legal aspects of business

1. Prospectus
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

2. Contd..
 According Section 2(36) of the Companies Act, 1956,
"Prospectus" means any document described or issued
as prospectus and it include any:
(i) notice,
(ii) circular,
(iii) advertisement or
(iv) other documents inviting the deposits from the public
or offers from the public for subscription or purchase of
shares or debentures of the company.
Thus a document is called a prospectus if it satisfies two
things:
1. It is a invitation to purchase or subscribe shares or
debentures of the company and
2. The invitation is made to the public.Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

3. Contd.
 Dating of prospectus (Sec. 55)
 Powers of SEBI: Section 55A-provisions of the following
sections shall be administrated by SEBI-
a) Sections 55 to 58 – matters related to prospectus
b) Section 59-penalty if prospectus is issued without expert’s
consent and if expert is part of company/management.
 Registration of prospectus (Sec.60)- the prospectus must be
issued within 90 days of the date on which a copy thereof is
delivered for delivered. Penalty-punishable to the extend of
Rs. 50000
 Shelf prospectus-prospectus issued by bank or any financial
institution fore one or more issues of the securities or class
of securities specified in that prospectus.
 Red Herring prospectus-it does not have details of either
price or no. of shares being offered or the amount issued.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

4. Contd..
 Matters included in Prospectus: - Prospectus of the
public limited company includes following matters:
1. Main object of the company.
2. Number and classes of shares.
3. Names of directors.
4. Minimum subscription.
5. Particulars of various contracts.
6. Name of underwriters.
7. Estimated preliminary expenses.
8. Voting rights and various reports that are to be set out.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

5. Contd.
• Deemed Prospectus-offer for sale(Sec.64)- provisions
are-
1. Prospectus by implication.
2. Intention to offer shares or debentures to the public.
3. Additional information-
a) Consideration and time and place of inspection of
contract.
b) Issuing house to be deemed director
c) Signing of prospectus-2 directors in a company or by
not less than one half of the partners in the firm as the
case may be.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

6. Contd..
 Consequences of false and misleading statements
made in the prospectus: - The law requires that the
person who issues the prospectus should not mislead the
public by false or misleading statements.
 Meaning of false and misleading statement:
According to Section 65 of the Companies Act, 1956,
1. A statement in prospectus is deemed to be misleading
or untrue if the statement is misleading in form and in
context in which it is included.
2. Where the omission from the prospectus of any matter
is calculated to mislead, then the prospectus shall be
deemed to be a prospectus in which an untrue
statement is included.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

7. Contd..
 Rights and liabilities arising from false and
misleading statements: Several types of rights
and liabilities arise from the false and
misleading statements. They are broadly of two
types. They are as follows:
 Civil liabilities
 Criminal liabilities
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

8. Civil liabilities
1. Right and liabilities of shareholder against the
company–
(a) The shareholders are entitled to rescind the contract to take
up the shares.
(b) The shareholders can claim the damages for the deceit when
the statement is fraudulent.
2. Rights and liabilities of shareholders against the
directors and the promoters-
(a) The shareholders can claim the damages for the misleading
statements made in the prospectus.
(b) Shareholders can also claim the damages for not complying
with the provisions of Section 56 of Companies Act, 1956
relating to contents of the prospectus.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

9. Contd..
 In the aforesaid situation, the defenses available to
the directors are: i.e. the director may escape by
(i)withdrawal of the consent. He may escape by
saying that the prospectus was. issued without his
consent.
(ii)He may say that prospectus was issued without his
knowledge,
(iii)He was ignorant of untrue statements made in
the prospectus,
(iv)He has reasonable ground to believe the
statements, as true, as the statements were given by
the experts.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

10. Contd..
 Rights and liabilities of the company against
the directors or the promoters-In the situation
of misleading statements made in a prospectus,
the company can:
(a) Repudiate (cancel) the contract, or
(b) Claim the damages.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

11. cases
 Rex v. Lord Kyslant case-a prospectus was issued by a
company stating that the company had paid a dividend every
year between 1921 to 1927 (year of depression) thus giving
the impression of a financially stable company. However
company had in each of those years incurred considerable
trading losses and was able to pay dividends only out of
realized capital profits. This fact was suppressed. Held, the
prospectus was false in a material particular in that it conveys
a false impression.
 Peek v. gurney case-A company issued a prospectus
containing false statements. A, relying on the prospectus,
applied for and was allotted shares. Later, he sold these shares
to P.The company was wound up and P had to pay nearly
100,000 pound as a contributory. P sought an indemnity for
his loss from the directors at the time of the issue of the
prospectus. Held, the directors were not liable to P.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

12. Contd..
 Criminal liability: According to Section 63 of
Companies Act, 1956, any person who
authorizes the issue the prospectus containing
any fraudulent statements, then he is liable for
(a) imprisonment for two years, or
(b) fine of Rs. 5000/- or both.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU

13. Statement in lieu of prospectus (Sec. 70)
 Where a public company does not invite public to
subscribe for its share, but arranges money from private
sources, it need not issue a prospectus to the public.
 In such case the promoters are required to prepare a
draft prospectus known as ‘statement in lieu of
prospectus’ which should contain the information
required to be disclosed by the Schedule III of the Act.
 Sec. 70 does not apply to a private company.
Prepared by Dr. Seema H.
Kadam,Associate Prof.,TMES-
MBA,GTU