Page 264 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

In Rex v. Kylsant (1932), the prospectus stated that dividends of 5 to 8 per cent had been regularly Notes
paid over a long period. The truth was that the company had been incurring substantial losses
during the seven years preceding the date of the prospectus and dividends had been paid out of
the realised capital profit. Held: the prospectus was false and misleading. The statement though
true in itself was rendered false in the context in which it was stated.
A half truth, for instance, represented as a whole truth may tantamount to a false statement
(Lord Halsbury in Aarons Reefs v. Twisa). Thus, the persons issuing the prospectus must not
include in the prospectus all the relevant particulars specified in Parts I & II of Schedule II of the
Act, which are required to be stated compulsorily but should also voluntarily disclose any other
information within their knowledge with might in any way affect the decision of the prospective
investor to invest in the company.

Notes Allotment of Shares in Fictitious Names Prohibited (S.68A)
Following acts are punishable with imprisonment for a term extending to five years:
(i) making an application to a company for acquiring or subscribing for, any shares
therein under a fictitious name; or
(ii) making a company to allot or register any transfer of shares therein to any other
person in a fictitious name.

Also this Section should be prominently reproduced both in the prospectus as well as in
application forms for shares.
Initial offer of securities to be in dematerialized form i certain cases (s. 68B). Every listed
company, making initial public offer of any security for a sum of spaces ten crores or
more, shall issue the same only in dematerialized form by complying with the requisite
provisions of the Depositories Act, 1996 and regulations made thereunder.

Self Assessment

Fill in the blanks:
4. Where a prospectus contains an untrue statement, every person authorizing its issue is
punishable with imprisonment for a term up to ……………years.
5. The ‘Golden Rule’ for framing of a prospectus is that the …………..nature of the company’s
venture should be disclosed.

6. The persons issuing the prospectus are bound to state everything accurately and not
……….material facts.

11.3 Share and Share Capital

Section 2(46) defines a share “as a share in the share capital of a company and includes stock
except where a distinction between stock and share is expressed or implied”. This definition
does not bring out the meaning of a share in its true perspective. A share signifies the following:

(i) The interest of a shareholder in the company; the right to receive dividend, attend meetings,
vote at the meeting and share in the surplus assets of the company, if any, in the event of
the company, being wound up [Bacha F. Guzdar v. Commissioner of Income Tax, Bombay,
L. R. 617 (S. C.)];

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