Page 250 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

In corporate law, a stock certificate or share certificate is a legal document that certifies ownership Notes
of a specific number of stock shares in a corporation. In large corporations, buying shares does
not always lead to a stock certificate.

11.1 Prospectus

A prospectus, as per s.2 (36), means any document described or issued as prospectus and includes
any notice, circular, advertisement or other document inviting deposits from the public or
inviting offers from the public for the subscription or purchase of any shares in or debentures of
a body corporate.
11.1.1 Steps which are Necessary before the Issue of Prospectus

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
have 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.

11.1.2 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
take up the issue, he or they will do so. In return for this undertaking, the company agrees to pay
the underwriter a commission on all shares or debentures, whether taken up by the public or by
the underwriters.
Section 76 prescribes certain conditions subject to which underwriting commission may be paid.
These are:
1. The authority to pay is given in the articles of the company. Authority in the Memorandum
is not sufficient.
2. The commission payable cannot be more than 5 per cent of the issued price of shares and
per cent of the price of debentures.

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