Page 170 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 9: Prospectus

Objectives Notes

After studying this unit, you will be able to:

Discuss the meaning of Prospectus
Explain SEBI guidelines reading to disclosure on prospectus

Introduction

In last unit you have studied about the formation of company. Promoters have been described

to be in fiduciary relationship with the company. This relationship of trust and confi dence
requires the promoter to make a full disclosure of all material facts relating to the formation
of the company. The Memorandum of Association of a company is its charter which contains
the fundamental conditions upon which alone the company can be incorporated. It tells us the
objects of the company’s formation and the utmost possible scope of its operations beyond which

its actions cannot go. Thus, it defines as well as confines the powers of the company. In this unit
will study about underwriting and prospectus in detail .
9.1 Steps which are Necessary before the Issue of Prospectus

We have mentioned earlier that a private company is prohibited from inviting public to subscribe
to its share capital and it arranges its share capital privately. The shares are subscribed by a
small number of persons who are known to the promoters or are related to them by family
connections.
A public company may also decide not to invite public to subscribe to its share capital and arrange
its capital privately as in the case of a private company. Under such circumstances, the public
company is required to submit a statement in lieu of prospectus with the Registrar of Companies
at least three days before the allotment of shares is made.
However, a public company limited by shares, generally issues shares to the public for which it
has to issue a prospectus. In that case it has to follow the procedure below.

After the certificate of incorporation is obtained, the affairs of the company are taken over by the

first directors appointed in accordance with the provisions of law. They will elect one of their
members as the chairman of the Board of Directors, if none is named in the articles of association.
The Board attends to the following matters:
(i) Appointment of various expert agencies such as bankers, auditors, secretary, etc.
(ii) Entering into underwriting contract, brokerage contracts.

(iii) Making arrangements for the listing of shares on stock exchanges.
(iv) Drafting a prospectus for the purpose of issue to the public.
The appointment of a banker is necessary as it has to receive the share application along with

application moneys. The appointment of first auditor is in the hands of Board of directors and it
becomes necessary, as we shall see later, to make the appointment before the issue of prospectus.
The appointment of company secretary is obligatory in case of companies, having the prescribed
paid-up share capital (presently, ` 50 lakhs or more). In other companies also, the appointment
of a company secretary is desirable.

9.2 Underwriting

The Board of Directors enters into underwriting contracts with underwriters. Underwriting, in
its simplest form, consists of an undertaking by some person or persons that if the public fails to

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