Unit 3rd

Prospectus

What is a Prospectus?
A prospectus is a document issued by the company inviting the public and
investors for the subscription of its securities. A prospectus also helps in
informing the investors about the risk of investing in the company. A
Prospectus is required to be issued only after the incorporation of the
company. These documents describe stocks, bonds and other types of
securities offered by the company. Mutual fund companies also provide a
prospectus to prospective clients, which includes a report of the money’s
strategies, the manager’s background, the fund’s fee structure and a fund’s
financial statements. A prospectus is always accompanied by performance
history and financial information of the company. The reason for
accompanying such an information along with the prospectus is to make sure
that, the investors are well aware of the company’s background and overall
performance and the investors do not fall into the prey of investing in a bad
company.

Definition of Prospectus under the Companies Act, 2013

Section 2(70) of the Act defines prospectus as, “A prospectus means any
document described or issued as a prospectus and includes a red herring
prospectus referred to in section 32 or shelf prospectus referred to in section
31 or any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of a body
corporate.”

Thus, it is clear from the above definition of the prospectus that, a

prospectus is a just an invitation to offer securities to the public and not an
offer in the contractual sense.

Companies that are required to issue a prospectus

• A public listed company who intends to offer shares or debentures
can issue prospectus.
• A private company is prohibited from inviting the public to subscribe
to their shares and thus cannot issue a prospectus. However, a
private company which has converted itself into a public company
may issue a prospectus to offer shares to the public.
Essentials for a document to be called as a prospectus
For any document to considered as a prospectus, it should satisfy two
conditions.

1. The document should invite the subscription to public share or

debentures, or it should invite deposits.
2. Such an invitation should be made to the public.
3. The invitation should be made by the company or on the behalf
company.
4. The invitation should relate to shares, debentures or such other
instruments.

Statement in lieu of prospectus

Every public company either issue a prospectus or file a statement in lieu of
prospectus. This is not mandatory for a private company. But when a private
company converts from private to public company, it must have to either file
a prospectus if earlier issued or it has to file a statement in lieu of prospectus.

The provisions regarding the statement in lieu of prospectus have been

stated under section 70 of the Companies Act 2013.
The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies ( ROC )
when the company has not issued prospectus to the public for inviting them to subscribe for shares.
The statement must contain the signatures of all the directors or their agents authorized in writing. It
is similar to a prospectus but contains brief information. The Statement in Lieu of Prospectus needs
to be filed with the registrar if the company does not issues prospectus or the company issued
prospectus but because minimum subscription has not been received the company has not
proceeded for the allotment of shares.

Statement in lieu of prospectus means a statement instead of a prospectus. A

statement in lieu of a prospectus is a statement issued by a public unlisted
company instead of a prospectus. It’s a document prepared by public
companies that don’t issue a prospectus when they are formed.
This statement has all the information that a prospectus has and it is signed by all the
directors of the public company or the directors-to-be. If the company doesn’t file a
statement in lieu of prospectus, it won’t be allowed to allocate any shares or
debentures.

Contents of Statement in Lieu of Prospectus

Information in the statement instead of a prospectus includes:

• Company Name.
 • The company’s share capital is divided into ordinary shares and the value of one
share.
• Description of the planned activities and prospectus.
• Names, addresses, roles and responsibilities of proposed or appointed directors,
officers, appointed lawyers and company secretaries.
• Rules for selecting and compensating these corporate representatives.
• Voting rights during company meetings.
• Quantity and value of shares and debentures intended to be issued.
• Names, jobs and addresses of those selling goods bought or offered for sale by the
company.
• Amount to be paid in cash, stocks or bonds to each real estate seller.
Provision for Statement In Lieu Of Prospectus [Section 70, Companies Act,
2013]
Section 70 of the Companies Act, 2013 deals with statement in lieu of prospectus as:

A company with share capital that either doesn’t issue a prospectus or has issued one
but hasn’t allocated any shares to the public must follow certain rules before allotting
shares or debentures. At least three days before making the allotment, the company
must submit a ‘statement in lieu of prospectus’ to the Registrar for registration.

This statement should be signed by every person listed as a director or proposed

director of the company or by their authorised agent in writing. It should contain the
details outlined in Part I of Schedule III and include the reports specified in Part II of
Schedule III, while taking into account the provisions in Part III of that Schedule
(Section 70).

When a private company transforms into a public company, it must provide the
Registrar with a statement in lieu of prospectus. This statement should include the
particulars described in Part I of Schedule IV, along with the report outlined in Part II
of Schedule IV, subject to the provisions in Part III of that Schedule (Section 44(2)(b)).

Failure to comply with these rules can result in a fine of up to Rs. 1,000 for the company
and every director responsible.

If the ‘statement in lieu of prospectus’ contains false information, the person who
authorised its submission can face imprisonment of up to two years or a fine of up to
Rs. 5,000 or both. However, they can avoid liability if they can prove that the statement
was not significant or that they had reasonable grounds to believe it was true. The
legal and criminal consequences for incorrect statements or misrepresentations are
the same as those for a prospectus (Section 70(5)).

Differences Between Prospectus and Statement in Lieu of Prospectus

The differences between prospectus and statement in lieu of prospectus are:
Purpose
A prospectus is a detailed document that provides information about a company’s
securities offering, while a statement in lieu of prospectus serves a similar purpose but
is used in specific situations where a regular prospectus cannot be used.

Issuer
A prospectus is usually issued by a company that is going public or issuing new
securities, whereas a statement in lieu of prospectus is issued by a company that is
already publicly traded.

Content
A prospectus typically contains extensive information about the company’s
management, financial statements and the terms of the securities offering. In contrast,
a statement in lieu of prospectus may have less detailed information.

Regulation
Prospectuses are subject to strict regulatory requirements and must be filed with the
appropriate securities commission. Statements in lieu of prospectus may have fewer
regulatory requirements.

Approval
A prospectus needs approval from the securities commission before it can be used,
while a statement in lieu of prospectus may not require approval.

Distribution
A prospectus is usually distributed to potential investors, whereas a statement in lieu
of prospectus may not be widely distributed.

Timeframe
A prospectus is typically prepared and distributed when a securities offering takes
place, whereas a statement in lieu of prospectus may be prepared and distributed at
any time.

Purpose of use
Prospectuses are used to attract investment in securities, whereas a statement in lieu
of prospectus is typically used for less formal purposes, such as enabling a company
to make a public offering without the cost and time associated with preparing a
prospectus.

What Information Is Normally in a Prospectus?

A prospectus includes pertinent information such as a brief summary of the
company’s background and financial information. The name of the
company and its principals, age of the company, management experience,
and management's involvement in the business. Furthermore, the number
of shares being issued, the type of securities being offered, whether an
offering is public or private, and the names of the banks or financial
companies performing the underwriting are also listed.

A prospectus includes some of the following information:

• A brief summary of the company’s background and financial

information
• The name of the company issuing the stock
• The number of shares
• The type of securities being offered
• Whether an offering is public or private
• Names of the company’s principals
• Names of the banks or financial companies performing
the underwriting

Share
Section 2 (84) of the Companies Act, 2013 defines Share. Share means a
share in the share capital of a company and includes stock. It can also be
said that share is just part of securities.

Why is Shares Issued?

Shares are issued by companies to raise money from investors who tend to
invest their money. This money is then used by companies for the development
and growth of their business.

Shares are units, also known as stocks or equities, representing ownership in a company.
Some companies, consider them as financial assets. So, when a company issues shares of
stock to investors, the capital generated can be used to fund its operations, expand its
business, or make acquisitions. As a result, investors become part owners of the
company and are entitled to a portion of its profits and assets.

TYPES OF SHARES
Shares can be widely divided into two categories namely, ordinary shares and preference shares.

1. Ordinary Share/ equity shares

Ordinary shares carry no exceptional or preferred rights. Ordinary shareholders are entitled
to share in the earnings of the company. They can vote at the company’s general meeting
as well as other official meetings. They are also eligible to participate in any dividends or
any distribution of assets on winding up of the company.
 2. Preference Shares
Preference shareholders usually get a significance or 'priority' over ordinary shareholders
in terms of payments of dividends or on winding up of the company. There are varying
degrees of preference shares having different rights and characteristics. Holders of
preference shares are entitled to having a fixed periodic income and have restricted voting
rights liable to particular circumstances or particular resolutions; however this is strictly
depend

What Is Share Capital?

Share capital is the money a company raises by issuing common or
preferred stock. The amount of share capital or equity financing a
company has can change over time with additional public offerings.

The term share capital can mean slightly different things depending on the
context. Accountants have a much narrower definition and their definition
rules on the balance sheets of public companies. It means the total amount
raised by the company in sales of shares.

Understanding Share Capital

Share capital is reported by a company on its balance sheet in the
shareholder's equity section. The information may be listed in separate line
items depending on the source of the funds. These usually include a line
for common stock, another for preferred stock, and a third for additional
paid-in capital.

Types of Share Capital

1. Authorized Share Capital
Authorized share capital refers to the maximum number of shares a company may issue. The
Memorandum of Association limits the authorized capital to a fixed amount. Authorized share
capital is more than the total outstanding shares.
A company may increase its authorized capital for several reasons, such as acquiring another
company or employee stock options. Any change in the authorized capital requires shareholder
approval since an increase in the authorized capital may shift the balance of power between the
shareholders and other stakeholders.

2. Unissued Share Capital

Unissued shares still need to be issued to the general public or employees. Unissued stock forms part
of the company's treasury and does not impact the shareholders. The Board of Directors controls
unissued shares. Unissued shares are not tradeable in the secondary market.
Most companies hold a significant percentage of their unissued shares. The value of unissued share
capital is low. The objective is to sell or allocate unissued shares at a premium in the future. The
company may use unissued stock to pay off debt or to raise money for new investments. Directors
may even allocate unissued shares to a minority shareholder if necessary.

3. Issued Share Capital

Issued share capital is the number of shares a company issues to its shareholders. Issued share
capital is a mix of common equity shares and preferred capital.
It is a major component of the shareholder's funds under the liabilities of a balance sheet. Also,
analysts use issued capital to evaluate the worth of common equity stock. For example, ABC Ltd
issues thousand shares with a face value of Rs. 10. The company issues the shares for Rs. 15 per
share. Therefore, ABC Ltd. raises Rs. 10,000 from the initial sales of shares. Rs. 5,000 is surplus and
constitutes the company's reserves.

4. Subscribed Capital
A company's authorized share capital is equal to its registered capital. A fraction of the issued capital
is the subscribed capital. Shareholders promise to purchase or subscribe to a company's shares. The
payment of subscribed share capital may be in instalments.
Subscribed capital represents the portion of a company's issued capital accepted by the public. The
public shows interest in a company by way of a subscription. A company can only issue part of the
share capital in one instance.

It may issue additional shares over time. Moreover, the company may only require payment of part
of the share's entire face value.

5. Paid-Up Capital
Paid-up capital is investment received by a company from a share issue. Typically, a company issues
fresh capital to raise funds. Fresh share capital constitutes the company's paid-up capital. As per the
Companies Act 2013, the minimum paid-up capital requirement is Rs. 1 lakh.
Paid-up Capital is essential for fundamental analysis. A company with a low paid-up capital may
have to rely on debt to finance its operations. Conversely, high paid-up capital signifies less reliance
on borrowed funds.

6. Called-Up Capital
Called-up Capital is the subscribed capital section that consists of the shareholder's payment. The
balance sheet separately captures called-up capital under the shareholders' equity. Called-up capital
is useful for companies with unforeseen or emergency fund requirements.
On issuance of shares, the company calls upon its shareholders to pay a part of the capital. Thus,
called-up capital offers more flexibility in the investment and payment terms.
Advantages of Raising Share Capital
a. Fixed Cost – Contrary to debt instruments, share capital restricts the company's fixed cost.
While the company must pay interest on loans or fixed instruments, the dividend payment is
voluntary.

b. Creditworthiness – Investors and lenders prefer companies with a minimum level of share
capital. Share capital signifies financial security. An overly leveraged company may raise concerns
for liquidity or stability.

c. Financial Flexibility - Share capital allows companies flexibility and discretion for fund usage.
However, lenders may prescribe certain conditions to use capital. Companies also have a prerogative
over issued capital and the share's nominal value. They may raise additional funds in the future.

d. Default Risk - Share capital increases confidence level concerning default or bankruptcy.
Shareholders have an inherent interest in the company's overall success and function in the
company's best interest.

Disadvantages of Raising Share Capital

a. Control and ownership – Share capital bequeaths voting rights to investors. Hence, it reduces
the control and ownership of founders.

b. Share dilution – An additional share issue may dilute the cost of existing shareholders. It will
also affect dividend payments and voting rights.

c. Public Disclosure – Public companies are subject to extensive compliance and reporting
requirements. Also, it provides more access to the public about the company's finances.

d. Shareholder Risk – An increase in the nominal value of shares increase the shareholder's future
limited liability. It is significant, especially in case of liquidation or winding up.

e. IPO cost – The cost of an initial public offering is extremely high. It involves the preparation of a
prospectus, underwriting cost, finance, legal fees, listing charges, and advertising.
Debenture

The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means
to borrow or loan. Debentures are written instruments of debt that companies issue
under their common seal. They are similar to a loan certificate.
Debentures are issued to the public as a contract of repayment of money borrowed
from them. These debentures are for a fixed period and a fixed interest rate that can
be payable yearly or half-yearly. Debentures are also offered to the public at large,
like equity shares. Debentures are actually the most common way for large
companies to borrow money.

A debenture is a type of bond or other debt instrument that is unsecured

by collateral. Since debentures have no collateral backing, they must rely
on the creditworthiness and reputation of the issuer for support. Both
corporations and governments frequently issue debentures to raise capital
or funds.

• A debenture is a type of debt instrument that is not backed by any

collateral and usually has a term greater than 10 years.
• Debentures are backed only by the creditworthiness and reputation
of the issuer.
• Both corporations and governments frequently issue debentures to
raise capital or funds.
• Some debentures can convert to equity shares while others cannot.

Features
Let us look at some important features of debentures that make them unique,

• Debentures are instruments of debt, which means that debenture

holders become creditors of the company

• They are a certificate of debt, with the date of redemption and amount
of repayment mentioned on it. This certificate is issued under the
company seal and is known as a Debenture Deed
• Debentures have a fixed rate of interest, and such interest amount is
payable yearly or half-yearly
• Debenture holders do not get any voting rights. This is because they are
not instruments of equity, so debenture holders are not owners of the
company, only creditors

• The interest payable to these debenture holders is a charge against the

profits of the company. So these payments have to be made even in
case of a loss.
Advantages of Debentures

• One of the biggest advantages of debentures is that the company can

get its required funds without diluting equity. Since debentures are a
form of debt, the equity of the company remains unchanged.
• Interest to be paid on debentures is a charge against profit for the
company. But this also means it is a tax-deductible expense and is useful
while tax planning

• Debentures encourage long-term planning and funding. And compared

to other forms of lending debentures tend to be cheaper.

• Debenture holders bear very little risk since the loan is secured and the
interest is payable even in the case of a loss to the company

• At times of inflation, debentures are the preferred instrument to

raise funds since they have a fixed rate of interest
Disadvantages of Debentures

• The interest payable to debenture holders is a financial burden for the

company. It is payable even in the event of a loss

• While issuing debentures help a company trade on equity, it also makes

it to dependent on debt. A skewed Debt-Equity Ratio is not good for the
financial health of a company

• Redemption of debentures is a significant cash outflow for the company

which can imbalance its liquidity

• During a depression, when profits are declining, debentures can prove

to be very expensive due to their fixed interest rate
Types of Debentures
There are various types of debentures that a company can issue, based on security,
tenure, convertibility etc. Let us take a look at some of these types of debentures.

• Secured Debentures: These are debentures that are secured against an

asset/assets of the company. This means a charge is created on such an
asset in case of default in repayment of such debentures. So in case, the
company does not have enough funds to repay such debentures, the
said asset will be sold to pay such a loan. The charge may be fixed, i.e.
against a specific assets/assets or floating, i.e. against all assets of the
firm.
 • Unsecured Debentures: These are not secured by any charge against the
assets of the company, neither fixed nor floating. Normally such kinds of
debentures are not issued by companies in India.

• Redeemable Debentures: These debentures are payable at the expiry of

their term. Which means at the end of a specified period they are
payable, either in the lump sum or in installments over a time period.
Such debentures can be redeemable at par, premium or at a discount.
• Irredeemable Debentures: Such debentures are perpetual in nature.
There is no fixed date at which they become payable. They are
redeemable when the company goes into the liquidation process. Or
they can be redeemable after an unspecified long time interval.

• Fully Convertible Debentures: These shares can be converted to equity

shares at the option of the debenture holder. So if he wishes then after a
specified time interval all his shares will be converted to equity shares and
he will become a shareholder.

• Partly Convertible Debentures: Here the holders of such debentures are

given the option to partially convert their debentures to shares. If he opts
for the conversion, he will be both a creditor and a shareholder of the
company.
• Non-Convertible Debentures: As the name suggests such debentures do not
have an option to be converted to shares or any kind of equity. These
debentures will remain so till their maturity, no conversion will take place.
These are the most common type of debentures.
What is a Debenture Bond?

A debenture bond is a bond that is not secured by any assets of the issuer. Instead, the bond
is only backed by the reputation and integrity of the issuer. This type of bond typically
carries a higher rate of interest than a secured bond, to compensate investors for the
increased risk of not having their funds repaid.

Who Issues Debenture Bonds?

Debenture bonds are typically issued by large corporations and governments with excellent
credit ratings. Investors are less concerned about these entities defaulting on their
payments.
 Shares Debentures

What it means?

Shares are the Debentures are

company-owned the borrowed
capital. capital of the
company.

Holder

The person who The person who

holds the holds the
ownership of the ownership of the
shares is called as Debentures is
Shareholders. called as
Debenture holders.

Status

Owners. Creditors

Mode or return

Shareholders are Whereas,

given the debenture holders
dividends. are given interest.

Payment of return

Dividends can be Interest can be

paid to the paid to the
shareholders out of debenture holders,
regardless of if the
 profits earned by company has
the company. earned profits.

Voting rights

Shareholders Debenture holders

possess voting do not possess
rights. any right for
voting.

Conversion

Shares cannot be However,

converted into debentures can
Debentures. easily be
converted into
Shares.

Trust Deed

Trust deed is not When the

carried out in the debentures are
shares. circulated to the
public, a trust
deed has to be
carried out.

CLASSIFICATION OF COMPANIES SECURITIES

Securities” refers to substitutable and tradable financial instruments with a
particular monetary value. This represents the ownership of a listed company
through its shares. The legal entity’s bonds represent creditor relationships
with government agencies or businesses or optional ownership. For laymen,
securities are financial assets of monetary value that investors use to invest
in a company, while companies use them to raise capital. In India, securities
are defined under the Securities Contracts (Regulatory) Act of 1956.
Under Section 2 (h), securities include “shares, scrips, stocks, bonds,
debentures, debenture stock or other marketable securities of a like nature in
or of any incorporated company or other body corporates. Companies Act
2013 also refers to the exact definition, and under Section 2 (81), securities
have the same meaning as defined above.

Equity securities
Equity securities represent the ownership of shareholders of a company
(company, partnership, or trust). They are realized in the form of equity
capital shares, including both common stock and preferred stock. Equity
securities holders are usually not entitled to regular payments. In contrast,
equity securities often pay dividends but benefit from capital gains (if their
value increases) when the securities are sold, they may receive it. Equity
Securities gives holders some control over the company through voting
rights. In the event of bankruptcy, they will only receive a portion of the
remaining interest after all debt has been repaid to the creditor. It may also
be provided as a payment method.

To calculate the shares of a company, you need to divide the number of

shares owned by the company by the total number of shares of the company
and multiply by 100. The advantage of investing in equity securities is
virtually no risk of default for the company. Their profit or loss corresponds
to the ownership they exercise in the company.

Equity securities can increase or decrease in value depending on the

company’s performance and the financial markets.

Debt securities
Debt securities represent borrowings that need to be repaid and are subject
to conditions that determine the loan’s size, interest rate, and due date or
renewal date. Debt securities, including government bonds, corporate bonds,
certificates of deposit (CD), and collateralized debt obligations (such as CDOs
and CMOS), typically pay the regular holder interest and repay the principal
(regardless of the issuer). Give the right. `Performance) Furthermore, all
other contractually agreed rights (not including voting rights) and usually
issued for some time, after which the issuer can repay. Debt securities can
be secured (backed by collateral) or unsecured, and with collateral, they can
be contractually prioritized over other unsecured subordinated bonds in the
event of bankruptcy.

The mechanism of this bond is to issue a bond of a specific value with a

period in which the company promises to pay the amount specified in the
bond. The value that a company promises to pay later is usually higher than
the value of the bonds offered and gives investors an incentive to buy the
bonds. Bonds are called zero-coupon bonds or bonds, depending on whether
the bond is sold below par or at par, but the increase in value is based on
interest.

Let us look at an example. If the school district wants to build a new school,
it can issue a loan to fund the project. Investors who buy bonds borrow
money from the school district, hoping to be repaid through interest. This
scheme is suitable for both investors and bond issuers. Bonds are less
volatile than stocks and help balance the investment portfolio. Companies
that issue bonds also receive loans to meet their financial needs.

Derivatives securities
It is a financial instrument whose value depends on another underlying
financial instrument or another underlying promise or contract. It is called a
derivative because its value is derived from another promise, contract, or
financial instruments such as a stock or bond. In the past, derivatives have
been used to ensure a balanced exchange rate for internationally traded
commodities. International traders needed an accounting system to lock
various home currencies at a particular exchange rate. Swaps, futures
contracts, and options are examples of derivative securities.

Apart from these three kinds of securities, there is also a fourth kind of
security used which does not fall into any of the heads mentioned above
because of its nature, called hybrid security.

Hybrid securities
As the name implies, hybrid securities are a combination of some of the
characteristics of debt and capital. Examples of hybrid securities are warrants
(an option that gives shareholders the right to buy shares at a specified price
within a specified time), convertible bonds (corporate bonds that can be
converted into the issuer’s common stock), and preferred stock. Shares of a
company where payments of interest, dividends, or other capital interests
may take precedence over overpayments of other shareholders.

These are defined under Section 2 (19A) of the Companies Act, 1956 as
“any security which has the character of more than one type of security,
including their derivatives” These are hence called ‘hybrids’ because they
have mixed characteristics of both equity and debt.

The Supreme Court dealt with the issue of whether ‘hybrid’ securities are
‘securities’ as per the scheme of the Companies Act and SEBI Act in the case
of Sahara India Real Estate Corporation Limited & Ors. v. SEBI
In this case, the Supreme Court held that ‘hybrid securities’ are securities
within the meaning of the Companies Act, Securities Contracts Regulation Act
and hence the SEBI Act.

It based its decision on the fact that Section 2 (h) of the Securities Contracts
Regulation Act, 1956 defines securities to include “shares, scrips, stocks,
bonds, debenture stocks, or other marketable securities of like nature in or of
any incorporated company or other body corporate” and that the term
‘hybrids’ has been defined as ‘any security having the character of more than
one type of security and since these securities are ‘marketable’ they would
fall within the meaning of securities for Companies Act, Securities Contracts
Regulation Act and the SEBI Act.

Examples of hybrid securities are preferred stock that allows holders to

receive dividends before holders of common stock, convertible bonds that
can be converted to a known number of shares during the bond’s life or at
the maturity date of the contract and so on. Hybrid securities are a complex
product. Even experienced investors can find it challenging to understand
and assess the risks associated with a transaction. Institutional investors
may not understand the terms and conditions of the transactions they enter
into when purchasing hybrid securities.

Securities trading
Listed securities are listed on the stock exchange, and issuers can attract
investors by seeking a listing of securities and providing a liquid and
regulated trading market. In recent years, informal electronic trading
systems have become commonplace, and securities are often traded “over-
the-counter” or directly between investors online or over the phone. An initial
public offering (IPO) is the company’s first extensive public offering of
shares.

After the IPO, each newly issued share still on sale in the primary market is
called a secondary offering. Alternatively, securities can be personally offered
to a restricted qualified group as part of a so-called private placement. This is
a significant difference in both corporate law and securities supervision.
Companies may sell shares in a combination of public and private
placements. In the secondary market, also known as the aftermarket,
securities are transferred from one investor as an asset to another.

Shareholders can sell securities to other investors for cash or capital gains.
Therefore, the secondary market complements the primary market. Private
placements are less liquid because the secondary market is not publicly
tradable and can only be transferred between qualified investors.
Other securities

Certified securities
Certified securities are presented in the form of physical paper. Securities
can also be held through a direct registration system that records shares. In
other words, the transfer agent manages the shares on behalf of the
company without a physical certificate.

Bearer securities
A bearer security is tradable security and gives shareholders the rights that
arise from the security. They are transferred from investor to investor, in
some cases by endorsement and delivery. Concerning ownership, bearer
securities prior to digitization were always split. Each security represents a
separate asset that is legally separated from the other securities on the same
issue.

Registered securities
The registered documents will include the owner’s name and any other
required information registered by the issuer. Registered papers will be
transferred by changing the registration. Registered bonds are not always
split. NS. The whole problem forms a single asset, and each security
becomes part of the whole. Unsplit securities are essentially substitutable.
The share of the secondary market is not always divided.

INTER- CORPORATE LOANS

Inter-corporate loans are defined as any loan, guarantee, or security given
by one company to another company or individual. Inter-corporate loan, as
defined by the Companies Act of 2013, plays a critical role in the
development of Indian enterprises. There is a constant flow of finances for
the group as well as other enterprises in need of capital. Inter-corporate loan
means when one firm gives a loan, security, or guarantee to another
company or corporation. Inter-corporate investment occurs when one firm
invests in another company in any way. After receiving approval from the
board of directors or shareholders, a corporation can give loans, investments,
guarantees, or security to another company. Section 186 of the Companies
Act describes the regulations by which a corporation can give a loan and to
whom it can provide, as well as the legislation governing company loans and
investments. Given India’s ongoing industrialization, the corporation may
require additional capital. As a result, they may require the assistance of an
inter-corporate loan. Section 186 of the Companies Act, 2013 has made a
few changes to the Inter Corporate Loans and Investments made by a
company to simplify the company’s operation and processes. This statute
establishes the rules under which a firm may or may not grant a loan,
provide a guarantee, or make an investment.

Objectives behind inter-corporate loans

The inter-corporate loan serves a variety of purposes. Loans provided from
one business unit of a firm to another are known as inter-corporate loans.
This is frequently done for the following reasons and goals:

• To transfer cash to a company unit and to avoid a cash shortage.

• To move money into a business unit (typically corporate) where it
will be pooled for investment.
For the following reasons, an inter-corporate loan is particularly beneficial:

• There is no need to go through the elaborate and tedious process

like a bank loan which requires a lot of documentation and
approvals.
• Cash is available to any corporation on very short notice.
• The payback terms are substantially more favourable.

Inter-corporate loan limit

Inter-corporate loans are subject to significant restrictions under the
Companies Act of 2013. The maximum amount of an inter-corporate loan is
capped at the following for all the companies-

• A company can lend, guarantee, or secure a loan, guarantee, or

security above 60% of its paid-up share capital to any person or
corporation.
• If the total amount of inter-corporate loans does not exceed the
prescribed limit, the loan and investment will be processed by board
resolution.
• The board resolution will be approved by all of the directors present
at the meeting.
• If the total amount of inter-corporate loans exceeds the set limit, a
special resolution must be passed beforehand.
Restrictions on inter-corporate loans
The limits listed below must be considered while establishing arrangements
for an inter-corporate loan.

• If a corporation defaults on interest payments, it is forbidden from

making any inter-corporate loans under the Companies Act of 2013,
and this prohibition will remain in effect until the problem is fully
addressed.
• No inter-corporate loans shall be made at a rate lower than the
current bank lending rate.
According to Section 186(4) of the Companies Act, 2013, if a company
makes inter-corporate loans, it must disclose the following information to its
members in its financial statement:

• Amount of loan provided.

• The investment made/guarantee given.
• Purpose of providing the loan.
• Source of funding for meeting the proposal.
• The particulars of the body corporate interested in making such
loans.

Board of directors and public financial institution approval

• Before making any inter-corporate loans, every company must
obtain the consent of all directors under Section 186 (5) of the
Companies Act, 2013.
• If a company has already taken a loan from a public financial
institution, it is mandatory to obtain prior approval from that public
financial institution.

Procedure for granting inter-corporate loans

The procedure to be followed when offering inter-corporate loans is as
follows:

• The firm can lend or guarantee up to 60% of its paid-up capital and
100% of its free reserves and security premium, whichever is more,
through board decision.
• A meeting of the Board of Directors must be held with notice, and
no investment may be made unless the board resolution is passed.
 • If a loan from a public financial institution is already in place, prior
approval from that financial institution is required.
• However, if the total loan amount does not exceed the restrictions
set out in Section 186(2) of the Companies Act, 2013, no prior
authorization from that financial institution is required.
• The Company Board can approve one of the directors or any other
person to apply for financial institution permission after deciding on
the source of funds and the amount required.
• The holding of a general meeting of shareholders is essential.

• Within 30 days of passing the resolution, the copy must be filed in

form No. MGT-14 (Filing of resolution and agreements to the
Register) with the fees stipulated in the Companies Rules, 2014.
• The corporation must attach essential documentation by the
resolution form’s requirements.
• Every company that makes a loan or provides a guarantee must
keep a record in Form MBP-2 (Register of loans, guarantees,
security, and acquisition). Entries in the register must be made for
each loan transaction.
• The company must ensure that no loan is given at a rate of interest
lower than the current rate of Government security, and it must
publish the loan’s full details in the financial statement.
ROLE OF THE COURT TO PROTECT THE INTERESTS OF
CREDITORS AND SHAREHOLDERS
CREDITOR:

A creditor is a body or person who provides debt capital to the company in

return for financial benefit. There are secured and unsecured creditors.
Creditors are protected by various provisions of the law. They carry the
highest amount of risk in the security market compared to the
shareholders. They can get affected if the company undergoes financial
distress and avoids insolvency, then the interests of creditors can be
affected. The rights of the creditors are as follows,

• During the liquidation of the company, the creditors are given the top
priority while making payments of dividends.
• They have the right to participate in the distribution of assets of the
company at the time of liquidation of the company and are entitled
to recover their funds from the amount they get from the
liquidation.
• Creditors meeting: It refers to a meeting called by the corporation to
devise a plan for reaching an agreement with the creditors. The
Companies Act of 2013 specifies the company’s ability to negotiate
 with creditors as well as the method for doing so. [2] They can vote
and make agreements on various matters.
• Restructuring and Rescheduling: When a firm is in financial
difficulties, creditors may have the authority to negotiate and
engage in debt restructuring or rescheduling arrangements with the
company. These procedures seek to provide a feasible option for
debt repayment while avoiding liquidation.

SHAREHOLDER:

A shareholder is an individual who purchases stock in the company which

helps in the allocation of capital. By owning shares, the shareholders hold
partial ownership in the company and take part in the decision-making
process of the company. They also enjoy voting rights and have limited
liability. Based on the number of shares held there are major and minor
shareholders. Minority shareholders are people who have invested money
in the firm but do not own enough shares to exercise control; as a result,
their interest in the company and its affairs is frequently disregarded. [3]

Shareholders are subjected to many risks in the market. There are rights,
provisions, and regulatory bodies provided by law. The rights of the
shareholders are:

• The shareholders have voting rights to take part in the company’s

decision-making for the smooth running of the company.
• The right to hold general meetings: A general meeting can be
called by shareholders. They have the authority to direct a
company’s director to call an extraordinary general meeting. They
can also contact the Company Law Board if the general body
meeting is not held by the statutory requirements. [4]
• The shareholders have the right to take legal action against the
company if their interests are affected by the company’s activities.
• They havethe right to information regarding the company’s affairs
and they can access any information regarding the company i.e.,
financial statements, audit reports, etc.
• They have the right to approach the court in case of insolvency of
the company.[5]
• They have the right to transfer their shares freely but should
adhere to the rules and regulations of the company which are
reasonable.
• They have the right to receive their dividends declared by the
company on time.

PROVISIONS BY LAW TO PROTECT THE INTERESTS OF

SHAREHOLDERS AND CREDITORS
 • Section 34 of the Company Act, 2013, deals with the Criminal
liability for misstatements in the prospectus which says that
If any statement in the prospectus is false or misleading, and the
person making the statement is aware that it is false or misleading,
they may face criminal charges. The obligation also extends to
anybody who authorises the distribution of a prospectus containing
such incorrect or misleading representations.[6]
• Section 35 of the Company Act, 2013, deals with Civil liability for
misstatements in prospectus which provides that if a
prospectus contains any explanation that is false or misleading in
the structure or context in which it is incorporated, or if any
consideration or exclusion of any issue is likely to mislead, then
each individual who approves the issue of such prospectus will be
punished with imprisonment for a term of at least 6 months, but
which may extend out to 10 years, and will also be subject to a fine
that is not exactly the aforementioned fine.[7]
• Section 66 of the Company Act, 2013 deals with share capital
reduction. It requires firms to follow specified procedures,
including getting shareholder and creditor consent, to guarantee
that any reduction in share capital will not harm creditors’ rights
and interests.
• Section 53 of the Indian Company Act, 2013, deals with
the Prohibition on the issue of shares at discount. It assures
that shares are issued at face value or a premium, preserving
shareholders’ interests.[8]

OTHER PROVISIONS

• Forward trading in business securities by key management persons is

prohibited.
• Insider trading in securities is prohibited.
• Voting through electronic means
• There will be no midnight. Annual general meeting – The schedule of
the AGM has been set to be between business hours, between 9 am
and 6 pm
• The quorum for meetings – is determined by the Company’s
membership base rather than a predetermined number regardless
of size.
• Minutes of general meetings, Board of Directors meetings, and other
meetings, as well as postal ballot resolutions.
• Document maintenance and examination in electronic form.

ROLE OF THE COURT TO PROTECT THE INTERESTS OF

SHAREHOLDERS AND CREDITORS
The court plays a vital role in protecting the interests of creditors and
shareholders which is discussed below:

• The National company law tribunal a.k.a. NCLT is a quasi-judicial

body established by the Central Government of India under the
company act, 2013. It deals with matters regarding corporate
disputes and companies. It enjoys a vast jurisdiction on various
matters like insolvency, liquidations, class action suits, oppression
and mismanagement, mergers, and acquisitions. This tribunal
protects the interests of creditors and shareholders as they can file
suits against companies if their rights are threatened.
• Under the creditor protection statute, the official courtroom protects
the rights of creditors and investors.
• The Court uses the process of legislative passage to aid creditors in
clearing the amount of debt through insurance firms.
• The investors are also protected by the legislation to retain their
quality of living.
• There are several options available to investors for returning money
to creditors as directed by the courts.
• Creditors and shareholders have the right to be heard in court and
the shareholders have the right to take legal action against the
companies if needed.

CASE LAWS

Here are a few case laws regarding how various matters were dealt
regarding protection of interests.

•R v. Lord Kylsant[10]

In this case, a table in the prospectus revealed that the firm had paid
dividends ranging from 8% to 10% in the prior years, except for the
exception of those two years when no dividend was given. The statement
indicates that the company in question was in good fiscal condition, but the
truth was that the company had suffered significant losses in trading in the
seven years preceding the prospectus date, and dividends had been paid
from funds earned during the unusual duration of the war, rather than
current earnings. The Prospectus was found to be untrue as there was a
misrepresentation of a fact necessary to understand the assertions provided
in the prospectus.

• Bharat Insurance Co. v. Kanhaiya Lal[11]

This case comes under the exception of the majority rule which says that
the major shareholders have more power than compared to the minority
shareholders. In this case, the respondent is the company and the plaintiff
is one of the shareholders of the company. One of the company’s goals was
to “advance money at interest on the security of the land, houses,
machinery, and other property in India.” One shareholder filed a lawsuit
alleging that the corporation made multiple investments without enough
security and was in violation of the terms of the memorandum. The Court
ruled that he may sue because the majority rule does not apply to the ultra
vires statute.

• Glass v. Atkin[12]

In this case, Two defendants and plaintiffs shared ownership of a business.

The two plaintiffs filed a lawsuit against the defendants, alleging that they
had illegally diverted the organisation’s resources to their benefit. The court
allowed the action, observing that normally, it is for the organisation itself
to bring an action where its advantage is adversely influenced, but in this
case, the two plaintiffs were justified in bringing the action for the benefit of
the organisation because the two defendants being in equal control would
easily prevent the organisation from suing.

Class Action Suits

In a class-action suit, a large group of people, having same or similar injuries caused by the same
person, collectively bring a claim to court, represented by one or more persons. This form of lawsuit
is also called a Representative Action. One set of persons representing a larger group approach the
court for redressal of their grievances.
The rationale behind such suits are – firstly to protect the interest of members of a class who are
geographically dispersed and secondly to reduce the duplication of the litigation as it combines the
various proceedings initiated in different parts/jurisdiction bearing same cause of action(s).
Further it also makes adjudication possible; otherwise as per the rule of necessary party all the
members of a class are required to be made plaintiff, which otherwise would have made the
adjudication impossible.
In January 2009, India witnessed one of its biggest corporate scandals – the ‘Satyam scandal’ also
referred to as ‘India’s Enron’. Satyam Computers Services Limited (“SCSL”) was under the
microscope for fraudulent activity and misrepresentation of its accounts to its board, stock
exchanges, regulators, investors and all other stakeholders. Thereafter, shareholders of SCSL,
approximately 300,000 were unsuccessful in claiming damages worth millions due to the absence
of the provision for filing a class action suit under the Companies Act, 1956. American investors on
the other hand were able to claim their part of damages in the US Courts through a class action suit
against SCSL.
The concept of class action was first introduced in the US in the year 1938. ‘Class Action’, which is
also known as ‘Representative Action’, is actually a form of lawsuit where a large group of people
collectively brings a claim to the court through a representative. A class action suit is filed generally
when a number of people have suffered the same or similar injuries. Often many of the individuals’
injuries are relatively minor, such that they might not pursue legal redress on their own. Together,
however, the value of the claims of the class add up, and claiming as a class helps consolidate the
attorneys, evidence, witnesses, and most other aspects of the litigation.
2. Class Action Suits under various laws
Class Action suits under Companies Act, 2013:
1. A suit can be filed or any other action may be taken by any person, group of persons or any
association of persons affected by any misleading statement or the inclusion or omission of any
matter in the prospectus under the following provisions of the Act. (Section 37)
Section 34 – Criminal Liability for misstatements in prospectus
Section 35 – Civil Liability for misstatements in a prospectus
Section 36 – Punishment for fraudulently inducing persons to invest money.
2. A class action suit can be filed by members or depositors of the company or any class of them if
they are of the opinion that the affairs of the company are being conducted in a manner prejudicial
to the interest of the company or members or depositors. (Section 245)

2.2 Class Action suits under Code of Civil Procedure:

There are no limits on the subject matter except for actions that cannot be filed in the civil courts
at all, such as mismanagement suits. All persons having same interest in the suit can make an
application for the class action suit.

2.3 Class Action suits under Competition Act:

A class may dispute an agreement which causes an appreciable adverse effect on competition
within India or abuse of dominant position by an enterprise. Any person, consumer or their
association can bring the action. E.g. Price Fixing
Class Action suits under Consumer Protection Act:
The suit under this Act is restricted to disputes relating to goods and services sold/provided or
delivered or agreed to be sold/provided or delivered. Consumers of the goods or services aggrieved
can bring the action under this Act.

Advantages of Class Action Suits

1. Clubbing of similar applications and bar on futile litigations:
When the facts are similar in suits filed in different dominions by the members of the same class,
standing against the same or similar defendants, it makes sense to combine them all and adjudicate
it under one roof. Clubbing of similar claims/suits would also result in efficiency of judiciary, as
the same would save precious time of judiciary from adjudicating the similar dispute numerous
times. Hence Class Action Suits against similar defendants/respondents seeking similar relief may
be consolidated into one. Further the legislature also intends to bar the future class action on same
subject matter.
2. Reduction of Cost:
The cost of bringing a claim to the settlement under the present mechanism at times is very
expensive as well as time consuming particularly while filing of suits under Civil Procedure Code,
1908. Further the territorial jurisdiction of the civil court also leads to duplicity of litigation leading
to multiplicity of cost for same cause of action. It therefore makes far greater sense for people to
share the costs of litigation by teaming up with others in a similar position. If as a group, only one
set of counsels are instructed and the factual cases of each members are identical the legal cost will
be far less than that would have been if instituted individually.
3. Class action suits would allow individuals to hold some of the world’s most powerful companies
and organizations accountable for their actions. These lawsuits will cover a wide range of issues
including the mismanagement of monies invested with a company, securities law related fraud,
malfunctioning of accounts, restraining company to act ultra vires or in breach of the articles of
association of the Company, etc.
4. Class action suits will provide a window to the small shareholders to redress their grievances
irrespective of their jurisdictional limitation.
4. Eligible entities according to the Company’s Act, 2013
A class action suit can be filed against following persons to claim damages or compensation or
demand any other suitable action from or against:
•
o the company or its directors for any fraudulent, unlawful or wrongful act or
omission.
o the auditor/audit firm for any improper or misleading statement made in audit
report or for any fraudulent, unlawful or wrongful act or conduct.
o any expert or advisor or consultant or any other person for any incorrect or
misleading statement made to the company or for any fraudulent, unlawful or
wrongful act or conduct or any likely act or conduct on his part.

5. Reliefs under Class Action Suits

Following orders can be sought from Tribunal by Members/Depositors:
(A) To restrain the Company from:
•
o committing an act which is ultra vires to Memorandum of Association (MOA) or
Articles of Association (AOA)
o committing breach of any provision of MOA or AOA
o acting on resolution which is void (due to suppression of facts/misstatements)
o doing an act which is contrary to the provisions of this Act or any other Act
o taking action contrary to any resolution passed by the members.

(B) To claim damages or compensation or demand any other suitable action from or
against:
•
o the company or its directors
o the auditor/audit firm for any improper or misleading statement made in audit
report or for any fraudulent, unlawful or wrongful act or conduct
o any expert or advisor or consultant or any other person for any incorrect or
misleading statement made to the company or for any fraudulent, unlawful or
wrongful act or conduct or any likely act or conduct on his part;
• C) To declare a resolution altering the memorandum or articles of the
company as void if the resolution was passed by suppression of material facts
or obtained by mis-statement to the members or depositors
• (D) To seek any other remedy as the Tribunal may deem fit.

• 6. Consideration by Tribunal
Section 245(4) provides that in considering an application under sub-section (1), the Tribunal shall
take into account, in particular—
(a) whether the member or depositor is acting in good faith in making the application for seeking
an order;
(b) any evidence before it as to the involvement of any person other than directors or officers of the
company on any of the matters provided in this section;
(c) whether the cause of action is one which the member or depositor could pursue in his own right
rather than through an order under this section;
(d) any evidence before it as to the views of the members or depositors of the company who have
no personal interest, direct or indirect, in the matter being proceeded under this section;
(e) where the cause of action is an act or omission that is yet to occur, whether the act or omission
could be, and in the circumstances would be likely to be – authorised by the company before it
occurs or ratified by the company after it occurs;
(f) where the cause of action is an act or omission that has already occurred, whether the act or
omission could be, and in the circumstances would be likely to be, ratified by the company.

7. Punishment for non-compliance of Tribunal’s orders

Any Order passed by the Tribunal shall be binding on the Company, Members, Depositors,
Directors, Auditors, Experts, Consultant, Advisors or any other person. [Section 245(6)].
In case the company or any officer who is in default does a non-compliance of any order passed by
the Tribunal under section 245, then the fine/punishment is as follows [Section 245(7)]:
•
o Company: Fine ` 5,00,000 to ` 25,00,000
o Officer in Default: Imprisonment up to 3 years and fine ` 25,000 to ` 1,00,000

8. Required members for applying action class suits

A) Members:
•
o Company having Share Capital: at least 5% of total number of members or 100
members whichever is less. (Listed or Unlisted)
o Unlisted Company: member or members holding not less than five per cent (5%)
of the issued share capital.
o Listed Company: member or members holding not less than two per cent (2%) of
the issued share capital.
o Company having not Share Capital: at least 1/5th of total number of members.

(B) Depositors:
At least five per cent (5%) of the total number of depositors of the company or one hundred (100)
depositors of the company.
Depositor or depositors to whom the company owes five per cent of total deposits of the company.

DERIVATIVE ACTIONS
Derivative Actions Derivative actions are lawsuits filed by a shareholder on
behalf of the company against its directors or officers for breaches of duty,
mismanagement, or any other wrongful act that affects the interests of the
company. The damages awarded in derivative actions go to the company, not
the shareholders themselves.
Features of Derivative Actions
The following are some of the essential features of derivative actions:

Standing: Shareholders who wish to file a derivative action must have standing, which means
that they must have a substantial stake in the company. This requirement ensures that only
shareholders with a significant interest in the company can initiate legal proceedings on its
behalf.
Approval: Before a shareholder can file a derivative action, they must first obtain the approval of
the board of directors. If the board is unwilling to initiate legal proceedings, shareholders can
approach the court to seek permission to file the action.

Control: In derivative actions, the control of the lawsuit rests with the shareholder

Advantages of Derivative Actions: The following are some of the advantages of derivative
actions:

Accountability: Derivative actions hold directors and officers accountable for their actions and
ensure that they act in the best interests of the company and its shareholders.

Compensation: Derivative actions can result in compensation for the company for any losses
suffered due to the wrongful acts of its directors or officers.

Deterrence: Derivative actions can act as a deterrent against future wrongdoing by directors and
officers by sending a message that they will be held accountable for their actions.

Limitations of Derivative Actions: The following are some of the limitations of derivative actions:

Approval Requirement: The requirement for obtaining approval from the board of directors
before filing a derivative action can be a significant hurdle for shareholders, especially if the
board is unwilling to take action against its own members.

Cost and Time-Consuming: Derivative actions can be costly and time-consuming, requiring
extensive legal expertise and resources. Additionally, the damages awarded in derivative actions
go to the company, not the shareholders themselves.
Limited Recovery: The damages recovered in derivative actions are limited to the losses suffered
by the company, and shareholders may not receive direct compensation for their losses or
damages.

Limited Scope: Derivative actions can only be filed for breaches of duty or wrongful acts that
affect the company and not for individual shareholder grievances.

Prepared by Sanabel uzma