Doctrine of Constructive Notice

Doctrine of Indoor Management

Prospectus Share capital

Shares- Borrowings

Dr. K Ashok Anand

 Doctrine of Constructive Notice

The memorandum and articles when registered with the

Registrar become public documents and accessible to all.
They can be inspected on payment of a nominal fee.
Therefore, there is a presumption that any outsider dealing
with company has read and understood these documents.
This is known as doctrine of constructive notice
 Doctrine of Indoor Management
Persons dealing with the company in good faith have a right to
assume that the internal requirements prescribed in public documents
(memorandum and articles) have been observed. In other words,
persons are not bound to enquire into regularity of internal
proceedings. This is know as the Doctrine of Indoor Management
The doctrine of indoor management was propounded in the case of
Royal British Bank v. Turquand

There are certain exceptions to this doctrine

Where the outsider had knowledge of irregularity.
In case of forgery.
Negligence on the part of the outsider.
Acts outside scope of apparent authority.
 Prospectus
Section 2(36) of the Companies Act defines the term Prospectus.
it means any document described or issued as prospectus, notice,
circular, advertisement or other document inviting deposits from the
public or inviting offers from the public for the subscription or purchase
of any shares in, or debentures of a body corporate.

Note : The prospectus is the basic document on

the basis of which the intending investors decide
whether or not they should subscribe to the shares
or debentures.
Therefore, the law requires unstinted disclosure of
various matters through prospectus and forbids
variations of any terms and conditions of a
contract contained therein except with the
approval and authority of the company in general
 The rules and regulations of Issue of Prospectus
1. Dating of prospectus

2. Registration of prospectus

3. Approval of prospectus by various agencies

(i) All the lead managers to the issue.

(ii) Each of the stock exchanges where the shares of the company are listed and
where the shares/debentures are proposed to be listed.

(iii) The lead financial institution underwriting the issue, if applicable

Note: The draft prospectus is vetted by SEBI to ensure adequacy of

disclosures. However, vetting by SEBI does not amount to approval of
prospectus. SEBI does not take any responsibility for the correctness of the
statements made or opinions expressed in the prospectus
 Abridged form of Prospectus

As per Section 2(1) of the Companies (Amendment) Act, 2000

abridged prospectus means a memorandum containing such
salient features of a prospectus as may be prescribed.

The abridged prospectus (in Form 2A) and the share application
form should bear the same printed number. The investor may
detach the share application form along the perforated line after
he has had an opportunity to study the contents of the abridged
prospectus, before submitting the application.
 Shelf Prospectus
According to Section 60-A as inserted by the Companies
(Amendment) Act, 2000 Shelf Prospectus means a prospectus
issued by any financial institution or bank for one or more issues
of the securities or class of securities specified in that prospectus.
Any public financial institution, a public sector bank or scheduled
bank whose main object is financing, shall file a shelf prospectus.
Financing means making loans to or subscribing in the capital of, a
private industrial enterprise engaged in infrastructural
financing, or such, other company as the Central Government
may notify in this behalf. A company filing a shelf prospectus with
the Registrar shall not be required to file prospectus afresh at every
stage of offer of securities by it within a period of validity of such
shelf prospectus. It shall be required to file an information
memorandum.
 Red-herring Prospectus

A prospectus which does not have complete particulars on the price

of securities and the quantum of securities offered . A public company
making an issue of securities may circulate information memorandum
to the public prior to filing of prospectus [Section 60B (1)].

As per Section 2(19B), information memorandum means a process

undertaken prior to the filing of prospectus by which a demand for the
securities proposed to be issued by the company is elicited, and the
price and terms of issue for such securities is assessed by means of
notice, etc.
 A company inviting subscription by an information memorandum
shall be bound to file a prospectus prior to the opening of the
subscription lists and the offer as red-herring prospectus, at least 3
days before the opening of offer [Section 60B (2)].
Exact issue size or issue price is not mentioned in the red-herring
prospectus.
On the basis of offers received, company will finalise the issue
price and issue size and then close the offer.
After closure of offer of securities, a final prospectus will be
prepared stating the total capital raised whether by way of debts, or
share capital and the closing price of securities and any other details
as were not complete in red-herring prospectus.
The prospectus will be filled with ROC and also with SEBI in case
of listed company. [Section 60B (9)].

Sahara vs SEBI"
 Offer for sale or Prospectus by implication or Deemed
Prospectus
In order to avoid the rigorous requirements of
prospectus, one practice was to issue shares to
another person. Such other person (often called Issue
House) would then make further offer of sale of their
shares to public by advertisements, etc. In order to
curb this tendency Section 64 provides that offer of
sale or advertisement of such Issue House will be
deemed to be prospectus issued by the company. This
is called deemed prospectus. All enactments and rules
of law as to the contents of prospectus and as to the
liability in respect of statements, omissions from
prospectus under Section 60, the persons making the
offer of sale to the public are to be deemed as
directors of the company [Section 64(4)].
 SHARES AND SHARE CAPITAL
Definition: According to the section 2(46) of the Companys Act
1956, share means a part in the share capital of the company and
it also includes stock except where a distinction between stock
and share capital is made expressed or implied

The amount collected by the company from the public towards its
capital, collectively is known as share capital and individually is
known as share.
Meaning of Stock
Stock is the aggregate of fully paid up shares,
consolidated and divided for the convenient holding
into different parts. It may be transferred or split up
into fraction of any amount, without regard to the
original face value of share. Stock can be validly
issued only when shares are fully paid up.
 Types of shares
As per the provision of section 85 of the
Companies Act, 1956, the share capital of a
company consists of two classes of shares,
namely:
1. Preference Shares
2. Equity Shares
 Preference Shares
According to Sec 85(1), of the Companies Act, 1956, a preference share is one,
which carries the following two preferential rights:
(a) The payment of dividend at fixed rate before paying dividend to equity
shareholders.
(b) The return of capital at the time of winding up of the company, before the
payment to the equity shareholder. Both the rights must exist to make any
share a preference share and should be clearly mentioned in the Articles of
Association.
Preference shareholders do not have any voting rights, but in the following
conditions they can enjoy the voting rights:
1. In case of cumulative preference shares, if dividend is outstanding for more
than two years.
2. In case of non-cumulative preference shares, if dividend is outstanding for
more than three years.
3. On any resolution of winding up.
4. On any resolution of capital reduction.
 Types of preference shares
1. Cumulative Preference Shares
2. Non-Cumulative Preference Shares
3. Participating Preference Shares:
4. Non-Participating Preference Shares
5. Convertible Preference Shares
6. Non-Convertible Preference Shares
7. Redeemable Preference Shares
8. Re-Redeemable Preference Shares
 Equity shares

According to section 85 (2), of Companies Act, 1956, Equity

share can be defined as the share, which is not preference
shares. In other words equity shares are those shares, which do
not have the following preferential rights:
(a) Preference of dividend over others.
(b) Preference for repayment of capital over others at the time
of winding up of the company.
(c) They have to claim dividend only, if the company in its A.
G. M. declares the dividend.
(d) The equity shareholders have the right to vote
 Sub-division of Share Capital

1) Authorised capital: The amount which is stated in the Capital Clause of the
Memorandum of Association as the share capital of the company. This is the
maximum limit of the company which it is authorised to raise and beyond
which company cannot raise unless the capital clause in the Memorandum is
altered in accordance with the provisions of Sec. 94 of the Companies Act,
1956.

2) Issued capital: The nominal value of that part of authorised capital, which
has been (1) subscribed for by the signatories to the Memorandum of
Association, (2) allotted for cash or for consideration other than cash and (3)
allotted as Bonus shares.

3) Subscribed capital: The paid-up value of the issued capital i.e. the total
amount called by the company less calls-in-arrear.
 Borrowing Powers of Company and Uitra-Vires Borrowings

The borrowing powers of a company are determined by the memorandum and the articles of
association.
. The memorandum and articles of a company may impose some restrictions on borrowing
power of the company.

Borrowing in excess of the limits laid down by the articles is Ultra vires the company
and not binding on it.
 Borrowings - Debenture
According to the Section 2(12) of the Companies Act, a debenture
includes debenture stock, bonds and any other securities of a
company, whether constituting a charge on the assets of the
company or not.
In simple words, it is a document which either creates a debt or
acknowledge it. Debentures are commonly issued by the
companies in the similar manner as issue of shares through
prospectus.
 Types of Debenture
(1) Bearer or unregistered debentures :- These are debentures which are payable
to bearer. These are regarded as negotiable instruments and are transferable by
delivery.

(2) Registered Debentures :- These are debentures which are payable to the
registered holders whose names appear both on the debenture certificate and the
companys register of debenture holders. A debenture holder can transfer the
debenture by following a prescribed procedure.

(3) Secured Debentures :- These debentures which create some charge on the
property of the company are known as secured debenture.

(4) Unsecured debenture or naked debenture :- Debenture which do not have any
charge on the assets of the company are known as unsecured or naked debentures and
the holders of such debentures like unsecured creditors may sue the company for the
recovery of the debt.

5) Redeemable Debenture

(6) Perpetual Debentures

(7) Convertible Debentures

The End

Dr. K Ashok Anand