Page 252 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

by issue of a prospectus, to make an application for listing the security in one or more recognised Notes
stock exchanges. This is known as listing of the shares. The information that permission has
been obtained from the stock exchange or that an application for getting permission has been
made or will be made, may be mentioned in the prospectus.
The eligibility criteria for listing of securities of a company are: (i) minimum issued equity
capital of a company should be ` 3 crores; and (ii) the minimum public offer of equity capital
shall be not less than 25% [Rule 19(2)].

For listing of its shares, the company has to comply with all the requirements of the Securities
Contracts (Regulation) Rules, 1957. Rule 19 (2) (b), requires that at least 25% of each class or kind
of securities issued by the company shall be offered for public subscription through newspaper
advertisement for a period not less than 3 days and that allotment to such applicants shall be
made fairly and unconditionally.

11.1.5 Structure of Share Capital

The amount of authorised capital and its subdivision into equity and preference share capital is
given in the Memorandum of Association which is prepared before the certificate of incorporation
is obtained. After obtaining the certificate of incorporation and before the issue of prospectus,
the Board of directors have to take a decision regarding the total amount of capital which is to be
raised by issue of shares and the kinds of shares to be issued. A company cannot issue capital
exceeding the authorised capital mentioned in the memorandum. How much capital should be
raised at a particular time? It depends upon a number of factors, such as the purpose for which
the capital is required (whether for acquiring fixed assets like plant and machinery, etc., or for
providing additional working capital); the alternative sources of raising capital (e.g., debentures,
public financial institutions and so on). The directors should also decide about the ratio of equity
to preference share capital. For certain purposes the Central Government has fixed this ratio at
3:1. Also, the amount of capital in each category, i.e., equity and preference and the amount to be
called up at the time of application, allotment, etc., are to be decided. Also, the Board of directors
have to decide about the type of preference shares to be issued.

11.1.6 Time of Floatation

The Board of directors will then decide about the time of issue of prospectus. It is advisable to
consider the condition of the capital market, the investors’ mood, fiscal and monetary policies of
the Government and the state of business conditions before issuing a prospectus.

11.1.7 Definition of a 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. Thus, a prospectus is not merely an advertisement; it may be a circular or even
a notice. A document shall be called a prospectus if it satisfies two things: (1) It invites
subscriptions to share or debentures or invites deposits. (2) The aforesaid invitation is made to
the public.
What constitutes an offer to the public? Section 67 lays down two-way criteria as to what shall
constitute an invitation to the public. These are:

1. An invitation to the public shall include an invitation to any section of the public, whether
selected as members or debenture holders of the company concerned or as clients of the
person issuing the prospectus or in any other manner. However, a document by way of

LOVELY PROFESSIONAL UNIVERSITY 245