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PROSPECTUS
Definition of “Prospectus” {Section- 2(36)}
“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 a body corporate;
PROSPECTUS HAS FOLLOWING 3 INGREDIENTS:
1) There must be an invitation to the Public.
2) Invitation may be made by or on behalf of an existing company or intended company.
3) Invitation in connection with any security of the company.
In certain cases prospectus need not be issued:
The prospectus containing all the details required under section 26 is not required to be
issued in the following cases:
Where a person is bona fide invitee to enter into an underwriting agreement with regard
to shares or debentures. [Section 33(1)(a)];
Where the shares or debentures are not offered to the public [Section 33(1)(b)];
Where the issue relates to shares or debentures uniform in all respects with the shares
or debentures already issued and dealt in or quoted at a recognized stock exchange
[Section 26(1)(b)];
Where the shares/debentures are offered to existing shareholders/ debenture holders
[Section 26(1)(a)];
“Shelf prospectus” means a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus. {An explanation to sec. 31(3)}
i. A company filing a shelf prospectus with the Registrar shall not be required to file a
fresh prospectus at every stage of offer of securities by it within a period of validity of
each shelf prospectus.
ii. A company filing a shelf prospectus shall be required to file an information
memorandum on all material facts relating to new charges created, changes in the
financial position as have occurred between the first offer of securities, previous offer
of securities and succeeding offer of securities within such time as may be prescribed ,
prior to making of second or subsequent offer of securities under the shelf prospectus.
Shelf Prospectus {Sec. 31}
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Provided in case of any applicant make advance payment to the company for subscription
then company shall first intimate about such changes to applicant and if he wants to
withdraw his advance, company shall refund his advance within 15 days of receiving such
request.
iii. An information memorandum shall be issued to the public along with shelf prospectus
filed at the stage of the first offer of securities and such prospectus shall be valid for
a period of one year from the date of opening of the first issue of securities under that
prospectus:
Provided that where an update of information memorandum is filed every time an offer of
securities is made, such memorandum together with the shelf prospectus shall constitute the
prospectus.
(1) A company proposing to make an offer of securities may issue a red herring prospectus prior
to the issue of a prospectus and shall file it with the Registrar at least 3 days prior to the
opening of the subscription list and the offer.
(2) 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.
(3) Upon the closing of the offer of securities under this section, the prospectus stating
therein the total capital raised, whether by way of debt or share capital, and the closing
price of the securities and any other details as are not included in the red herring
prospectus shall be filed with the Registrar and the Securities and Exchange Board.
The expression "red herring prospectus" means a prospectus which does not include
complete particulars of the quantum or price of the securities included therein.
Prospectus is an invitation issued to a public to subscribe for or purchase the securities of the
company. Section 2(36) of the Companies Act, 1956 defines “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 a
body corporate;
Red herring Prospectus {Sec. 32}
Distinguish between Prospectus and Letter of Offer:
Letter of offer Prospectus i. Letter of Offer is issued by the
company when it raises its capital by
issue of rights shares to its existing
shareholders.
Prospectus is not required to be issued, when
securities are offered to existing share
holders or debenture holders.
ii. Letter of offer is issued in case of
right issue
Prospectus is issued in case of public issue or
offer for sale.
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Distinguish between “shelf prospectus” and “red-herring prospectus”
Shelf prospectus Red-Herring Prospectus i. “Shelf prospectus” means a prospectus
in respect of which the securities or
class of securities included therein are
issued for subscription in one or more
issues over a certain period without
the issue of a further prospectus.The
shelf prospectus will be valid for a
period of 1 year, from the date of
first issue of securities. A company
filing a shelf prospectus a fresh at
every stage of offer securities by it
will in a period of validity of such shelf
prospectus.
i. Red- herring prospectus is a
prospectus, which does not have
complete particulars:
ⓐ The price of securities offered;
and
ⓑ The quantum of securities
offered.
❒ Prospectus must be dated: This provides prime facie evidence of the date of its publication.
Every prospectus shall be dated & signed whether issued by company (public company) or by
any person interested in the formation of company or on behalf of company or interested
person.
❒ Signature: The prospectus shall be signed by every person who is named therein as a
director or proposed director of the Company or by his duly authorised attorney.
❒ A copy of prospectus must be filed with the Registrar on or before its publication: The copy
sent for registration must be signed by every person who is named in the prospectus as a
director or a proposed director of the company or by his agent authorized in writing. The
Registrar shall not register a prospectus unless the requirements with respect to its
registration are complied with and the prospectus is accompanied by the consent in writing
of all the persons named in the prospectus.
❒ The prospectus must be issued within 90 days of its registration either by newspaper
advertisement or otherwise.
❒ The consent of the expert should be obtained: If the prospectus includes a statement
purporting to be made by an expert, consent in writing of that expert should be obtained
and this fact is stated in the prospectus. It should also state that the consent given has not
been withdrawn.
The expert should not be one who is himself engaged or interested in the formation, promotion,
or management of the company. He should be unconnected with the formation or management of
the company.
The company and every person who knowingly issues a prospectus without delivering a copy
thereof to the Registrar for the registration shall be punishable with fine up to Rs. 50,000
Dating, signing and registration of Prospectus
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which may extend to 3 lakh rupees and person or party in default shall be imprisoned for term
which may extend to 3 years or with fine or both
WHEN REGISTRAR MUST REFUSE REGISTRATION
Section 60(3) provides that the Registrar shall not register a prospectus if —
it is not dated — Section 55;
it does not comply with the requirements of Section 56 as to the matters and reports to be
set out in it;
it contains statements or reports of experts engaged or interested in the formation or
promotion or management of the company — Section 57;
it includes a statement purported to be made by an expert without a statement that he has
given and has not withdrawn his consent to the manner of its inclusion therein;
it does not contain consent in writing of directors, a copy of the documents mentioned in
Section 60(1) has been filed or does not comply with regard to the fact that a copy of it has
been filed with Registrar;
It is not accompanied by the consent in writing of the auditor, legal adviser, attorney,
solicitor, Issue House, banker, managers to the issue or broker, if named in prospectus to
act in that capacity — Section 60(3).
Contents of the Prospectus {Sec. 26}
Part I
Public Offer Headings Explanation
1. General
Information
Address of the Registered Office of the Company.
The authority for the issue and the details of the resolution passed
therefore.
A statement regarding the application made to one or more Stock
Exchanges for listing of securities or name of the stock exchange(s)
in which stocks shall be dealt with.
Minimum subscription, amount payable by way of premium, issue of
shares otherwise than on cash.
Procedure and time schedule for allotment and issue of securities.
Imprisonment for not less than 6 months which may extend to 10
years and fine of not less than amount involved in fraud which may
extend to 3 times of amount involved in fraud, if application made
under fictitious name.
Name and address of the auditors, lead managers, debentures
trustees, and underwriters, solicitors, auditors or such other persons
as may prescribed.
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A statement by BOD that all monies shall be transferred to a
separate bank account and disclosure of details in the prescribed
manner about all the monies including utilized and unutilized monies
out of previous issue.
Consent of the directors, auditors, bankers to the issue, expert’s
opinion, if any, and of such other persons, as may be prescribed.
2. Allotment of
securities or
refunds (Sec.
39)
Date of the opening and closing of the issue, and declaration about
the issue of allotment letters and refunds within the prescribed time
i.e. within 15 days from the closure of issue or such lesser time as
specified by SEBI;
Interest @ 15% for the delayed period due to be paid to the
applicants in case of non-compliance of above provision;
Allotment shall not be made unless company received 5% of nominal
value of securities issued or such other amount or percentage as may
be prescribed by SEBI.
Allotment shall not be made without obtaining prior approval from
stock exchange(s) where stocks shall be dealt with.
A return of allotment shall be filed by company having share capital in
form PAS-3 along with fees as may be prescribed.
In case of default (for each default) with respect to return of
allotment or refund, company and every officer in default shall be
liable to a penalty of Rs. 1000 for each day during which such default
continues or Rs. 1 lakh whichever is less.
3. Utilization of
application
money
[Sec. 40(3)]
Application shall be utilised only for the following purposes:-
for adjustment against allotment of securities where the securities
have been permitted to be dealt with in the stock exchange(s)
specified in the prospectus; or
for the repayment of monies within the time specified by the SEBI,
received from applicants in pursuance of the prospectus, where the
company is for any other reason unable to allot securities.
In case of default company is liable to a penalty of Rs. 5 lakh which
may extend to 50 lakh rupees and officer in default is liable to
imprisonment for a term which may extend to 1 year or with fine of
Rs. 50000 which may extend to Rs. 3 lakh.
4. Underwriters The prospectus shall disclose-
Name of the underwriting;
Rate & the amount of the commission payable;
Number of the securities underwritten absolutely or
conditionally.
The commission should be authorised by articles of the company and
may be paid out of proceeds of the issue or profits of the company or
both but commission shall not be paid on the non-offered securities.
The rate shall not exceed 5% in case of shares or 2.5% in case of
debentures.
A copy of the contract of the payment of the commission shall be
filed with ROC along with the copy of prospectus at the time of
registration of prospectus.
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5. Capital
Structure
Authorized, issued, subscribed and paid up capital
Present issue size
Paid up capital after issue or conversion of convertible securities
Security premium account
6. Sources of
Promoters
contribution
Disclosures in such manner as may be prescribed about sources of
promoter’s contribution.
7. Terms of the
present issue
Terms of payment
Rights of the Instrument holder
How to apply – availability of forms, prospectus and mode of payment.
Utilization of Issue Proceed
8. Particulars of
Issue
Objects of the Issue
The Cost of the Issue Project
Means of financing the Project
Appraisal
Deployment of funds in the project including interim.
9. Details about
Company
Management
and Project
Company’s main objects and present business of the company.
Details of directors including their appointments and remuneration,
and such particulars of the nature and extent of their interests in the
company as may be prescribed.
Names and addresses of Company Secretary, Chief Financial Officer,
auditors, legal advisers, bankers, trustees, if any, underwriters and
such other persons as may be prescribed.
The location of project, schedule of implementation of the project,
gestation period, extent of progress made management perception of
risk about project etc.
10. Outstanding
litigation
Any litigation or legal action pending or taken by a Government
Department or a statutory body during the last 5 years immediately
preceding the year of the issue of prospectus against the promoter of
the company.
11. Financial
information
Auditor’s report, P & L, assets and liabilities, rates of dividend paid by the
company during preceding 5 FYs.
12. Declaration
about
compliance of
various laws
Company shall make a declaration about the compliance of the
provisions of this Act and a statement to the effect that nothing in
the prospectus is contrary to the provisions of this Act, the
Securities Contracts (Regulation) Act, 1956 and the Securities and
Exchange Board of India Act, 1992 and the rules and regulations
made there under; and
State such other matters and set out such other reports, as may be
prescribed.
Offer for sale (OFS)
OFS by company through “Issue House”
{Sec. 25}
OFS by members of the company through
BOD {Sec. 28}
The document “Offer for sale” is an Members of the company are allowed to
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invitation to the general public to purchase
the shares of a company through an
intermediary, such as an issuing house or a
merchant bank.
A company not intended to offer shares
directly to the public through prospectus
may allot or agree to allot any shares or
debentures to an “Issue house”. The issue
house in turn makes an “OFS” to the public.
To make OFS any of the following
condition must be fulfilled [Sec. 25(1)]:
After the allotment or agreement to
allot OFS was made to public within 6
months.
At the date when the offer was made,
the whole consideration to be received
by the company in respect of the
securities had not been received by it.
The document ”OFS” or offer document
(OD) is considered to be prospectus here
because as per sec. 25(1) any document by
which offer or sale of shares or
debentures is made to the public is
deemed to be prospectus.
All laws and rules made thereunder as to
the contents of the prospectus and as to
liability in respect of mis-statements in
and omission from prospectus or otherwise
relating to prospectus shall apply as if this
is a prospectus issued by the company.
OFS shall contain all contents of
prospectus along with following additional
information [Sec. 25(3)]:
The net amount of the consideration
received or to be received by the
company in respect of the securities
to which the offer relates; and
The time and place at which the
contract where under the said
securities have been or are to be
allotted may be inspected.
As far as the signature of the prospectus
is concerned, it will be sufficient if it is
signed by 2 directors (Issuing house is a
company) and in case of firm by not less
than half of the directors. [Sec. 25(4)]
offer their entire or part of holding of
shares to public in consultation with BOD.
[Sec. 28(1)]
Any document by which the offer of sale
to the public is made shall, for all
purposes, be deemed to be a prospectus
issued by the company. [Sec. 28(2)]
all laws and rules made thereunder as to
the contents of the prospectus and as to
liability in respect of mis-statements in
and omission from prospectus or otherwise
relating to prospectus shall apply as if this
is a prospectus issued by the
company.[Sec. 28(2)]
The members, whose shares are proposed
to be offered to the public, whether
individuals or bodies corporate or both
shall collectively authorise the company, to
take all actions in respect of offer of sale
for and on their behalf and they shall
reimburse the company all expenses
incurred by it on this matter.
All the provisions of prospectus shall be
applicable except the provisions relating
to:
minimum subscription;
minimum application value;
any statement to be made by the
Board of directors in respect of the
utilization of money; and
any other provision or information
which cannot be compiled or gathered
by the offeror, with detailed
justifications for not being able to
comply with such provisions.
The name of the entity bearing the cost of
making OFS shall be disclosed with reasons
in the prospectus or offer document.
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Variation in terms of contract or objects of prospectus (Sec. 27)
Company can vary the terms of contracts referred in prospectus or objects of the
prospectus subject to the approval or authority given by company by special resolution in the
general meeting.
Provided that the details, as may be prescribed, of the notice in respect of such
resolution to shareholders, shall also be published in the newspapers (one in English and one
in vernacular language) in the city where the registered office of the company is situated
indicating clearly the justification for such variation:
Company varying the terms shall not use any amount raised by it through prospectus for
buying, trading or otherwise dealing in equity shares of any other listed company.
An exit offer shall be given to the dissenting shareholders being those shareholders who
have not agreed to the proposal to vary the terms of contracts or objects referred to in
the prospectus, by promoters or controlling shareholders at such exit price, and in such
manner and conditions as may be specified by the SEBI by making regulations in this behalf.
Abridged Prospectus
Meaning of 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. [Sec. 2(1)]
Form of Abridged Prospectus and attached to application form: No form of application
for the purchase of any of the securities of a company shall be issued unless such form is
accompanied by an abridged prospectus.
Furnish the copy of prospectus: A copy of the prospectus shall be furnished before the
closing of the subscription list and the offer on a request being made by any person.
When abridged prospectus is not required: where the form of application is issued –
a. To person who is bona fide invited is to enter into an underwriting agreement with
respect to the shares or debentures.
b. In relation to shares or debentures which were not offered to the public
Penalty: if company contravenes this provision shall be liable with fine of Rs. 50000 for each
default.
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Liability for Untrue Statement
It is now clear that a prospectus must be complete and perfect in all details or in other words
nothing should be omitted and nothing must be untrue in a prospectus.Where an untrue
statement occurs in a prospectus, there may arise
(i) civil liability
(ii) Criminal liability.
Every person who is a director of the company at the time of the issue of the
prospectus, every promoter of the company and every person, including an expert, who
has authorized the issue of a prospectus, shall be liable.
Onus for Proof of Mis-statement
The burden of proof in a suit by an allottee that he has been misled by the mis-statement in the
prospectus lies on the allottee. He must prove the following:
(i) The misrepresentation was of a fact
(ii) It was in respect of a material fact. What is a material statement of fact will depend
upon the circumstances of each case.
(iii) He acted on the misrepresentation; and
(iv) He suffered damages in consequence.
Remedies against the company for Misrepresentation in Prospectus
When co. is liable:
A company is responsible for a statement in prospectus only if it is shown that the
prospectus was issued by the company or
By someone with the authority of the company, e.g., the Board of directors.
The company is also liable even though the prospectus is issued by the promoters;
liability for mis-statement in the Prospectus
Civil Liablity Criminal Liability
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The Board ratifies and adopts the issue,the prospectus is the basis of the contract for
shares.
Recession of the contract:
The first remedy against the company is to rescind the contract.
A person who takes shares on the faith of a prospectus containing false statements, may
apply to the Court for the contract to be set aside, and
his name to be struck off from the register of members.
He may also claim his money back.
But the allottee must act within a reasonable time, before any proceedings to wind up
the company have been commenced, and
Before he does anything after notice of misrepresentation which is inconsistent with
the right to rescind.
He will lose his right to rescind if he attempts to sell the shares or attends a general
meeting of the company, or receives dividends.
Sue for the damages:
The second remedy against the company is to sue for damages for deceit.
This suit is founded on the tort of deceit, and is not a case of fraud on the part of
directors or promoters.
The allottee may recover damages from the company for any loss he may have suffered
if the invitation to take shares is emanating from the company and
The persons making it on behalf of the company have fraudulently mis-represented
material facts.
The allottee cannot both retain the shares and get damages against the company.
In actual practice, however, suits for damages against the company are rarely filed.
Damages are generally claimed from the directors, promoters and other persons who
authorized the issue of the prospectus.
Civil Liability for Mis-Statement in Prospectus or Remedies against Promoters,
Directors and Experts {Sec. 35}
Persons responsible for mis-statement in Prospectus {Sec. 35(1)}:
(i) Every person who is director at the time of issue of Prospectus;
(ii) Every person who has authorized himself to be named and is named in the prospectus
either as a director or as Proposed director;
(iii) Every promoter of the company or as proposed director;
(iv) Every other person who has authorized the issue of Prospectus;
(v) Expert as defined in the Act
Aforementioned persons are liable to compensate every person who subscribe for shares on the
faith of Prospectus containing untrue statement, if he suffers any loss or damage by reason of
such untrue statement.
Defenses available to aforementioned persons {Sec. 35(2)}:
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Any of Abovementioned persons shall not be liable, if he proves that-
Withdrew his consent before the issue of Prospectus, if consented to become a director
Prospectus was issued without his knowledge and he gave the reasonable public notice on
becoming aware of the untrue statement in the prospectus.
Prospectus issued to defraud the applicants (Sec. 35(3)}:
Notwithstanding anything contained in above provisions where it is proved that prospectus was
issued to defraud the applicants or for any fraudulent purpose all the persons mentioned u/s
35(1) shall be personally responsible, without any limitation of liability, for all or any of
the losses or damages that may have been incurred by any person who subscribed to the
securities on the basis of such prospectus.
According to section 34 of the Companies Act, 1956, where a prospectus includes any untrue
statement, every person who has authorized the issue of the prospectus shall be punishable u/s
447 which indicates:
1) Imprisonment for a term not less than 6 months which may extend to 10 years; and
2) Fine up to the amount involved in the fraud which may extend to 3 times of amount of
fraud.
However, where a person who has authorized the issue of the prospectus proves, either that
the statement was immaterial or that he had reasonable ground to believe, and did, up to the
time of issue of prospectus believe, that the statement was true.
Penalty for Fraudulently Inducing to Invest Money {Sec. 36}
Liability of imprisonment of not less than 6 months which may be extended to 10 years and fine
not less than the amount involved in the fraud which may be extended to 3 times of the amount
involved in the fraud provided by Section 447 against any person who, either knowingly or
recklessly has made a false, deceptive or misleading statement, promise or forecast or had by
dishonestly concealing material facts, induced another person to enter into, or to offer to enter
into:
a) Any agreement for or with a view to acquiring, disposing of, subscribing for, or
underwriting shares or debentures; or
b) Any agreement, the purpose or pretended purpose of which is to secure a profit to any
of the parties from the yield of shares or debentures or by reference to fluctuations in
the value of shares or debentures.
c) any agreement for, or with a view to obtaining credit facilities from any bank or financial
institution,
Liability for making application on the fictitious name {Sec.38}
(1) Any person who makes or abets
making of an application in a fictitious name or
making of multiple applications under different names or in different combinations
of his name or surname
Criminal liability for Mis-Statement in Prospectus (Sec. 34)
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to a company for acquiring or subscribing for its securities; or otherwise induces directly or
indirectly a company to allot, or register any transfer of, securities to him, or to any other
person in a fictitious name, shall be liable for action under section 447 i.e. imprisonment for
not less than 6 months which may extend to 10 years and fine of not less than amount
involved in fraud which may extend to 3 times of amount involved in fraud.
(2) The above provision shall be prominently re-produced in every prospectus or every
application form issued for securities.
(3) If any person found guilty under this section, court may order disgorgement of gain, if
made, seizure and disposal of securities in possession of such person.
(4) Amount received through disgorgement or disposal of securities shall be credited to IEPF.
Action by affected persons or Class suits {Sec. 37}
Global Depository Receipts
As defined by Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme, 1993
“Global Depositary Receipts” means any instrument in the form of a depositary receipt or
certificate (by whatever name it is called) created by the Overseas Depositary Bank outside
India and issued to non-resident investors against the issue of ordinary shares or Foreign
Currency Convertible Bonds of issuing company.
As per section 2(44) “Global Depository Receipt” means any instrument in the form of a
depository receipt, by whatever name called, created by a foreign depository outside India
and authorised by a company making an issue of such depository receipts.
A company may, after passing a special resolution in its general meeting, issue depository
receipts in any foreign country in such manner, and subject to such conditions, as may be
prescribed. (Sec. 41)
Note: GDR are discussed in detail under the chapter of shares.
Any person, group of persons or any association of persons affected by any misleading
statement or the inclusion or omission of any matter in the prospectus may file a suit or take
any other action u/s 34 or 35 or 36.
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