promoters prospectus d

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Promoters

D efinition

There is no definite meaning

Facts of each case point out that whether a person should be considered as a Promoter

In Twycross v Grant (1877) 2CPD 469 CA

The court said that the defendants

1. Framed the scheme

2. Provisionally formed the company

3. Found the directors and qualified them

4. Prepared prospectus

5. Paid for printing, advertising and other expenses incidental to bringing the undertaking

Hence by work undertaken by him, it is clear that they are .

D efinition

Hence we can say that:-

Before a company can be formed, there must be some persons who have the intentions to form acompany and who take the necessary steps to carry that intention into operation. Such persons arecalled Promoters . (Charlseworth and Morse, Company Law p48; 14 th edition, 1991)

Are all persons involved in incorporation of a company are promoters?

D efinition

A person who works under professional capacity is not a promoter.

eg:- Solicitor preparing documents of the proposed company; accountant

Bu t if he acts o u tside his professional capacity than he might be treated as Promoter.

eg:- If Solicitor helps in getting the subscribers/ shareholders or helps in appointment of D irectors

D uties and Liabilities

If there is any misrepresentation in prospectus, the promoters have civil and criminal liability.

It is a fiduciary position somewhat like trustee or agent but not exactly so because company isnot in existence.


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His dealing must be fair and open

He is not restrained from making profit during the promotion/ incorporation of the company buthe has to disclose his interest.


Disclos u re

If promoter is starting a company for the purpose of buying his property and wants to draw his paymentfrom the money obtained from the shareholders, he must faithfully disclose all facts relevant to theproperty. If he conceals any fact in relation to character or value of the property or his personal interestthan the company is entitled to set aside the transaction (rescind) or claim for compensation/ damages.

To whom the Promoter has to disclose?


E rlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

A group of Persons headed by E purchased an island containing phosphate mines for 55,000 pounds Acompany was then incorporated to take over the island and to work the mines. E named 5 persons asdirectors. 2 were abroad. Of the three others, 2 were persons entirely under E s control. These 3directors purchased the island at 1,10,000. A prospectus was then issued. Many persons took shares.The purchase of Island was adopted by the shareholders at their first meeting; but the realcircumstances was not disclosed to them.

The company failed and the liquidator sued the promoter for refund of the profit.

The promoter argued that the BO D s had full Knowledge of the facts.

The principle laid down:- If the promoters propose to sell their property to the company, it is incumbentupon them to take care that they provide with competent and impartial executive body, who canexercise an independent judgement on the purchase of the property.


Every time it is not possible for the promoters to provide an independent BO D as in private or publiccompany consisting of only family members.

Gluckstein v. Barnes (1900)AC 240

A syndicate of persons were formed to raise a fund, buy a property, called Olympia and resell it to acompany. They first bought up some of the charges upon the party for sums below the amount whichthe charges afterward realised and thereby made a profit of 20,000 pound. They brought the property


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A copy of SILOP and application form are circulated among selected persons which can not bepassed on to others.

Book Building Process

Private placements are done by banking and financial institutions and is known as Book BuildingProcess.

In BBP orders are collected from investment bankers and large investors based on an indicativeprice.

Even in public issue operation, book building is allowed to the extent to which reservation inissues is permissible (SEBI)

BBP is advantageous because the demand for and value of the company s securities is

discovered by providing price flexibility and bidding.

Prospectus (s2(36))

Public appeal for subscription must be accompanied by a memorandum containing such salientfeatures of a prospectus as may be prescribed.

Prospectus

Definition:

D ocument described or issued as prospectus, includes

Any notice, circular, advertisement or other documents

Inviting deposits from the public or inviting offers from the public for the subscription orpurchase of any shares in debentures of a body corporate.

Prospectus

Application form to be accompanied with prospectus or abridged prospectus.

Publication cost of prospectus has become very high so 1998 amendment introduced the

concept of an abridged prospectus.

Full prospectus should be made available on demand, before the closing of subscription.

Abridged Prospectus

It is substitute of full prospectus.

It is a memorandum containing such salient features of a prospectus as may be prescribed.


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There should be nothing in AP which is not there in full prospectus

Two applications can accompany one AP

The provisions of the Act relating to prospectus (misrepresentation, omission) would be onlyapplicable if it is issued. Issued means issued to public.

Sec.67 says that no offer or invitation shall be treated as made to the public if it is not calculatedto become available to persons other than addresses or is otherwise a domestic concern of thepersons making and receiving the offer etc. The Amendment of 2000 says any circulation tomore than 50 persons would become a public offer.

Case

N ash v Lynd

A document marked strictly private and confidential but in form of a prospectus (did not contain all

the material facts as required by the Act) was prepared by the defendant, the M D of the company. Acopy of it along with application forms was sent to a solicitor who in turn sent it to the plaintiff.

An action for compensation for omission of certain facts was brought by the plaintiff.

It was held that it did not amount to an issue and hence the plea was dismissed.

Prospectus

It should be dated. (s.55)

The date shall, unless the contrary is proved, be taken as the date of publication of the prospectus.

D isclosures to be made (s.56)

Expert s consent.(s.58) Expert should not be one who is himself engaged or interested in theformation, promotion or management of the company.

It should be registered.(s.60)

Copy of every Prospectus is to be registered with the ROC on or before the publication of theprospectus.

Registration of Prospectus

Copy of the Prospectus sent for Registration must be signed by every person who is named therein as adirector or proposed director of the company or by his agent.

It should be accompanied with

Consent of the expert (if a report of an expert is to be published;


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Copy of every contract relating to appointment and remuneration of managerial personnel;

A copy of every material contract, unless it is entered into in the ordinary course of business ortwo years before the date of the prospectus;

A written statement relating to the adjustments, if any, (profits or losses or assets and liabilities)dealt in any report in pursuance to Part II of Schedule II. The statement should give reasons forthe adjustments and be signed by an expert;

The consent in writing of the person, if any, named in the prospectus as the auditor, attorney,banker, broker etc., to act in this capacity.

Registration of Prospectus

The Prospectus must be issued within 90 days of its registration.

The company and every person who knowingly issues a prospectus without registration is

punishable with a fine which may extend up to Rs.50,000

It must be stated on the face of the prospectus that it has been registered and that the requisitedocuments have been filed.

Shelf Prospectus

It is like information contained in a file lying on a shelf.

It is issued by public financial institution or public sector bank.

It is valid for certain period

The institutions will not have to file a prospectus every time it issues securities withinthe validity period.

The company is required to file an information memorand u m on all material facts tonew charges created, changes occurring in the financial positions in the period from firstoffer of securities, previous offer of securities and the succeeding offer within such timeas may be prescribed by the central Gov. prior to making second or subsequent offer of securities under the shelf prospectus.


Disclos u re

The golden rule as to framing of prospectus must be observed which was laid down in New Brunswick and Canada Rly and Land Co v Muggereridge (1860) 3 LT 651 and was described as a golden legacy in

H enderson v Lacon (1867) 17LT 527



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Disclos u re

The rule of golden legacy is

Public is invited to take shares on the faith of the representations contained in the prospectus. Thepublic is at the mercy of the promoters. Everything must, therefore, be stated with strict and scrupulousaccuracy .

Any misrepresentation would make all involved, liable (civil & criminal)

Remedies for Misrepresentation

Following remedies for misrepresentation are available:-

D amages for D eceit (Liability of D irectors and company)

Compensation under Section 62

Rescission for misrepresentation

Liability under section 56

D amages for D eceit

D erry v Peek (1889) 14 AC 337(Fraudulent Misstatement)

A special Act incorporating a tramway company provided that carriages might be moved by animalpower and with the consent of the Board or Trade, by steam power. The directors issued a prospectuscontaining a statement that by because of passing of special Act, the company had the right to use

steam power instead of horses and that a saving would be effected thereby.

Consequently, the company had to be wound up.

The plaintiff having taken shares on the faith of the statement brought an action of deceit against thedirectors.

The statement was certainly untrue because the power to use steam was stated to be an absolute right,when it was conditional on the approval of the Board of Trade. But the directors honestly believed thatonce the Act of Parliament had authorized the use of steam the consent of the Board of Trade waspractically concluded. Hence


E dgington v Fitzmaurice (1885) 29 Ch D 459

(false representation must relate to some existing facts which are material to the contract of Purchasingshares)


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The directors of a company issued a prospectus inviting subscriptions for debentures stating that theobjects of the issue of the debenture was

to complete alterations in the buildings of the company,

to purchase horses and vans and to develop the trade of the company.

Relying on the statement plaintiff advanced money.

However the real object was to enable the directors to pay off pressing liabilities

The company became insolvent and plaintiff sued the directors for fraud.


E dgington v Fitzmaurice (1885) 29 Ch D 459

Judgment:

There was misrepresentation of facts.

W hether this was fraudulent?

Fraud is proved if false representation has been made-

1. Knowingly, or

2. W ithout belief in its truth, or

3. Recklessly, carelessly whether it be false or true

Principle laid down

Anyone who has been induced to invest money in a company by a fraudulent statement in aprospectus can sue the persons responsible for issuing it.

If his action is successful he recovers full compensation for the loss sustained by him directly asa result of the fraud.

But the burden of proof lie on him to establish the following main points of action.


Peek v Gurney (1873) 43 LJ Ch 19: (Remedy for D irect allottees)

A deceitful prospectus was issued by the defendants on behalf of a company. The plaintiff received acopy of it but did not take any shares originally in the company. The allotment was completed andseveral months afterwards the plaintiff bought 2000 shares from the stock exchange.


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The action against directors for deceit was -------

The objective of Prospectus is to invite people to become allottees and once the allotment is closed, thevalidity


Possfund Custodian Trustees Ltd v D iamond (1996) 2 BCLC 665 Ch D : (Buyers in Secondary Market)

The prospectus here was for flotation of securities on the unlisted securities market. A majority of thecomplainants were original allottees and others were buyers in the open market. The company wentinto receivership. There were action actions against the company for false statements in the prospectus.

The company applied for striking out the claims of after market purchasers.

The court said that such purchasers would have to establish that they had reasonably relied on therepresentation made in the prospectus


Liability of Company

The company may be sued for damages provided that the fraud was committed by the directors withinthe scope of their authority. But the action against company is beset with the limitation laid down by theHouse of Lords in H ouldsworth v City of Glasgow Bank (1880) 5 App Cas 317 that

The contract of allotment must first be rescinded and then claim damages because

-one cannot remain in the company as a shareholder and yet sue it for damages.


Liability of Company

Present View

E nglish Misrepresentation Act, 1967 entitles the Court to award damages in lieu of rescission.

Thus, rescission is no longer necessary as a prerequisite for liability of the company in England.

Compensation under Sec.62

In Derry v Peek the D irectors were not held liable for the payment of damages because they believed inwhat they quoted.

But it was argued that investor is only interested in his loss and not on the misrepresentation beinginnocent or fraudulent.

Hence section 62says:


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Every person who is a director of the company at the time of the issue of theprospectus.

Every person who has authorized himself to be named as a director in the prospectus.

Every promoter who was a party to the preparation of the prospectus

Every person who authorized the issue of the prospectus.

They are liable to compensate the investor for any loss sustained by him by reason of any untruestatement contained in the prospectus

Compensation under Sec.62

Greenwood v Leather shod Wheel Co. (1900) 1 Ch 421

The prospectus issued by a wheel manufacturing company stated: Orders have already been received

(inter alia), from the House of Commons W heels for the trolleys in the House of Commons have beenordered and are now in use. In fact no single order had been obtained except for trial and by way of experiment.

It was held that the prospectus contained untrue statement.

Under this section, the plaintiff does not have to prove fraud. If the statement is false, the directorscannot escape liability even if they had made bona fide and not with the intent to deceive.

Bu t they have certain defenses u nder the section, S. 62 (2)

D efenses under the section, S. 62(2)

W ithdrawal of consent- D irector not liable if he had withdrawn his consent to become adirector before the issue of the prospectus and the same was issued without hisauthority or consent

Issue without knowledge- By proving that Prospectus was issued without his knowledgeor consent and on becoming aware he forthwith gave a public notice to that effect

Ignorance of untrue statement- He was ignorant and on becoming aware, he withdrewhis consent by a reasonable public notice, before allotment

Reasonable ground for belief- he as to show that he honestly believed the statement tobe true and belief was based on reasonable ground. ( D erry v Peek)

Statement of expert-

D efenses under the section, S. 62(2)


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An action was brought by the plaintiff to recover compensation from a director of a company inrespect of false statements in a prospectus.

The director contended that the statements were prepared by the promoters and before issuing heenquired from one of them whether everything is alright and he replied in affirmation. So he is not liable

as he believed the statement to be true.

D uty of D irector?

Interest of Promoter?

Legal standing of statement made by promoter or any other competent party?

Rescission for misrepresentation

Sec. 18, 64, 75 of Indian Contract Act, 1872 is applicable

Sec. 18- An allotment of shares can be avoided at the option of the allottee if it was caused bymisrepresentation whether innocent or fraudulent

Sec. 64 - By avoiding the contract he is able to get rid of his shares and claim the money he paid forthem.

Sec. 75 A person who lawfully rescinds a contract is entitled to compensation for any damage which hehas sustained through the non-fulfillment of the contract.

Essential req u isites for rescission

False representation

Of facts and not of Law

Reliance and Inducement

By or on behalf of company

Limits of Recission and loss of right

By affirmation

By unreasonable D elay

By commencement of W inding up

Criminal Liability


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For any untrue statement in the prospectus, every person who authorized the issue of the prospectusshall be punishable with

Imprisonment for a term which may extend to two years , or with fine which may extend up toRs.50,000/ or both

Person involved can take a defense by showing that

The statement was immaterial or

He had reasonable ground to believe and

Up to the time of the issue of the prospectus believed that the statement was true.

Shares

Allotment - Acceptance by the company of the offer to take shares

Offer and Acceptance = Contract/ Allotment

Contract D eed = Share certificate

A share is

N ot a sum of money but

Interest of a shareholder in the company which is

Measured by a sum of money

For the purpose of liability and interest

Shares

V ishwanathan v. E ast Tndia D istilleries- It is movable property (but can be transferredonly in the manner provided by the AOA of the company). S. 82.

It is intangible

A share is not a negotiable interest

CIT v Associated Industrial D evelopment Co. It is an expression of proprietaryrelationship between a shareholder and the company

Shree Gopal Paper Mills Ltd. V CIT- Life of share:- part of share capital Shares issuedconverted to stock (if mentioned in AOA)

W hen share is associated with any person it becomes movable party whose transfer isgoverned by Sale of Goods Act and AOA of the company


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Shares

Share Certificate (S.84)

Shree Gopal Paper Mills Ltd. V CIT -

Certificate under the common seal of company

Prima facie evidence of the title of shares or stock

Presently no share certificate is issued, shares transferred in demat form

Share Capital

Amount of share capital not necessary to disclose during registration

In case if the company desires to be registered it must state (where?) the amount of capital and the no. of shares into which it is to be divided

Share Capital

N omenclatures

Authorised Capital

Issued Capital

Subscribed Capital

Paid-up Capital

Reserve Capital

Shares

Shares

Capital may be divided into shares of one class or two

Kinds of shares

1. Equity share capital/shares

1. W ith voting rights; or

2. W ith differential rights as to dividend, voting or subject to conditions prescribed(Amendment 2000)


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2. Preference Share Capital

3. Shares

Issue of share capital with differential voting rights ( D VR); Rules,2001

shares with D VR + non-voting shares= 25% total issued share capital

Company issuing should have 3 yrs distributable profit in the three financial yearspreceding such issue

Equity capital with regular voting rights will not be allowed to be converted into D VRshare and vice-versa

Issue of D VR has to be approved by the shareholders resolution in a general meetingand listed company may obtain the shareholder s approval through postal ballot

A company which has defaulted in filing annual returns during immediately precedingthree financial years or has failed to repay its deposits or interests thereon on due dateor pay dividend shall not be eligible to issue shares with differential rights

Shares

Issue of Equity share capital with differential voting rights ( D VR); Rules,2001

Company should not have defaulted in addressing investor s grievances

It should be permissible in AOA

The Company should not have been convicted of any offence under:

1. SEBI Act, 1992;

2. Securities Contracts (regulation) Act; 1956; and

3. FEMA, 1999

Members holding equity shares with equity share with differential rights shall beentitled to bonus and rights issue of the same class

Shares

Equity shares

This do not enjoy any preferential right in the matter of payment of dividend orrepayment of the capital

D ividend is not fixed but varies from year to year depending on the profits available.


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Rate of dividend is recommended by BO D s and declared by shareholders in the AGM

In public company and deemed public company equity shareholders have right to voteon every resolution placed in the meeting and the voting rights shall be in proportion tothe paid up equity capital

Shares

N ature of Preference Shares/ Share Capital

Assured preferential dividend (fixed amount or fixed rate payable and may be paid backand shares acquired/redeemed)

Payment made before equity shareholders are paid (during the life of company andwinding up)

Voting Rights given only when their interests are affected like in winding up or

repayment or reduction of its share capital. However, if preference dividend is not paidfully for more than two yrs, they shall also get voting right on every resolution placedbefore the company.(s.87)

Safe source of investment than equity shares

Shares

Types of Preference Shares/ Share Capital

Participating or N on- Participating

Cumulative or N on-Cumulative

Redeemable or Irredeemable Preference Shares ( Amendment 1988 prohibits the issueof Irredeemable Preference Shares and in 1996, redeemable after 20 yrs from the dateof its issue)

Pre-class handout for 16-4-2010

How capital is raised by companies limited by shares and guarantee?

W ho helps in raising of capitals?

Can existing companies raise capital from the shareholders of fully paid up capital?

Can a shareholder who has partly paid up share be called to raise capital?

Statutory restriction on Allotment

Minimum Subscription and Application Money(s.69)


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Statement in lieu of Prospectus

Opening of Subscription list

Shares to be dealt in on Stock Exchange


Minimum Subscription and Application Money(s.69)

N ot to be less than 90% of the whole issue offered to the public S. 69(1)

N o shares can be allotted unless at least so much amount has been subscribed and

Application Money (which must not be less than 5% of the nominal value of the share)has been received in cash

It is condition precedent to valid allotment that the allotment money should have beenpaid to and received by the company

The application money has to be kept in separate bank account with the bankers to theissue and can be transferred to company s account when the allotment is done


Minimum Subscription and Application Money (s.69)

To constitute a valid offer the application has to be accompanied by payment

Allotment of shares made without the application money paid is invalid and thedirectors are guilty of misfeasance

Failure to attracting minimum subscription within 120 days of the issue of prospectus application money should be repaid without interest if not repaid within 130 days, thedirectors become personally liable for it with interest unless they prove that the faultwas not theirs

Application money can only be used for allotment or for refund and not to settle anyother account of the applicant


Statement in lieu of Prospectus

N o allotment shall be made at least three days before the registration of SILOP with ROC

If allotment done against above condition than it is voidable at the instance of theapplicant provided


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1. He moves within two months of the statutory meeting of company

2. W ithin two months after the date of allotment where statutory meeting is notrequired to be held or allotment is done after statutory meeting

3. Only notice giving is sufficient, to start legal proceeding in this time is notnecessary

W here contravention is willful, the guilty directors are liable to compensate the allotteeand the company, provided the party suing has suffered loss and brought the actionwithin two years of the allotment.


Opening of Subscription list (s.72)

Time of opening of s u bscription List - N o allotment shall be made until the beginning of

the 5th day from the date of the issue of the prospectus.

This time may be extended but cannot be cut short by the directors

A statement to extend this time has to be made in the prospectus

Any contravention to this does not make the allotment void, although it would attractpenalty on the company and its officer

Application for shares are revocable only from the 6 th day from the opening of thesubscription list


Shares to be dealt in on Stock Exchange (S. 73)

Every company intending to offer shares or debentures to the public by the issue of aprospectus has to make an application before the issue to any one or more of therecognized stock exchange for permission for the shares/debentures to be dealt with atthe exchange.

This is compulsory (Amendment 1988)

An allotment shall become void if the permission has not been granted before the expiryof ten weeks from the date of the closing of the subscription list

If the allotment becomes void under S.73, the applicants money should be refundedwithin 8 days other wise the directors would be personally liable to repay it with interestof 4% - 1 5% per annum.



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Shares to be dealt in on Stock Exchange (S. 73) Objective of this section

UO I vs Allied International Products Ltd.(1970) 3 SCC 574

SC said that the object of the provision is to enable shareholders to find a ready market for their sharesso that they can convert their investment into cash whenever they like. SC held that even if one out of several stock exchange applied for and granted recognition it would be sufficient to validate thefunction.

Amendment of 1974 nullified this judgment. N ow, if out of the stock exchanges applied for, a single stock exchange refuses to grant listing, the allotment, if already made, becomes void. Than What Company issu pposed to do?


Shares to be dealt in on Stock Exchange (S. 73) Than What Company is s u pposed to do?

The company may appeal to the Central Government.

If the appeal is successful, the decision of stock exchange is set aside and the listing would be granted.

The allotment would be saved.


Present position of S. 73

1. S.73 (1) The name of the stock exchange/s to which an application for permission hasbeen made to be specified in the prospectus itself

2. S.73 (5) If any stock exchange has not granted its permission or has not disposed off theapplication within 10 weeks the allotment shall become void, even if some other stockexchange/s have granted the permission

3. Earlier an application had to be disposed off within 4 weeks or could have beenextended by the exchange to 7 weeks. N ow the time is that of 10 weeks from the dateof the closing of the subscription list

Restriction on Transfer

Private Companies or Public Companies (not listed)

For the convenience of trading in unlisted securities (investors in new and small companies) an Over theCou nter Ex change of India ( OTCE I) has been established which provides liquidity facilities to suchinvestors.

Sec 3(iii)


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Pvt. company can impose restriction on the right of share transfer through it s constitutional document.

Case

Article provided that shares can be transferred to outsider only if no existing members accept them atface value.

Q. W hat should a share holder wishing to transfer his shares do?

Q. D o the Board of D irectors have the right to refuse the transfer of the shares done to an outsider?Explain.

Case

Smith and Fawcett, Re (1942) Ch 304

Article provided that directors may at any time in their absolute and unconditional discretion refuse to

register any transfer of shares.

Issued capital consisted of 8002 shares, each holding 4001 shares each.

One director died, son applied to get the shares registered in his name

D irector transferred only 2001 shares, rest to himself.

Q. Is the refusal valid?

Q. D o the D irector have the right to refuse the transfer of the shares? Explain.

Restriction on Transfer

In the following circumstances, however there can be judicial or quasi-judicial intervention:

Mala fide intention of the director

Inadequacy of reasons

Irrelevant considerations

Allotment

Effective allotment has to comply with the requirements of the law of contract relating to acceptance of an offer

Allotment by proper authority

W ithin reasonable time reasonable time must remain a question of fact in each case.On the expiry of reasonable time application must be deemed to have been revoked.Application in June allotment in N ov invalid.


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Must be communicated Posting of properly addressed and stamped letter of allotment is a sufficient communication even if the letter is delayed or lost in the courseof post.

H ousehold Fire and Carriage Accident Insurance Co. v Grant

Absolute & unconditional The applicant must promptly reject the allotment whenshares have been allotted to him without his condition being fulfilled. An acquiescenceon his part would amount to waiver of the condition.

Share Certificate

It is a document certifying that he is the holder of the specified number of shares in thecompany.

Shares in depository record is not given their distinctive number

Objective of share certificate

1. Estoppel as to title

2. Estoppel as to payment

Pre-class handout for 16-4-2010

W hat are Sweat Equity shares?

W hat is Underwriting Commission (S. 76)

W hat is Brokerage?

D ifference between Underwriting Commission and Brokerage

Issue of Shares at Premium (S. 78)

(S. 79) Issue of Shares at discount

Allotment of shares at discount is ultra vires. So if allottee (got shares at discountedvalue) has been registered as member become bound to pay the full value of shares.

Contract to take shares at discounted rate is unenforceable

Issue of shares at discount even in indirect manner is also not permissible

Mosely v Koffyfontein Mines Ltd., (1904) 2 Ch 108

Company issued debentures at discount, which is allowed by Act, and gave each debenture holder theright to convert his debentures into shares


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It was held that it was colourable scheme for issuing shares at a discount and therefore was not legal.

(S. 79) Issue of Shares at discount

Subject to following strict conditions, company may issue its shares at discount

Shares of the class issued for the first time are not allowed to be sold at a discount

The Company contemplating such an issue must have become entitled to commencebusiness at least one year before the date of issue

Proced u re A resolution (specifying the rate of discount not exceeding 10%, except with the approval of CG) authorizing the issue must be passed.

Finally within 2 months, from the date of approval by BO D , Sanction from CG should be obtained andthe share should be issued.

Example Sweat eq u ity shares (S.79-A)

Sweat Equity Shares (S.79-A)

Sweat equity shares issued at a discount or for consideration other than cash for providingknow-how or making available rights in the nature of intellectual property rights or valueadditions.

This section enables the companies to issue shares in lieu of services.

The shares should be of a class which has already been issued.

The issue should be authorized by a special resolution at a general meeting of the company.

The resolution should specify the number of shares and their current market price and also theclass or classes of directors or employees to whom they are issued

At least one year must have elapsed between the commencement of business by the companyand the date of such issue.

SEBI Regulations governs it.

(S.76)Underwriting Commission

S.76 allows a company to pay commission to any person for his subscribing or agreeing tosubscribe for Shares or debentures or for procuring of agreeing to procure subscription forshares or debentures of the company.

Underwriting is now compulsory


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Financial Institutes work as underwriters.

Underwriting agreement is not only guarantee, but also an application of shares which are nottaken up by public.

The underwriter may relieve himself of the burden by entering into sub-underwriting contracts.The sub-underwriter becomes bound to the company in the same way as the originalunderwriter.

Conditions governing Underwriting Commission

The payment of the commission must be authorised by the article.

The rate of commission should not exceed 5% of the price at which the shares are issued or anyless amount prescribed by article. In case of debentures it should not exceed 2.5%.

The rate should be disclosed in the prospectus or statement in lieu of prospectus.

N o. of shares/debentures underwritten has to be declared in the prospectus.

A copy of underwriting contract should be delivered to the Registrar along with the Prospectus.

Brokerage

Reasonable Brokerage should be allowed.

Commission of 2.5% to brokers was held to be reasonable

A broker does not undertake to subscribe for shares to the extent of public default.

The brokerage can be paid only to a person who carries on the profession of broker and not to aperson who has casually induced others to subsribe.

Call on Shares

S.36(2) says that all money payable by any member to the company shall be a debt due fromhim to the company .

But the liability to pay this debt arises only when a valid call has been made.

Voting rights are regulated only by the amount actually called by the company. (S.92 gives thecompany the power, if so authorized by its article, to accept from any member the whole or apart of the amount remaining unpaid on any shares held by him, although no part of that hasbeen called up. Such payment will not entitle the member to more voting rights as comparedwith other members until all have been called upon to pay.)

An enforceable call shall have to conform to the provisions of the Act and the AOA of thecompany.


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Requisites of a valid call

By Resolution Of Board of D irectors - D irectors making it are duly appointed and qualified andthe meeting of the directors has been duly convened, the proper quorum is present and theresolution making the call is duly passed.

Amount and time of Payment- The resolution must state the amount of the call and the time atwhich it is to be paid, otherwise the call will be invalid.

Bona fide in interest of company- The amount called up must be used scrupulously for theobjects of the company and the amount uncalled must be called onlky it is necessary for thoseobjects.

Uniform basis- Calls shall be made on a uniform basis on all shares falling under the same class.

Issue of Shares at Premium

Shares are allotted at greater than the nominal value.

SEBI guidelines have to be followed when fixing the rate of premium.

An amount equal to the extra value of shares shall be deposited in separate account to beknown as The Securities Premium Account.

The fund in the share/securities premium account can be used in the following four ways:-

1. It may be applied to issue to the members as fully paid by way of bonus the unissuedshares of the company

2. It may be used to write-off preliminary expenses

3. It may be uused to write-off commission or discount account.

4. It may be spent in providing for the premium payable on the redemption of preferenceshares or debentures of the company.

Purchase of its own share(S.77)

N o company limited by shares and no company limited by guarantee and having a share capital,shall have power to buy its own shares, unless the consequent reduction of capital is effected

and sanctioned in pursuance of S. 100 to 104 or of S. 402.

Buy-Back of Shares(S.77-A)

Brought by Companies (Amendment) Act, 1999


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S.77-A (1) indicates the fund out of which the exercise of buy-back is to be financed. The sourcesallowed are the (i)Company s free reserves, (ii) securities premium account, (iii) proceeds of anearlier issue.

N o buy back of any kind of shares or other specified securities can be made out of the earlier

proceeds of the same kind of shares/specified securities.

S.77-A (2)prescribes formalities. (i)There should be provision of buy-back in AOA. (ii)A specialresolution at a shareholder s meeting or a resolution of the BO D should be passed. (iii)Theamount involved in buy-back should be less than 25% of the company s total paid up capital andfree resources. (iv) Buy-back of equity shares in any financial year shall not exceed 25% of thecompany s total paid-up equity capital in that financial year. (v) The shares bto be bought backshould be fully paid. (vi) Buy-back of listed securities should be in accordance with theregulations made by the SEBI.

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Amendment in 2001 provides an exception to the S.77-A(2).

The requirement of (2) is not to apply where the buy-back is 10% or less than that, of the totalpaid-up equity capital and free reserves of the company and has been authorized by a resolutionof the BO D passed at its meetings.

N o offer of buy-back can be made within one year reckoned from the date of the proceedingoffer of buy-back.

S.77-A(3)-The notice for convening the meeting of shareholders for passing a special resolutionshould carry following information:-

1. Full and complete disclosure of all material facts

2. The necessity for buy-back

3. The class of security intended to be purchased

4. The amount to be invested in buy-back

5. The amount involved

6. Time-limit for completion of the transaction

7. Buy-Back of Shares(S.77-A)

S.77-A(4)- Every transaction of buy-back of shares must be completed within 12 months fromthe date of the special resolution passed by the shareholders.


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Company can buy-back shares from existing shareholders of the company either

1. D irectly or

2. From the open market or

3. From odd lots or

4. From the employee s stock option shares or

5. Sweat equity shares

From odd lots- Means the lot of securities in a listed public company which is smaller than thenumber of shares which can be traded in a particular stock exchange in one transaction.


Before the resolution of buy-back is implemented,

1. A declaration of solvency has to be filed with the Registrar and SEBI

2. On a prescribed form it has to be stated that BO D has made full inquiry into the affairsof the company and have found that it is capable of meeting all its liabilities and will notbe rendered insolvent for a period of 12 months from the date of declaration. It has tobe verified by an affidavit.

3. It has to be signed by at least two directors, one of whom should be M D , if any.

4. A company whose shares are not listed at a stock exchange has not to file this

declaration with SEBI

Physical destruction of securities. S.77-A(7)- within 7 days of the last day on which the buy-backprocess is completed.

Further issue after buy-back S.77-A(8)- W here a company has resorted to the buying back of itssecurities, it can not make a further issue securities within a period of 24 months. (i) It maymake bonus issue or (ii) go for conversion of warrants, stock option schemes, sweat equity or(iii) conversion or preference shares/ debentures into equity shares.


Register of bought back securities S.77-A(9)

1. Particulars of bought back securities

2. Consideration paid for them

3. D ate of cancellation, etc.


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Return of buy-back S.77-A(10)- After completion the company has to file a return with SEBI andRegistrar within 30 days from the date of completion.

Penalty- S.77-A(11)- company and every officer involved will face 2 yrs imprisonment and/ or Rs.50,000

promoters prospectus d

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