Doctrine of Indoor Management and Prospectus Rules

Doctrine of Indoor Management

The doctrine of indoor management allows outsiders who are dealing with company to assume that as far as the internal proceedings of company are concerned, everything has been properly done. This limitation to doctrine of constructive notice is known as doctrine of indoor management or Turquand rule.

*Royal British Bank vs Turquand 1856

Exceptions:

• Knowledge of irregularity
• Negligence
• Forgery

Prospectus

Is a document issued by the public company in order to invite the public to make offers for shares and debentures of the company. Any document described or issued as a prospectus or any notice, circular, ad, or other document inviting offers from public for subscription or purchase of any securities of a body corporate can be called a prospectus. It includes red herring prospectus and a shelf prospectus.

Prospectus should contain following info:

1. Names and address of the registered office of the company, company secretary, auditors, legal advisers, and underwriters
2. Dates of the opening and closing of the issue
3. A statement by the board of directors about the separate bank account where all monies received out of the issue are to be transferred
4. Detail about underwriting of the issue
5. Capital structure of the company
6. Main object of public offer
7. Risk factors specific to the project

Misstatement in Prospectus and the Consequences (Golden Rule of Prospectus)

A prospectus is a document which gives information to the public as to the company's soundness. The prospectus must be full, frank, and honest disclosure of all material facts with scrupulous accuracy. No material should be misstated or withheld. Greatest care should be taken in its preparation. The persons who are responsible for the preparation and issue of the prospectus should not only state all relevant facts but also not omit any material facts. This is the golden rule as to the framing of prospectus.

Liability for Misstatements:

1. Civil Liability: A person who was induced to subscribe shares of a company on the faith of a misstatement in the prospectus has fourfold civil remedies: a) Rescission of contracts, b) Damages for deceit, c) Suit against directors for compensation, d) Liability under Section 35 of the Companies Act
2. Criminal Liability: By Section 447, any person found guilty of fraud shall be punishable with imprisonment not less than 6 months but which may extend to 10 years and shall also be liable to a fine not less than the amount involved in the fraud but which may extend to 3 times the amount involved in fraud

Private Placement

The expression private placement means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of private placement offer letter. By Section 42 of Act 2013, a company may make private investment through issue of a private placement offer letter. A company shall not make a private placement of its securities unless the proposed offer of securities has been previously approved by the shareholders of the company, by a special resolution for each of the offers. The offers of securities or invitation to subscribe securities shall not be made to more than two hundred persons in the aggregate in a financial year. Any offer made to qualified institutional buyers or to employees of the company under a scheme of employees stock option shall not be considered while calculating the limit of two hundred persons. The restriction of two hundred persons would be reckoned individually for each kind of security that is equity shares, preference shares, or debentures. The offer should be made to them by name. It should be accompanied by an application addressed to the person to whom the offer is made. It should be sent to him either in writing or in electronic mode within thirty days of recording the names of such persons. The value of such offer per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities. A complete record of private placement offer.

Shelf Prospectus

Section 31 of Company Act 2013. 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 issue of a further prospectus. The general principle regarding the issue of securities is that whenever a public company offers to the public to subscribe its securities it has to issue a prospectus. But in case of notified companies by filing a shelf prospectus the requirement of issuing prospectus on every issue of securities can be avoided. A shelf prospectus shall be valid for a period of one year from the date of opening of the first issue of securities under that prospectus. A company filing a shelf prospectus shall also file an information memorandum on all material facts relating to new charges created and changes in the financial position prior to the making of a second or subsequent offer of securities under the shelf prospectus. When an information memorandum is filed every time an offer of securities is made such memorandum together with the shelf prospectus shall be deemed to be prospectus.

Red-Herring Prospectus

Section 32. It means a prospectus which does not include complete particulars of the quantum or price of the securities included therein. A company proposing to issue a red-herring prospectus shall file it with the registrar at least three days prior to the offer and opening of the subscription list. 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 Exchange Board of India. 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.

Issuing Houses and Deemed Prospectus

The provisions relating to preparation and issue of prospectus are most stringent. In order to evade the onerous requirements, a company may allot the whole of the shares or debentures to an intermediary known as issuing house without offering the shares or debentures to the public.

Share Capital

A company limited by shares can issue shares. The share capital of the company can be classified under several heads. They are:

1. Nominal capital or authorised capital or registered capital
2. Issued capital
3. Subscribed capital
4. Called up capital
5. Paid up capital
6. Uncalled capital
7. Reserved capital

Section 43 of the share capital of a company limited by shares shall be of two kinds:

1. Equity Share Capital: It means all share capital of a company limited by shares other than preference share capital. It may be with voting rights or with differential rights as dividend or voting.
2. Preference Share Capital: It is that part of the issued share capital of the company limited by shares which carries or would carry a preferential right with respect to payment of dividend or repayment in the case of winding up or repayment of capital. Types of preference shares: 1. Cumulative 2. Non-cumulative 3. Participating 4. Non-participating 5. Convertible 6. Non-convertible.

Issue and redemption of preference share: A company having a share capital may, if so authorized by its articles, issue preference shares. In order to issue preference shares, the following conditions should be satisfied: 1. The issue of such shares is to be authorized by passing a special resolution in the general meeting of the company. 2. The company at the time of such issue of preference shares has no subsisting default in the redemption of the preference shares issued earlier and in the payment of dividend due on any preference shares. The preference shares may be redeemed 1. At a fixed time or on the happening of a particular event 2. At any time at the company's option and 3. At any time at the shareholder's option.

Alteration of share capital: The share capital of the company may be altered if the power to alter the capital is given by articles by a special resolution. The articles are to be altered first and incorporate a provision allowing alteration of capital. If there is provisions in the articles for alteration of capital, the share capital of a company may be altered in several ways: 1. By increasing the authorized share capital 2. By consolidating any part of the share capital into shares of larger amount 3. By converting fully paid-up shares into stock.

Reduction of Share Capital

Section 66. A company limited by shares can reduce its share capital by a special resolution. There should be provisions in the articles of association of the company allowing such reduction. The company may reduce its share capital in the following methods: 1. By extinguishing or reducing the liability on any of its share in respect of share capital not paid up 2. By writing off or canceling any paid-up capital which is lost or unrepresented by available assets 3. By paying off capital which is in excess of the wants of the company.

Sweat Equity Shares

Section 2(88) sweat equity shares issued by the company to its employee or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights. It can be issued only if satisfying the following conditions: 1. The issue of sweat equity shares is to be authorized by a special resolution passed by the company in the general meeting. 2. The resolution should specify the number of shares, current market price, consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued 3. Not less than one year should have been elapsed since the company had commenced its business.

Bonus Shares

Section 63. A company may issue fully paid-up bonus shares to its members out of: 1. Its free reserves 2. The security premium account 3. The capital redemption reserve account. No issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets.

Rules to be Followed for the Allotment of Shares

The allotment creates a binding contract between the applicant and company. Rules: 1. Minimum subscription 2. Application money 3. Opening of the subscription list 4. Shares to be dealt in one or more stock exchanges 5. Returns of allotments

Certificates of Shares

Section 46. Every person whose name is entered as a member in the register of members of the company has a right to receive a certificate of his shares. The company shall issue a certificate of shares within two months of the allotment of shares or within one month after the application for the registration of the transfer or transmission of shares. It shall state: 1. The name and address of shareholders 2. Numbers of shares held by him 3. Distinctive number of shares 4. Class of shares 5. Amount paid on each share.

Doctrine of Estoppel

There are two kinds of estoppel: 1. Estoppel as to title: If a company issues a share certificate in the name of a person, it cannot afterwards be alleged that the person is not entitled to those shares. 2. Estoppel as to payment: A company is estopped from alleging that the amount stated in the share certificate has been paid as not been paid.

Securities at Premium or Share at a Premium

Section 78. The memorandum or articles of association need not authorize such issue. The premium so received must be transferred to a separate amount called securities premium account. Purposes: 1. For issuing fully paid bonus shares 2. To write off preliminary expense 3. To write off expenses, commission, or discount on the issue of securities or debentures.

Shares at a Discount

Section 53. If a company issues shares at a discount, the company shall be punishable with a fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punished with imprisonment for a term of 6 months or a fine not less than one lakh rupees or may extend to 5 lakh rupees or with both.

Calls on Shares

A call is a demand made by a company to its shareholders to pay the whole or part of the balance remaining unpaid on each share. It is to be made after passing a resolution of the board of directors at a meeting of the board. The call must be made in accordance with provisions of the article.

Forfeiture of Share

When a person to whom shares are allotted fails to pay any calls on his shares, the company may proceed to sue him for the payment or it may forfeit its shares. Conditions: 1. A forfeiture for non-payment must be authorized by the articles of the company 2. The notice must give not less than 14 days time, it must state the possibility of forfeiture for the failure to pay within the period 3. The directors must pass a resolution forfeiting the shares. If the resolution is not passed, the forfeiture will be invalid. Effects: 1. A person whose shares have been forfeited ceases to be a member in respect of forfeited share 2. The liability of the members whose shares have been forfeited ceases and when the company receives payment in full in respect of the shares.