CA Intermediate (Batch Aug 2023)

Solution of Test of Chapter 3 – Prospectus

Maximum Time = 1 hour
Part A - MCQ

Q1. c
Q2. b
Q3. c
Q4. c
Q5. c
Q6. a
Q7. b
Q8. a
Q9. c
Q10. b

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 Part B - Subjective
1.
(i) Meaning of ‘Private Placement’ –

As per Explanation I to section 42(3), the term "private placement" means any offer or invitation to subscribe or
issue of securities to a select group of persons by a company (other than by way of public offer) through private
placement offer - cum-application, which satisfies the conditions specified in section 42.
Further, as per section 42, private placement can be done to maximum 200 identified persons in a Financial
Year, but the limit of 200 excludes
 Qualified Institutional Buyers; and
 Employees of the company to whom the shares are allotted pursuant to an ESOP scheme

(ii) ‘Time Limit for Allotment of Securities’ and ‘repayment of application money in case of default in
allotment’ -

 A company making an offer or invitation under section 42 shall allot its securities within 60 days from the
date of receipt of the application money for such securities and
 if the company is not able to allot the securities within that period, it shall repay the application money to
the subscribers within 15 days from the expiry of 60 days and
 if the company fails to repay the application money within the aforesaid period, it shall be liable to repay
that money with interest at the rate of 12% p.a. from the expiry of the 60th day.

2. As per section 26(1) of the Companies Act, 2013, every prospectus issued by or on behalf of a public company either
with reference to its formation or subsequently, or by or on behalf of any person who is or has been engaged or
interested in the formation of a public company, shall be dated and signed and shall state such information and set
out such reports on financial information as may be specified by the Securities and Exchange Board in consultation
with the Central Government.

Provided that until the Securities and Exchange Board specifies the information and reports on financial
information under this sub-section, the regulations made by the Securities and Exchange Board under the
Securities and Exchange Board of India Act, 1992, in respect of such financial information or reports on financial
information shall apply.

According to clause (c) of section 26 (1), the prospectus shall make a declaration about the compliance of the
provisions of the Companies Act, 2013 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.

Accordingly, the Board of Plum Limited which proposes to issue the prospectus shall provide such reports on financial
information as may be specified by the Securities and Exchange Board in consultation with the Central Government
to comply with the above stated provisions and make a declaration about such compliance.

3. Yes, the Director shall be held liable for the false statements in the prospectus under sections 34 and 35 of the
Companies Act, 2013. Whereas section 34 imposes a criminal punishment on every person who authorises the issue
of such prospectus, section 35 more particularly includes a director of the company in the imposition of liability for such
misstatements.

The only situations when a director will not incur any liability for misstatements in a prospectus are as under –
(i) No criminal liability under section 34 shall apply to a person if he proves that such statement or omission was
immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe,
that the statement was true or the inclusion or omission was necessary.
(ii) No civil liability for any misstatement under section 35 shall apply to a person if he proves that -

(1) Having consented to become a director of the company, he withdrew his consent before the issue of the
prospectus, and that it was issued without his authority or consent; or

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 (2) The prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he
forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
(3) That he relied on statement of an expert who has given his written consent and he had reasonable ground
to believe that the person making the statement was competent to make it.

Therefore, in the present case the director cannot hide behind the excuse that he had relied on the promoters for
making correct statements in the prospectus. He will be liable for misstatements in the prospectus. However, he can
escape the liability if he falls under any of the above-mentioned safeguards.

4. As per the provisions of Section 40 of the Companies Act, 2013 the conditions for the payment of underwriter’s
commission are as follows
A company may pay commission to any person in connection with the subscription to its securities, whether absolute
or conditional, subject to such conditions as given in Rule 13 of the Companies (Prospectus and Allotment of
Securities) Rules, 2014.

Conditions for the payment of commission -

1. the payment of such commission shall be authorized in the company’s articles of association;
2. the commission may be paid out of proceeds of the issue or the profit of the company or both;
3. Rate of commission - The rate of commission paid or agreed to be paid shall not exceed, in case of shares, 5%
of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of
debentures, shall not exceed 2.5% of the price at which the debentures are issued, or as specified in the
company’s articles, whichever is less.
4. Disclosure of particulars: the prospectus of the company shall disclose the following particulars -
a. the name of the underwriters;
b. the rate and amount of the commission payable to the underwriter; and
c. the number of securities which is to be underwritten or subscribed by the underwriter absolutely or
conditionally.
5. There shall not be paid commission to any underwriter on securities which are not offered to the public for
subscription;
6. A copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the
prospectus for registration.

5. Irregular allotment - The Companies Act, 2013 does not specifically provide for the term “Irregular Allotment” of
securities. Hence, we have to examine the requirements of a proper issue of securities and consider the consequences
of non- fulfilment of those requirements.
In broad terms an allotment of shares is deemed to be irregular when it has been made by a company in violation of
Sections 23, 26, 39 or 40. Irregular allotment therefore arises in the following instances:

1. Where a company does not issue a prospectus in a public issue as required by section 23; or
2. Where the prospectus issued by the company does not include any of the matters required to be included therein
under section 26 (1), or the information given is misleading, faulty and incorrect; or
3. Where the prospectus has not been filed with the Registrar for registration under section 26 (4); or
4. The minimum subscription as specified in the prospectus has not been received in terms of section 39; or
5. The minimum amount receivable on application is less than 5% of the nominal value of the securities offered or
lower than the amount prescribed by SEBI in this behalf; or
6. In case of a public issue, approval for listing has not been obtained from one or more of the recognized stock
exchanges under section 40 of the Companies Act, 2013.

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6.
Information Memorandum together with Shelf Prospectus is deemed Prospectus.

The expression “shelf prospectus” means a prospectus in respect of which the securities or class of securities
included therein are issued for subscription in one or more issues over a certain period without the issue of a further
prospectus. [Section 31]

Any class or classes of companies, as the Securities and Exchange Board may provide by regulations in this behalf,
may file a shelf prospectus with the Registrar at the stage –

a. of the first offer of securities included therein which shall indicate a period not exceeding 1 year as the period of
validity of such prospectus which shall commence from the date of opening of the first offer of securities under
that prospectus, and

b. in respect of a second or subsequent offer of such securities issued during the period of validity of that
prospectus, No further prospectus is required for issue of securities.

A company filing a shelf prospectus shall be required to file an information memorandum containing all material
facts relating to new charges created, changes in the financial position of the company as have occurred between the
first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes
as may be prescribed, with the Registrar within 1 month, prior to the issue of a second or subsequent offer of securities
under the shelf prospectus.
Where an information memorandum is filed, every time an offer of securities is made, such memorandum together
with the shelf prospectus shall be deemed to be a prospectus.

Hence, the proposal of ABC Limited to take into account the concept of deemed prospectus is correct.

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