2   Documents of Company

2.1 General

At the time of formation of a company, its promoters are required to draft certain documents. Memorandum of Association and Articles of Association happen to be the most important amongst them. Some documents of vital significance are also drafted after the company has been incorporated which include a Prospectus. It would be worthwhile to know their meaning, contents and importance to a company.

2.2 Memorandum of Association

2.2.1 Meaning

The Companies Act defines a memorandum as “memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.”

The above definition does not reveal the contents, true nature of significance of Memorandum of Association. In simple words, it may be defined as the constitution or charter of a company. It contains the fundamental conditions on the basis of which the company is allowed to be incorporated. It defines the relationship of the company with the outside world and lays down the basic objects which the company would try to achieve after incorporation. The basic purpose of a memorandum is to reveal to the prospective investors the risk that follows their investment and to enable the third parties dealing with the company determine whether their contractual relationship with the company would be valid.

2.2.2 Printing and Signing of Memorandum

The memorandum shall be—(i) printed(ii) divided into paragraphs numbered consecutively, and(iii) signed by each subscriber (who shall add his address,

descritption and occupation, if any), in the presence of a least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

2.23 Contents of Memorandum

The Memorandum of Association of a company must include the following paragraphs or clauses, called ‘conditions’, besides any other clause which the company may deem important to be included:(i) Name clause(ii) Registered clause(iii) Objects clause(iv) Liability clause(v) Capital clause.

Every memorandum ends with a declaration pertaining to the intention of the members to form an association and this is commonly known as the ‘Subscription’ or ‘Association’ clause.

2.2.4 Name Clause

This paragraph states the name of the company. A company being an entity, must have a name by which it can be referred to and may be identified. A Company can choose and adopt any name subject to the following rules:(i) A company cannot adopt a name which is undesirable in the

opinion of the Central Government. A name which is too identical with or too closely resembles the name of an existing company may be deemed to be undesirable by the Central Government. The phrase “too closely resembles” means that the names of two companies are similar enough to suggest that the two are either same or under the same group.

(ii) The name of a company should not contain those words and pictures the use of which has been prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950, e.g., U.N.O., W.H.O., pictorial representation of Mahatma Gandhi, Prime Minister of India, etc.

(iii) The name of a company must end with the word ‘Limited’ in case of a public company and with the words ‘Private Limited’ in the case of a private company. The Central Government may, however, allow a company to drop these words from its name provided it has been formed for the promotion of art, science or culture, etc., and it has prohibited the distribution of the profits among its members.

(iv) Every Company must

(a) paint or affix the name and address of its registered office, and keep the same painted or affixed, on the outside of every office or place in which its business is carried on, in a conspicuous positon, in letters easily legible.

(b) Have its name engraved in legible characters on its seal; and

(c) have the name and address of its registered office mentioned in legible characters on all business letters, bill heads, notices and other official publications, bills of exchange, invoices, etc.

Alteration of Name

(i) A company may change its name by passing a special resolution and obtaining the approval of the Central Government. However, no such approval is required where the only change in the name of a company is the addition thereto or there from the word ‘Private’ consequent upon conversion of a private company into a public company or vice versa.

(ii) If through inadvertence or otherwise, a company adopts a name, which is identical with or too closely resembles the name of any other existing company, it may alter its name by passing an ordinary resolution and with the previous approval of the Central Government in writing.

(iii) Where the company has received a direction from the Central Government to change the name within 12 months of its adoption, it may do so by passing an ordinary resolution and the previous approval of the Central Government. The procedure has to be carried out within a period of 3 months from the date of the direction or such longer period as the Central Government may allow.

The change of name by a company does not affect the rights and obligations of the company, or render defective any legal proceeding by or against it.

2.2.5 Registered Office or Domicile Clause

The registered office clause states the name of the State in which the registered office of the company shall situate. Every company is required to have a registered office from the date on which it begins to carry on its business or within 30 days of the date on which it is entitled to commence business, whichever is

earlier. The registered office determines the domicile of the company and the authorities having jurisdiction over it. All communications and notice in respect of a company are to be addressed to its registered office.

Change of Registered Office(i) Where registered office is sought to be shifted from one

locality to another, the Board of Directors should pass a resolution to this effect; and the notice of change of registered office should be given to the Registrar of Companies within 30 days of making the change.

(ii) Where registered office is sought to be shifted from one city to another but within the same State in which the registered office is situated, the company should pass a special resolution to this effect, and the notice of change of registered office should be given to the Registrar within 30 days of making the change.

(iii) Where registered office is sought to be shifted from one State to another, the company should pass a special resolution to this effect and file a copy thereof with the Registrar of Companies within on months of its date. It should ensure that the proposed change is required:(a) To enable it to carry on its business more economically

and more efficiently.(b) To enable it to attain its main purpose by new or

improved means;(c) To enable it to enlarge or change the local area of its

operation;(e) To enable it to carry on some business which under

existing circumstances may conveniently or advantageously be combined with the objects specified in the Memorandum;

(f) To enable it to restrict or abandon any of the objects specified in the Memorandum;

(g) To enable it to sell or dispose of the whole, or any part of the undertaking, of the company; or

(h) To enable to amalgamate with any other company or body of persons.

The company should get the proposed alteration confirmed by the Company Law Board. Before doing so, the said authority must be satisfied that sufficient notice has been given to all the creditors whose interest is likely to be adversely affected by

such change. It may insist that the consent of the objecting creditors has either been obtained or their debts have been discharged. It may also require that notice of the alteration be given to Registrar of Companies who would be given an opportunity to appear before it and state his objectons and suggestions, if any. The Company Law Board may, then, confirm the change on such trms and conditions as it may deem fit. A certified copy of the aforesaid order confirming the change shall be filed with the Registrar of Companies within three months of the order who will register the altered memorandum within one month. The records of the company shall then be transferred to the Registrar of Companies having jurisdiction over the state where its registered office is shifted.

2.2.6 Objects Clause

The objects clause of a company highlight the objects for which has been formed. It stated:

(i) the main objects of the company and objects incidental or ancillary tereto;

(ii) the other objects of the company; and

(iii) in the case of non-trading companies with objects not confined to one state, the State of whose territories the objects extend.

A company can undertake activities only for the attainment of its objects. Any act which is not within the objects of the company is beyond its power, i.e., ulta vires. Such an act does not bind the company and a company cannot ratify it even by the unanimous consent of all its shareholder. Thus, the objects clause defines and confines the scope of the activities of the company.

Alteration of Objects Clause

(i) A company can alter the object clause in its Memorandum oly for any of the pruposes specified in the Companies Act, 1956 (stated earlier in connection with change of the registered office from one State to another).

(ii) The company should pass a special resolution in a meeting of its members, deciding to effect a change in the object clause. The company must file a copy of the resolution with the Registrar within one month.

(iii) A printed copy of the altered memorandum must also be filed with the Registrar.

If the company fails to do so, the alteration becomes void.

2.27 Liability Clause

The liability clause describes the nature of the liability of members of a company, i.e., whether it is limited by shares or by guarantee. The Memorandum of Association of a company limited by guarantee also states that each member undertakes to contribute to the assets of the company on its winding up, while he is a member or within one year after he ceases to be so, such amount as may be required but not exceeding a specified amount for payment of debts and liabilities of the company, costs, charges and expenses of winding up and for the adjustment of the rights of the contributories among themselves.

Change of Liability ClauseA company can change its memorandum so as to increase the liability of its members only when they agree to it in writing and not otherwise. In the case of a non-trading company, however, the annual or any other periodical subscription amount may be increased even without the consent of its members.

2.28 Capital Clause

The Memorandum of Association of a company states under capital clause the amount of share capital with which the company is to be registered and the division thereof into shares of fixed amount—equity and preference.

Alteration of Capital ClauseA limited company having a share capital may alter its capital clause only when it authorized by its articles of this effect. This can be done by passing ar ordinary resolution at its general meeting and getting the approval of the court to this effect.

2.29 Association ClauseThis clause states that the persons subscribing their signatures to the Memorandum of Association are desirous of forming themselves into an association in pursuance of the Memorandum. It shall be signed by at least 7 persons in case of a public company and by at least 2 persons in case of a private company. Each subscriber shall state his full name, address, occupation and shall sign in the presence of a witness who will

attest the signature and give similar particulars about himself. A subscriber cannot be a witness. Every subscriber is required to take at least one share in the company and write opposite his name the number of shares he takes. It may be noted that a subscriber must be competent to contract that is, he should not be a minor or a person of unsould mind, etc.

2.2.10 Doctrine of Ultra Vires

The doctrine of ultra vires states that an act which is not stated in the objects clause of Memorandum of Association or which is not incidental or ancillary othe attainment of such objects, is void and does not bind the company.Any person dealing with the company should ensure beforehand that the contractual relationship he contemplates with the company is within its powers. (i.e., intra vires) otherwise, later on, the courts will not enforce the rights and obligations arising out of such relationship.The purpose of the doctrine is to ensure “that the investor in a gold mining company does not find himself holding shares in a fried fish shop and to give to those who allow credit to a limited company some assurance that its assets would not be dissipated in unauthorized enterprises”.

Effects of Ultra Vires TransactionThe effects of a transaction which is ultra vires the company area as follows:(i) Any member of the company can apply to the Court praying

for issue of an injunction order restraining the company from proceeding with an ultra vires act.

(ii) Any member of the company may bring an action against the directors to compel them to restore to the company the funds that have been spent on ultra vires acts.

(iii) The directors of the company are its agents. Therefore, if they exceed their authority, i.e., they enter into a transaction which is ultra vires the company and consequently, which they cannot do, they will be personally liable to third parties and will compensate them for losses accruing to them.

(iv) Where a company acquires certain property for which the funds of the company have been applied, the company can

retain such property notwithstanding that such purchase in ultra vires because it represents corporate capital but in a different from only.

(v) An ultra vires contract is wholly void and unenforceable in the Court of Law. It does not bind the company nor the company can take advantage of any such contract.

(vi) Where the agent of servants of the company, while doing an act which is ultra vires the company, commit a tort (a civil wrong), the company shall not be held liable, because it never authorized the doing of such act expressly or impliedly.

Can a Company Ratify Ultra Vires Transaction?

An act ultra vires the company, being null and void, is incapable of ratification even by the unanimous consent of the shareholders. However, an act ultra vires the Articles can be ratified by the company by altering its Articles in a manner so as to include the power of doing such act within it. Similarly, an act which is ultra vires the directors but intra vires the company, can be ratified by the majority of the shareholders by passing a resolution.2.3 Articles of Association

2.3.1 MeaningMemorandum of Association lays down the objects and powers of a company. It regulates the relationship of company with the outside world. It does not legislate about the internal affairs of a company. This task is taken care of by another important document which is termed as ‘articles of association’. According to the companies Act, 1956, “articles” means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act,…”

The aforesaid statutory definition fails to unfold the contents, nature or significance of the articles. Simply stated, articles mean the rules of internal management of a company. They facilitate the accomplishment of goals as laid down in the Memorandum of Association. As such, articles are subordinate to the memorandum and must not contain any thing which contravene, or go beyond, the provisions of memorandum as well as Companies Act, 1956.

2.3.2 Registration of Articles

Articles of Association, signed by the subscribers of the memorandum, prescribing the regulations for the company, shall be registered along with the memorandum in the case of an

unlimited company or a company limited by guarantee or a private company limited by shares.

In the case of a public company limited by shares, articles of association may or may not be registered together with the memorandum. Such a company enjoys the option of adopting all or any of the regulations contained in Table A appended to the Companies Act, 1956. In nutshell, such a company may file its own articles or declare that it would follow Table A, wholly or in part. It also has to declare whether, in respect of matters on which it does not frame its own rules, the relevant provisions of Table A would apply or would remain excluded.

2.3.3 Form and Signature of Articles

Articles shall be –(i) Printed(ii) divided into paragraphs numbered consecutively; and(iii) signed by each subscriber of the memorandum of

association (who shall add his address, description and occupation, if any) in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, it any.

2.3.4 Contents of Articles

Articles of Association, usually, contain the rules relating to calls on shares, transfer of shares; transmission of shares; forfeiture of shares; share certificates and share warrants; alteration of share capital; general meetings; Directors – their appointment, remuneration, qualifications, meetings, etc., Manager; Secretary; Accounts and Audit; Borrowing powers; Dividends and reserves, capitalization of profits; and Winding up.

In the case of an unlimited company, the articles shall state the number of members with which the company is to be registered and, if the company has a share capital, the amount of share capital with which the company is to be registered.

In the case of company limited by guarantee, the articles shall state the number of members with which the company is to be registered.

In the case of a private company having a share capital, the article shall contain provisions which:(i) restrict the right to transfer shares;(ii) limit the number of members to 50, and

(iii) prohibit and invitation to public to subscribe to its shares or debentures.

In the case of any other private company, the articles shall contain provisions relating to the matters specified in the afore said points (ii) and (iii).

2.3.5 Alteration of Articles

The Companies Act, 1956, provides that a company may alter its Articles at any time by passing a special resolution. Thus, the law gives absolute power of alteration of its Articles to a company. However, the power to alter Articles by a company is subject to following restrictions:(i) The alteration of Articles must not contravene the provisions

of the Companies Act, 1956, or the Memorandum of Association of the company.

(ii) It should not be illegal or opposed to public policy.(iii) The Articles can be altered by a special resolution only. In no

case they can be altered by an ordinary resolution. Further, an alteration depriving the company of its right to alter the Articles in future shall be void.

(iv) An alteration purporting to increase the liability of a member shall not be binding on him unless agreed to by him in writing except in case of a club or association where such alteration provides for subscription or charges at a higher rate.

(v) Certain provisions cannot be altered except with the approval of the Central Government, e.g., the conversion of a private company into a public company.

(vi) The alteration must be made bonafide and for the benefit of the company as a whole.

(vii) The alteration must not constitute a fraud on the minority otherwise it will be void being oppressive to them.

(v) Alteration must not cause a breach of contract with third parties.

2.4 Doctrine of Constructive Notice

At the time of registration of a company, its Memorandum and Articles are filed with the Registrar of Companies. The office of the said Registrar is a public office and the documents filed with him are public documents. Any person can go to his office and inspect the available documents, of course, subject to the regulations in

this respect and on payment of a nominal amount. The law presumes that a person dealing with the company would access these documents, read their contents and understand them properly before making any contract with the company. The logic behind such an assumption is that a person purporting to deal with the company must ensure beforehand that his contractual relationship with the company would be within its powers and thus, valid. The law does not provide relief to a person who has suffered a loss on account of an ultra vires contract made with a company because he did not care to read the Memorandum and Articles.

2.5 Doctrine of Indoor Management

The doctrine of constructive notice is applicable to matters connected with public documents available for inspection to the general public. But, the internal proceedings and several other documents are neither filed with the Registrar of Companies nor are made available for inspection by a company. Such documents are outside the ambit of the doctrine of constructive notice. Even with respect to public documents, one can only find out whether a particular act can be validly done by the company. Many a time, the Memorandum of a company lays down that it can carry out an act but a particular procedure should be followed. The outsiders dealing with a company have no means to find out whether such procedures have been followed. Therefore, the law has laid down that an outsider dealing with the company is entitled to assume that the company has complied with the requirements pertaining to internal proceedings and need not probe into it. This is known as the ‘doctrine of indoor management’.

Exceptions to the Doctrine of Indoor Management(i) Where a person dealing with a company has actual or

constructive knowledge of the irregularity as regards internal management, he can not claim the benefit of the doctrine of indoor management.

(ii) Where a person dealing with the company could have discovered irregularity provided he had made an enquiry but which he did not do, such a person cannot avail himself of the doctrine of indoor management. Sometimes, the circumstances are such that these arouse suspicion in the mind of party contracting, it should make enquiry beforehand to ensure regularity of regulations etc.

(iii) A person cannot take advantage of the doctrine if he has never read the Articles of Association of the company with whom he is entering into a contract.

(iv) The doctrine of indoor management does not provide any relief in those cases where the acts done constitute either forgery or wich are void ab initio.

(v) Where an officer of the company acts outside his apparent authority, the company is not bound by his acts.

2.6 Binding effects of Memorandum and Articles

The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part of observe all the provisions of the memorandum and of the articles.

The effects of the above rule may be summed up as under:(i) Each member is bound to company to comply with the

provisions laid down in Memorandum and Articles. For example, he must pay calls on shares whenever directors require him to do so.

(ii) The company is bound to observe the provisions included in Memorandum and Articles. For example, directors must not undertak an ultra vires activity.

(iii) The Articles do not constitute any binding contract between members or company and the outsiders since they are operative only on insiders and not on the outsiders.

(iv) Articles do not constitute a contract between members except with respect to their rights and duties as members of the company.

2.7 Prospectus

2.7.1 MeaningA company is formed to accomplish certain objectives. This entails, inter alia, carrying out diverse activities and financing thereof. The requied finances may be obtained either from personal and private sources or from the general public According to the provisions of the Companies Act, 1956, whenever a public company wants to collect public funds, it is required to issue a document for this purpose wich is known as a ‘prospectus’.

The Companies Act, 1956, defines prospectus as “any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate” A

prospectus, thus, means a document issued by a company which seek to invite:(i) public deposits, or(ii) offers from the public to subscribe to its shares or debentures.

It is difficult to point out the exact number of persons that constitute ‘public’. The ‘public’ is of course a general word. No particular number is prescribed. Anything from two to infinity may serve; perhaps even one, if he is intended to be the first of series of subscribers but makes further proceedings needless by subscribing the whole. The Companies Act, 1956 provides that an invitation to public includes “any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner.” Thus, if an invitation is extended to any section of the public, however selected it may be, it will be termed as an ‘invitation to public’ and the document extending the invitation shall be a prospectus.In the following cases, however, the offer cannot be regarded as an invitation to public:(i) where it is not being calculated to result, directly or

indirectly, in the shares or debentures becoming available for subscription or purchases by person other than those receiving the offer or invitation; or

(ii) where it is a domestic concern of the persons making or receiving the offer or invitation.

2.7.2 Legal Requirements regarding Prospectus

(i) Must be DatedA prospectus issued by or on behalf of a company must be dated and that date, unless the contrary is proved, is taken as the date of its publication.

(ii) Must be RegisteredA prospectus cannot be issued by or on behalf of a company unless, on or before the date of its publication, a copy of it, signed by every person named therein as a director, or proposed director of the company, has been delivered to the Registrar for registration.The fact of registration must be stated on every prospectus issued by or on behalf of the company. Further, a company must issue prospectus to the public within 90 days of its registration.

(iii) Should not include Statement of Experts connected with Formation or Management

A prospectus must not include a statement purporting to be made by an expert unless he is a person who is or was not engaged or interested in the formation or management of the company.An expert means a person whose profession gives authority to a statement made by him, e.g., an engineer, a valuer, an accountant, etc.

(iv) Can be issued after Expert’s Consent to his Statement has been obtainedA prospectus including a statement purporting to be made by an expert shall not be issued unless:(a) the expert has given his written consent to the issue of the

prospectus with the statement included in the form and context in which it is intended and has not withdrawn such consent till registration thereof, and

(b) a statement that he has given and has not withdrawn his consent as aforesaid appears in the prospectus.

(v) Should accompany Application Form for Shares

A company cannot issue any form of application for shares or debentures unless the form is accompanied by a copy of prospectus.

(vi) Must state the Penalty for applying in a Fictitious Name

The following provision shall be prominently reproduced in every prospectus and every form of application for shares issued by the company:

“Any person who makes in a fictitious name an application to a company for acquiring or subscribing for any shares therein, shall be punishable with imprisonment for a period up to 5 years.”(vii) Contents of Prospectus

Every prospectus must state the matters specified and reports set out in Schedule II to the Companies Act, 1956. The important contents of the prospectus are as follows:

Part of schedule II

I. General information: (a) Name and address of registered office of the company (b) Consent of the Central Government for the present issue and declaration of the Central

Government about non-responsibility for financial soundness or correctness of statements (c) Names of Regional Stock Ex-change and other stock exchanges where application made for listing of present issue (d) Provisions relating to punishment of fictitious applications (e) Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90 days from closue of the issue, Date of opening of the issue, Date of closing of the issue (f) Date of earliest closing of the issue (g) Name and address of auditors and lead managers (h) Name and address of trustee under debenture trust deed (in case of debenture issue) (i) Rating from CRISIL (Credit Rating information Services of India Limited) or any rating agency obtained for the proposed debenture/preference share issue. If no rating has been obtained, this fact should be stated (j) Underwriting of the issue (Names and addresses of the underwriters and the amount underwritten by them).

II. Capital Structure of the Company: (a) Authorized, issued, subscribed and paid-up capital (b) Size of present issue giving separately reservation for preferential allotment to promoters and others (c) Paid-up capital: (i) after the present issue, (ii) after conversion of debentures (if applicable).

III. Terms of the Present Issue: (a) Terms of payment (b) Rights of the instrument holders (c) How to apply – availability of forms, prospectus and mode of payment (d) Any special tax benefits for company and its shareholders.

IV. Particulars of the Issue: (a) Objects (b) Project cost (c) Means of financing (including contribution of promoters).

V. Company, Management and Project: (a) History and main objects and present business of the company (b) Subsidiary(ies) of the company, if any (c) Promoters and their background (d) Names, addresses and occupations of manager, managing director and other directors including nominee-directors, whole-time directors (giving their directorship in other companies) (e) Location of project (f) Plant and machinery, technology process, etc (g) Collaboration agreements (h) Infrastructure facilities for raw material, water electricity, etc. (i) Schedule of implementation of the project and progress so far (j) Nature of product, approach to marketing and export possibilities (k) Future prospectus – expected capacity utilization during the first 3 years from the date of commencement of production, and the expected year when the company would be able to

earn cash profits and net profits, Stock market data for shares/debentures of the company (high/low price in each of the last 3 years and monthly high/law during the last 6 months (where applicable)

VI. Particulars in Regard to the Company and other Listed Companies Under the Same Management which made any capital issue during the Last 3 year : (a) Name of the Company (b) Year of the Issue (c) Type of the issue (Public/Rights/Composite) (d) Amount of Issue (e) Date of closure of issue (f) Date of completion of delivery of share/debenture certificates (g) Date of completion of the project, where object of the issue was financing of the project (h) Rate of dividend paid.

VII. Outstanding Litigation Pertaining to : (a) Matters likely to affect operation and finance of the company including disputed tax liabilities of any nature, and criminal prosecution launched against the company and the directors (b) Particulars of default, if any, in meeting statutory dues, institutional dues, and dues towards debenture-holders, fixed depositors (c) Any material development after the date of the latest balance sheet and their likely impact.

VIII. Management Perception of Risk Factors (e.g., sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost/time overrun etc.)

Part II of Schedule II

A. General Information1. Consent of Directors, Auditors, Solicitors/Adocates,

Manager to Issue, Registrar of Issue, Bankers to the Company. Bankers to the Issue and Experts.

2. Experts’ opinion obtained, if any.3. Change, if any, in directors and auditors during the last 3

years, and reasons thereof.4. Authority for the issue and details of resolution passed for

the issue.5. Procedure and time schedule for allotment and issue of

certificates.6. Name and addresses of the Company Secretary, Legal

Adviser, Lead Managers, Co-Managers, Auditors, Bankers

to the company, Bankers to the issue and Brokers to the issue.

B. Financial Information1. Report by the Auditors. A report by the auditors of the

company with respect to (a) its profits and losses (distinguishing items of non-recurriing nature) and assets and liabilities; and (b) the rates of dividends paid by the company during the preceding 5 financial years.

If, however, no accounts have been made up in respect of any part of the period of 5 yeas ending on a date 3 months before the issue of the prospectus, the report shall contain a statement of the fact. If the company has subsidiaries, the report shall, in addition deal with either the combined profits and losses and assets and liabilities of its subsidiaries or each of the subsidiary, so far as they concern the members of the company.

2. Reports by the Accountants. (a) A report by the accountants (who shall be qualified under the Act for appointment as auditor of a company and who shall be named in the prospectus) on the profits or losses of the business for the preceding 5 financial years, and on the assets and liabilities of the business on a date which shall not be more than 120 days before the date of the issue of the prospectus. This report is required to be given if the proceeds of the issue of the shares or debentures are to be applied directly in the purchases of any business.

(b) A similar report on the accounts of a body corporate by an accountant (who shall be named in the prospectus) if the proceeds of the issue are to be applied in the purchase of shares of a body corporate so that body corporate becomes a subsidiary of the acquiring company.

(c) Principal terms of loans and assets charged as security.

C. Statutory and other Information(i) Minimum subscription(ii) Expenses of the issue giving separately fees payable to : (a)

Advisers. (b) Registrars to the issue. (c) Managers to the issue. (d) Trustees for the debenture-holders.

(iii) Underwriting commission and brokerage.(iv) Previous issue of cash.

(v) Previous public or rights issue, if any (during last 5 years):(a) Date of Allotment : Closing Date:

Date of Refunds : Date of listing on the stock exchange:(b) If the issue is at premium of discount, the amount

thereof.(c) Premium, if any, on each share which had been issued

within the 2 years preceding the date of the prospectus.

(vi) Commission or brokerage on previous issue.(vi) Issue of shares otherwise than for cash.(vii) Debentures and redeemable preference shares and other

instruments issued by the company outstanding as on the date of prospectus.

(viii) Option to subscribe.(ix) Details of purchase of property : If the company proposes to

acquire a business which has been carried on for less than 3 years, the length of time during which the business has been carried on.

(x) Details of directors, proposed directors, whole-time directors, their remuneration, appointment and remuneration of managing directors, interests of directors, their borrowing powers and qualification shares.

(xi) Rights of members regarding voting, dividend, lien on shares and the process for modification of such rights and forfeiture of shares.

(xii) Restrictions, if any, on transfer and transmission of shares/debentures.

(xiii) Revaluation of assets, if any (during last 5 years).(xiv) Material contracts and inspection of documents.

2.7.3 Consequences of Mis-statements in Prospectus

The golden rule for framing prospectus may be described as under:“Those who issue prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature of extent and quality of the privileges and

advantages which the prospectus holds as inducement to takes shares.”Thus, mis-statement includes:(i) Omission of material facts, and(ii) Statements which are untrue.A mis-statement entitles a subscriber of shares of file a suit against –(i) the company, and(ii) the directors, promoters, experts, etc.

Liability of Company(i) A subscriber who has purchased shares in the company on

the faith of a prospectus containing mis-statements can rescind the contract to purchase shares with the company. He will therefore, surrender the shares to the company and the company will return his money along with the interest thereon. He, then ceases to be a member of the company.But this right can be exercised only if the following conditions are fulfilled:(a) There must be omission or misrepresentation of facts in

the prospectus, which is material and can affect the willingness of a person to purchase shares.

(b) The subscriber was induced to purchase shares on the faith of the contents of the prospectus.

(c) He must have purchased shares from the company and not in the open market.

(d) The subscriber should initiate proceedings for rescission as soon as he comes to know about the mis-statement in the prospectus. However, it must take place within a reasonable time and before liquidation of the company.

(ii) He can sue the company for claiming damages if the mis-statements amount to fraud. However, damages can be claimed if:(a) The prospectus was issued by or on behalf of the

company.(b) The subscriber has rescinded the contract of shares

with the company.

The right to claim damages can be exercised even if the company has gone into liquidation.

Liability of Directors, or Rights against Directors

Those who authorize the issue of a prospectus are also liable if it contains mis-statements. These persons include the directors, the promoters, experts, etc. The liability of these person is as follows:(i) Liability for omission of material facts(ii) Liability for mis-statement of material facts.(iii) Liability for fraud under General Law.(iv) Criminal liability

Liability for OmissionIf a subscriber suffers any loss because the prospectus does not contain all the particulars required by the Companies Act, 1956, all those persons who authorized the issue of prospectus shall be liable to pay damages to each subscriber at his instance.But a person can escape liability if he can prove that:(i) He was ignorant of the omission; or(ii) The non-disclosure arose from an honest mistake of fact on his part; or(iii) The court regards such omission as immaterial and excusable.

Liability for Mis-statements

Every director, promoter or any other person who authorized the issue of prospectus containing mis-statements is liable to compensate the subscribers for any loss sustained by them by reason of any untrue statement contained in the prospectus. A statement is deemed to be untrue if it is false in the form and context in which it is included and an omission which is calculated to mislead shall also render the prospectus false.

The plaintiff does not have to prove fraud or intent to deceive in order to claim damages. The measure of damages is the difference between the value of the shares prevailing in the market on the date of allotment and the notional value of the shares had the mis-representations made been true. However, the notional value of a share shall not exceed the price paid by the subscriber to the company.

A person can avoid his liability if he can prove that the prospectus was issued without his consent, or he withdrew his consent and gave a public notice, or that he gave a public notice on becoming aware of mis-statement, or that he has reasonable grounds to believe the statement to be true or it was made on the authority of some of government’s publication or an expert.

Liability under General Law for Fraud

Any person who has been induced to invest money by a fraudulent statement in the prospectus can recover damages for loss sustained by him as a result of fraud from person issuing the prospectus. But the plaintiff has to prove the following points:

(i) There was a fraudulent mis-statement. Fraud is proved when it can be proved that a false representation has been made:(a) knowingly, or(b) without belief in its truth, or(c) recklessly, carelessly whether it be false or true.

But if a person makes a statement honestly believing it to be true he is not guilty of fraud even if the statement is not true.

(ii) Representation related to some existing material facts which can affect the willingness to purchase shares.

(iii) The allottee must have taken the shares from the company. A purchaser of shares in the open market has no remedy against the company or officers of the company even if he bought shares on the faith of representations made in the prospectus.

This right of claiming damages is available to the aggrieved party even if the company goes into liquidation or where he loses his right to rescind the contract of purchase of shares.

Criminal Liability

Where a prospectus contains untrue statement, ever person authorizing its issue shall be liable for imprisonment up to 2 years or fine up to Rs. 5,000 with both. A person can put forward the following defences in order to avoid his liability.(i) That the statement was immaterial; or(ii) That he had reasonable grounds to believe it to be true till

the time of issue of prospectus.