Section 30 of Companies Act 2013
Suvarna Satpute
February 08, 2024 at 12:57 PM
Section 30 of Companies Act. Advertisement of prospectus.
“Where an advertisement of any prospectus of a company is published in any manner, it shall be necessary to specify therein the contents of its memorandum as 39 regards the objects, the liability of members, and the amount of share capital of the company, and the names of the signatories to the memorandum and the number of shares subscribed for by them, and its capital structure”.
A prospectus is an important legal document of a company for seeking public investment by inviting potential investors to subscribe to its shares or debenture. The prospectus discloses all the critical information related to the company’s operations, finances, prospects with risks involved in Investing in a company, and the purpose of offering securities.
Types of Prospectuses under Section 30 of Companies Act
1. Shelf Prospectus
Any class of the companies as per the provisions given in the Securities and Exchange Board of India can apply for the Shelf Prospectus. The company can apply for the Shelf Prospectus with the Registrar of Companies (RoC) at the beginning of issuing an offer.
A shelf prospectus can be issued when a company or any financial institution offers one or more securities to the public. An issuer should provide a validity duration of the prospectus, which should not be more than 2 years. The validity duration starts with the commencement of the first offer. A company shall offer details in a memorandum while filing the shelf prospectus.
2. Red Herring Prospectus:
A Red Herring Prospectus(RHP) comes before the final prospectus when a company offers securities. In contrast to the final prospectus, the RHP excludes the final price of the securities. RHP can be filed with the Registrar of Companies (RoC) at least 3 days before the opening of the offer, also the RHP carries similar objections to a full prospectus. If there is a variation between the RHP and the final prospectus should be highlighted. A final prospectus is filed with RoC and the Securities and Exchange Board upon final closing. The final document shall disclose the total capital raised (Debt or share), final offer price, and other missing details of RHP.
3. Abridged Prospectus:
The abridged prospectus should not exceed more than five pages. It must highlight key features for investors in it. While fulfilling the statutory obligations this document is easier for investor understanding and decision making. The abridged prospectus offers a cost-effective and transparent overview that benefits both parties.
4.Deemed Prospectus:
A legal document containing detailed information about securities offered to the public by a company with the compliance of rules prescribed in the Security Exchange Board, security laws, and Companies Act.
The offer of sale document issued by the intermediary qualifies as a deemed prospectus with the below criteria.
- It shall be offered by the intermediary within six months of allotment from the company.
- No prior consideration for the shares before the offer.
Section 30 of Companies Act deals with the advertisement of prospectus and allocation of securities. In the provision, we are discussing Section 30 alongside the Companies (Prospectus and Allotment of Securities) Rules, 2014.
Advertisement of prospectus under Section 30 of Companies Act
Whenever the company seeks public Investments, a company must provide specific disclosure by offering the company’s prospectus. The provisions of the said section are applied when “an advertisement of any prospectus of a company is published in any manner” through newspapers, magazines, company websites, and social media.
Mandatory Disclosures for the issuance of a prospectus
- business details and industry in which area it operates;
- Object of the issue;
- Names of the promotor;
- Size of the issue and offer for sale;
- Financial statement of past 3 years containing;
- Risk factors;
- Contingent liability of the issuer;
- Average cost of the share for promotors as well as shareholders;
- Pre-IPO details;
- Equity share details;
- Exemption of compliance with any other provisions of law;
- Liability of members;
- Signatories and subscription details;
- Capital Structure must be disclosed in MOA including authorised, issued, subscribed, and paid-up capital.
Offer to Public:
A company issues the offer of shares to the public to subscribe to the securities. Anyone can apply for the subscription or purchase of share capital once the offer of shares is issued in the prescribed form. The invitation for the offer of sale shall be made by the Company, on behalf of a company or concerning the intended company.
The issue of the prospectus can be differentiated in the given circumstances below
- If a company offers securities like shares or bonds to the public through a prospectus, it is a public issue.
- In some cases, the company would not issue a prospectus but send an offer to the public. The Company makes such an offer by notice, advertisement in a newspaper or website, circular, or by any other means.
- In some cases, the client receives documents that are marked as strictly confidential.
It would contain the proposed shares along with an executive application form.
- Moreover, such a document remains in a narrow circle inaccessible to the public when an individual receives an offer, it is not a public offer.
- A private company making an offer to selected persons would be a private offer.
Civil and Criminal liabilities for misstatement in the prospectus:
Misstatement in the prospectus can lead to legal liabilities. The Registrar of Companies(Roc) acts as a statutory authority and has the power to impose penalties in the form of fines. Provision related to the minimum and maximum quantum of a fine has been given in the Act. The aggrieved party can appeal against the order of such authorities as specified in the Act. The authorities like the National Company Law Tribunal (NCLT), High Court, and Supreme Court have the power to decide the matters related to it under their jurisdiction as an appellate authority.
For the misstatement in the prospectus may be liable for the civil and criminal liabilities under the below statutory provisions given under this Act.
Exceptions to the prospectus’s false statement liability
False statements can lead to civil or criminal liabilities. However, there may be an exception to it in specific circumstances. For example, if someone is designated as a director of the company and later has not continued as a director and alleges that a prospectus was issued without his consent. In such cases some one can prove that they are not accountable for the false statement. A person shall not be considered for criminal liability if proves that the statement or omission of information from the prospectus was immaterial or he has reasonable grounds to believe it in the following circumstances:
Issue of prospectus without knowledge: If one has proved that the prospectus has been issued without his consent or knowledge and informs investors by giving reasonable public notice saying that the prospectus was issued without his consent.
Withdrawal of consent: If one has given consent to the director and later withdraws his consent before the issue of such prospectus and he proves that the prospectus was issued without his consent.
If one has reasonable ground to prove that he is not responsible for believing that the statements were true believe them to be true.
If one has been able to prove that statement was correct and true as it is a summary of experts or specialists.
If one has proven that a correct copy or a correct and fair extract of the report or valuation.
Conclusion
A prospectus has been created and considered as a legal document as it serves as an invitation to the public to subscribe to the company’s securities. Section 30 of Companies Act mandates clear and concise information by advertising it with different channels and any misappropriate or misleading information in the prospectus are subject to civil and criminal liabilities. Section 30 advertising of prospectus reduces the risk of misleading or incomplete information which influences the investors to invest their money with the legality of advertising of prospectus with trust and confidence in the capital market.
FAQs
- If someone raises capital through a prospectus, what are the legal obligations individuals and companies have regarding the accuracy and completeness of the information presented?
If someone raises the capital through a prospectus, below are the Legal Duties regarding Accuracy and Completeness:
As per Section 30 of Companies Act, it is the duty of individuals and companies involved in issuing a prospectus to ensure it is true and contains all material information needed for investors to make informed decisions. This includes directors, promoters, experts, and signatories. Also, it is an obligation to disclose Material Information that a reasonable investor would consider important in their investment decision. However, each person involved must exercise due diligence to ensure the information’s accuracy and completeness. This involves reasonable verification and investigation based on their role and expertise.
2. How does the term “due diligence” impact liability considerations in section 30 of the Companies Act when issuing a prospectus?
Demonstrating due diligence can be a defense against civil and criminal liability, but it needs to be thorough and appropriate for the specific information, and failure to exercise due diligence may increase the risk of liability for individuals and companies.
3. What are the potential civil and criminal penalties associated with misstatements or omissions in a prospectus, highlighting the key differences between them?
Civil and Criminal Penalties are prescribed in Section 35 and Section 34 respectively:
Section 35 allows aggrieved investors to sue for compensation if they suffer a loss due to misstatements or omissions and Courts can award compensation to investors who prove losses in terms of damages.
Section 34 prescribed criminal liabilities, imprisonment for up to 5 years, or a fine of up to Rs. 5 lakh for knowingly issuing a misleading prospectus.
4. What are the most critical aspects of ensuring a legally compliance and morally responsible prospectus for a company?
The most critical aspects of ensuring a legally compliance and morally responsible prospectus for a company are accuracy and completeness, clarity in language used to avoid ambiguity, Compliance with SEBI regulations, and disclosure of potential risks and conflict of interest.
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