debenture is redeemed after a fixed period of time.

3. Debentures may be either secured or unsecured.

4. Interest payable on a debenture is a charge against profit and hence it is a tax deductible
expenditure.

5. Debenture holders do not enjoy any voting right.

6. Interest on debenture is payable even if there is a loss.

Advantage of Debentures:

Following are some of the advantages of debentures:

(a) Issue of debenture does not result in dilution of interest of equity shareholders as they do
not have right either to vote or take part in the management of the company.

(b) Interest on debenture is a tax deductible expenditure and thus it saves income tax.

(c) Cost of debenture is relatively lower than preference shares and equity shares.

(d) Issue of debentures is advantageous during times of inflation.

(e) Interest on debenture is payable even if there is a loss, so debenture holders bear no risk.

Disadvantages of Debentures:

Following are the disadvantages of debentures:

(a) Payment of interest on debenture is obligatory and hence it becomes burden if the
company incurs loss.

(b) Debentures are issued to trade on equity but too much dependence on debentures
increases the financial risk of the company.

(c) Redemption of debenture involves a larger amount of cash outflow.

(d) During depression, the profit of the company goes on declining and it becomes difficult
for the company to pay interest.
Different Types of Debentures:

A company can issue different types of debentures for raising funds for long term purposes.

Different forms of debentures are given and discussed below:

Ordinary Debenture:

Such debentures are issued without mortgaging any asset, i.e. this is unsecured. It is very
difficult to raise funds through ordinary debenture.

Mortgage Debenture:

This type of debenture is issued by mortgaging an asset and debenture holders can recover
their dues by selling that particular asset in case the company fails to repay the claim of
debenture holders.

Non-convertible Debentures:

A non-convertible debenture is a debenture where there is no option for its conversion into
equity shares. Thus the debenture holders remain debenture holders till maturity.

Partly Convertible Debentures:

The holders of partly convertible debentures are given an option to convert part of their
debentures. After conversion they will enjoy the benefit of both debenture holders as well as
equity shareholders.

Fully Convertible Debenture:

Fully convertible debentures are those debentures which are fully con-verted into specified
number of equity shares after predetermined period at the option of the debenture holders.

Redeemable Debentures:

Redeemable debenture is a debenture which is redeemed/repaid on a prede-termined date

and at predetermined price.

Irredeemable Debenture:

Such debentures are generally not redeemed during the lifetime of the com-pany. So, it is
also termed as perpetual debt. Repayment of such debenture takes place at the time of
liquidation of the company.
Registered Debentures:

Registered debentures are those debentures where names, address, serial num-ber, etc., of
the debenture holders are recorded in the register book of the company. Such debentures
cannot be easily transferred to another person.

Unregistered Debentures:

Unregistered debentures may be referred to those debentures which are not recorded in the
company’s register book. Such a type of debenture is also known as bearer debenture and
this can be easily transferred to any other person.

Case Laws:

Roy And Bros. vs Ramanath Das And Ors. on 13 April, 1943

Equivalent citations: AIR1945CAL37, AIR 1945 CALCUTTA 37

JUDGMENT Derbyshire, C.J.

1. This is an appeal from an order made by McNair J. on 13th January 1943. The order was in
terms of prayer (a) of the summons which was to this effect:

That the Official Liquidator may be directed to pay to the applicant in pari passu with other
debenture holders but in priority to other creditors whether secured or unsecured out of the
sale proceeds in his hands as well as out of money realised for uncalled capital of the
company and other realisations the sum of Rs. 99875-3-9 with further interest at 5 per cent,
up to the date of payment being the sum due on the 151 debentures issued by the company
in his favour.

2. The legal question in the case is whether debentures issued by a company charged on the
whole of its property which includes immovable property must be registered under
the Registration Act or whether registration under the provisions relating to the registration
of debentures of companies is sufficient. The facts which led up to this application are
shortly these. The East Bengal Sugar Mills Limited was a company formed to build, equip and
operate a Sugar Mill at Dacca in East Bengal. The Appellants, K. Roy and Brothers are building
contractors and they built the Mill for the company. They were not paid, for their work and
the materials with the result that they eventually went to arbitration and secured an award
for their debt. Whilst the Mill was being built the company in order to equip it arranged to buy
machinery from abroad and to pay for the machinery borrowed money on debentures issued
to various persons. The applicant, Ramanath Das, was a director and one of the managing
agents of the company. He took up 151 of these debentures, each of them for Rs. 500 and
paid for them. With the money realised from the issue of these debentures the company paid
for the machinery it had installed. The debenture were duly registered under Section 109,
Companies Act, but they were never registered under the provisions of the Registration
Act (Act 16) of 1908. The company after working for a time got into financial difficulties and a
winding up order was made by this Court. The debenture-holders did not appoint a receiver
under their debentures. The Official Liquidator appointed by the Court has taken possession
of the land, buildings, plant, machinery and utensils of the company and sold them to a
purchaser who has transferred the undertaking to another company known as the Kaligunge
Sugar Mills Limited.