Section 33 of Companies Act. Issue of application forms for securities.

Today the capital market is becoming more evolving for Investors! Different Regulatory Authorities are continuously trying to adapt to dynamic capital markets to protect investors and maintain a win-win situation for issuer and investors. If investors intend to apply for different types of Investment like stock, bonds, mutual funds, and exchange-traded funds application forms for security offers are made available to investors. In the interest of the potential investors, companies should comply with the legal provisions and processes made under the Companies Act, 2013. Similarly, the process of applying form for the issuance of securities can be complex and time-evolving but it provides required information related to the overall status of the company business and finances to make the right investment decisions. So, we are delving into Section 33 to understand the purpose of the issuance of application forms for securities.

1. Scope

“Section 33 prescribed the provisions related to Issue of application forms for securities.-

(1) No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus: Provided that nothing in this sub-section shall apply if it is shown that the form of application was issued-

(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or

(b) in relation to securities which were not offered to the public.

(2) A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.

(3) If a company makes any default in complying with the provisions of this section, it shall be liable to a penalty of fifty thousand rupees for each default.”

Analysis of Section 33 of Companies Act

Issue of application forms for company securities imposes specific requirements on companies issuing application forms for security purposes.

Let’s understand the breakdown of key provisions:

Subsection 1 of the said section issuing application form prohibited without an accompanying abridged prospectus. There is no need to issue an abridged prospectus except:

a) Underwriting Agreements: There should be a bonafide intention. When an underwriting agreement provides a financial guarantor for a particular level of subscribed securities.

b) Private Placements: In case of offering securities directly to a limited group of qualified investors, specially public offerings bypassing.

Subsection (2) of the said section provides disclosure rights where anyone can request a full prospectus from the company before ending of subscription period.

The obligation is the company must provide the requested prospectus.

Subsection (3) prescribes the liabilities for non-compliance of these provisions imposing a penalty of Rs. 50,000 for each default.

Abridged Prospectus:

As per section 2(1) of the Companies Act, 2013, an abridged prospectus acts as a memorandum that aims to summarise the full prospectus, highlighting all crucial details mandated by SEBI without omitting any important Information in the prospectus.

Section 33 (1) of the Companies Act, 2013 also prescribed the provisions for the abridged prospectus. It states that if any form is issued for the purchase of securities of the company, it shall be accompanied by an abridged prospectus.

It shall contain all the required and materialistic information so that the investor can make a sound decision and it also minimises the cost of public issue of the capital as it is a summerise form of a prospectus.

Requirements for filing prospectus:

Filing of the prospectus shall comply with the provisions made under Section 26 of the Companies Act, 2013. The prospectus must be dated and signed mentioning the date of publication and the copy shall be signed by all directors, proposed directors, and their agents. Also, it must delivered to the registrar on or before the date of publication.

It shall contain the following mandatory information:

As per Section 26 (1)(a):

The names and addresses of the registered office of the company, company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if any, underwriters, and such other persons as may be prescribed;
The dates of the opening and closing of the issue, and declaration about the issue of allotment letters and refunds within the prescribed time;
A statement by the Board of Directors about the separate bank account where all monies received out of the issue are to be transferred and disclosure of details of all monies including utilized and unutilized monies out of the previous issue in the prescribed manner;
Details about the underwriting of the issue; consent of the directors, auditors, trustees, advocates, merchant bankers, registrar, lenders to the issue, expert’s opinion, if any, and of such other persons, as may be prescribed;
The authority for the issue and the details of the resolution passed, therefore;
The procedure and schedule for allotment and issue of securities;
The capital structure of the company in the prescribed manner;
The main objects of the public offer, terms of the present issue, and such other particulars as may be prescribed;
The main objects and present business of the company and its location and schedule of implementation of the project;
The main objects of the public offer, terms of the present issue, the purpose for requirements of funds, funding plan, the summary of the project appraisal report, and such other particulars as may be prescribed;
Particulars relating to— management perception of risk factors specific to the project; gestation period of the project; extent of progress made in the project; deadlines for completion of the project; and any litigation or legal action pending or taken by a Government Department or a statutory body during the last five years immediately preceding the year of the issue of prospectus against the promoter of the company;
Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash;
Details of directors including their appointments and remuneration, and such particulars of the nature and extent of their interests in the company as may be prescribed; and disclosures in such manner as may be prescribed about sources of promoter’s contribution;

Requirements Under Section 26 (1)(b)

Reports by the auditors of the company with respect to its profits and losses, assets and liabilities, and other matters related to it;
Reports related to profits and losses for the consecutive five financial years immediately preceding the financial year of the issue of the prospectus including this kind of report of its subsidiaries should be in the given prescribed manner.

Provided that in case of a company where five years have not been completed from the date of incorporation, the prospectus shall set out in such manner as may be prescribed mentioning the reports relating to profits and losses for each of the financial years immediately preceding the financial year of the issue of prospectus including subsidiaries of such reports;

Reports made in the prescribed manner by the auditors on the profits and losses of the business of the company for consecutive five financial years immediately preceding the issue and assets and liabilities of its business on the last date to which the accounts of the business were made up, and a date should not more than one hundred and eighty days before the issue of the prospectus.

Requirements Under Section 26 (1)(c):

A declaration about the compliance of the provisions of this Act and a statement to the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts (Regulation) Act, 1956, and the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder; and state such other matters and set out such other reports, as may be prescribed.

Advantages and Limitations of Section 33 of Companies Act

Advantages

Section 33 of the Companies Act, 2013 protects the interest of Investors as

It mandates an application form with “Abridges Prospectus”.
This provides key company information, the Board of Directors, and the offered securities, and also it promotes transparency by requiring companies to disclose essential information through the abridged prospectus.
A summary of the full prospectus helps to reduce the information asymmetry which promotes fair market participation.

Limitations

Information Overload: While an Abridged Prospectus aims to summarize key information, it may still be lengthy and complex for some investors, especially for those who have limited financial investment experience or knowledge in the security market. This could still lead to confusion or a lack of understanding.

Limited Scope: The Abridged Prospectus is in summerise form and might not cover all the minor subtle differences and risks involved with the investment. Investors should still need to access the full prospectus for complete details.

Limited Availability of Full Prospectus: Section 33 has a provision to mandatorily provide all information providing the full prospectus upon request, delays or difficulties in accessing it could be a challenge for informed decision-making.

Limited Applicability: The said section only applies to public offerings, excluding private placements and underwriting agreements, where different disclosure rules might apply. This creates potential inconsistencies in investor protection across different investment types.

Conclusion:

Section 33, acts as a cornerstone for informed investment support for investors because an application form prescribed in this provision shall comply with SEBI regulations. Non-compliance can lead to civil or criminal liabilities against the security offer issuer. The core intention of this provision lies in protecting investor interests by keeping transparency and providing all relevant information within the ambit of the legal provisions.

FAQs

1. Who is responsible for ensuring application forms comply with Section 33 regulations? Is it the issuing company, SEBI, or both?

Both, the issuing company primarily bears the responsibility, but SEBI has to set regulations and enforce them with diligence if the legal compliance requirement meets or not before approving the application.

2. What specific information shall included on the application form, as per the section and any relevant SEBI regulations?

The specific Required Information as per SEBI regulations, generally includes company details, offer details, investor details, and declarations.

3. Can the company ever modify the application form format or content?

Yes, rectification of the application may be possible with SEBI approval, limited changes, and clear communication with investors.

4. What happens if a company fails to provide a prospectus to an investor upon request before the subscription closes?

If the company fails to Provide a Prospectus it may leads to penalties, potential lawsuits, and SEBI action.

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