Page 282 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

Notes

Task A company issued a prospectus advertising that the company has a great potential
with turnover of a million bags of cement in a year. It is discovered later that while the
company has the installed capacity of one million bags, it had never produced more than
6 lack bags of cement in a year. A buyer of shares seeks remedy against the misleading
statement. Would he succeed? Also, analyse the penalties which the company may suffer
for making the false statement.

Self Assessment

Fill in the blanks:
13. A ………………company limited by shares is prohibited by the Act and the Articles from
inviting the public for subscription of shares or debentures
14. Under ………………………arrangement, the company allots or agrees to allot shares or
debentures at a price to a financial institution or an Issue-house for sale to the public.

15. As per the guidelines issued by SEBI in June, 1992, …………………….of shares should not
be made by subscription of shares from unrelated investors through any kind of market
intermediaries.

Case Study Underwriting Gone Sour

ormally, underwriting a public stock offering is a highly profitable, low risk
business. In the US, managers and underwriters collect a handsome fee (7% gross
Nspread on IPO, lower on secondary offerings) but assume virtually no risk,
because the deals are (usually) pre-sold via investor commitments (circles) before the deal
is priced and the underwriters buy it (technically, they purchase it and then resell it to the
final owners).
But there is usual, and then there are the exceptions, and the downside of a hung IPO is
huge. The underwriters are stuck with a massive block of stock, and the whole world
knows they need to unload it. Not a pretty place to be in.
But that’s precisely the position that Morgan Stanley, Dresdner Kleinwort, and the members
of the underwriting syndicate may soon find themselves with an ill-fated HBOS
underwriting.
Morgan Stanley and Dresdner Kleinwort are facing a £4bn bill for underwriting HBOS’s
rights issue after shares in the Halifax owner collapsed below the price of the planned cash
call yesterday.

HBOS shares closed at 258p, down 34 yesterday and 17p below the rights price, amid a
sector rout that saw £8bn wiped from the value of banking shares. The sell-off led to
rumours that a large hedge fund with long positions in UK housebuilders had gone bust
and been forced to liquidate its positions.
Royal Bank of Scotland tumbled 21 to 212¼p after 60m shares were placed in a single trade,
a volume large enough to raise eyebrows in the City. The fall came despite a neutral
Contd...

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