Tag: Shareholders Rights

Director is an individual appointed to the board of a company to oversee and manage its affairs and operations. Directors are responsible for making strategic decisions, ensuring legal compliance, and safeguarding shareholders’ interests. They act as fiduciaries, meaning they must prioritize the company’s well-being over personal gain. Under the Companies Act, 2013 (India), a director is defined as “a person appointed to the board of a company.” Directors can be executive, non-executive, or independent, each playing a distinct role in governance. Their duties include policy-making, risk management, financial oversight, and representing the company to stakeholders.

Director Identification Number [DIN]

Director Identification Number (DIN) is a unique identification number assigned to an individual who is appointed as a director of a company or is intending to become a director in India. Introduced under the Companies Act, 2006, and later incorporated into the Companies Act, 2013, the DIN system aims to streamline the governance and tracking of individuals serving as directors across multiple companies. Ministry of Corporate Affairs (MCA) is responsible for issuing and managing the DIN database.

Key Features of DIN:

• Unique and Lifetime Validity:

DIN is a unique, eight-digit number assigned to an individual for a lifetime. Once issued, it remains valid irrespective of any change in the individual’s directorship status, company affiliation, or personal details. This ensures a consistent track record of a person’s involvement with companies.

• Mandatory for Directors:

As per the Companies Act, 2013, every individual intending to become a director must first obtain a DIN before they can be appointed to the board of any company. No person can be appointed as a director without possessing a valid DIN.

• Application Process:

To obtain a DIN, an individual must submit an application through Form DIR-3 on the MCA portal, along with personal details and supporting documents, including proof of identity and address. The form must be digitally signed by a practicing professional (such as a Chartered Accountant or Company Secretary) who verifies the applicant’s credentials.

• DIN for Foreign Nationals:

Foreign nationals, too, can apply for a DIN if they are appointed as directors of Indian companies. They must follow the same application process, but the identity and address proof requirements may differ based on their country of residence.

• DIN Database:

Once issued, a DIN is stored in a central database maintained by the MCA. This allows authorities, companies, and stakeholders to track an individual’s involvement in multiple companies, providing transparency and accountability.

• Updating DIN Information:

Any change in the personal details of the director, such as a change in name, address, or contact information, must be updated through Form DIR-6. This ensures that the records in the MCA database are current.

• Cancellation or Deactivation of DIN:

DIN can be deactivated by the MCA in cases of disqualification of the director, submission of incorrect information, or upon the director’s resignation or death. Additionally, directors who fail to comply with regulatory requirements, such as not filing financial statements, may also face the suspension of their DIN.

Qualification of Director

The qualifications required for becoming a director in India are outlined under the Companies Act, 2013, as well as through specific company bylaws or the articles of association. The Act provides a basic framework for eligibility, while individual companies may impose additional criteria based on their industry or governance needs.

1. Minimum Age Requirement

• A person must be at least 18 years old to be eligible to serve as a director.
• There is no maximum age limit under the Companies Act, 2013, but a company’s articles of association may set a retirement age for directors.

2. DIN (Director Identification Number)

• Every person appointed as a director must have a Director Identification Number (DIN). This unique identification number is issued by the Ministry of Corporate Affairs (MCA) and is mandatory for anyone intending to become a director in India.
• The DIN helps in maintaining a record of all directors and their roles across companies.

3. Nationality

• A director can be of any nationality, meaning both Indian nationals and foreigners can be appointed as directors in Indian companies.
• However, certain types of companies (like Public Sector Undertakings or companies in regulated industries) may have specific restrictions regarding the nationality of directors.

4. Educational and Professional Qualification

• The Companies Act, 2013 does not impose any minimum educational or professional qualifications for directors.
• However, certain companies, particularly in sectors such as banking, finance, and healthcare, may require directors to have specific qualifications or expertise.
• Independent directors, as mandated for listed companies, are required to possess appropriate qualifications or experience relevant to the company’s sector.

5. Financial Soundness

• Directors should not be insolvent or declared bankrupt. If a director has been adjudged insolvent or declared bankrupt and has not been discharged, they are disqualified from holding the position of a director.

6. Sound Mind

• A director must be of sound mind and capable of making decisions in the company’s best interests. Any individual who has been declared of unsound mind by a court is disqualified from serving as a director.

7. Non-Disqualification under Section 164 of the Companies Act, 2013

Under Section 164 of the Companies Act, 2013, certain disqualifications prevent a person from being appointed as a director. These include:

• Being convicted of any offence involving moral turpitude or sentenced to imprisonment for a period of six months or more (unless a period of five years has passed since the completion of the sentence).
• Failure to pay calls on shares of the company they hold.
• Disqualification by an order of a court or tribunal.
• Not filing financial statements or annual returns for three continuous financial years.
• If a person has been a director of a company that has failed to repay deposits, debentures, or interest for more than a year.

8. Residency Requirements

As per the Companies Act, 2013, every company must have at least one director who has stayed in India for a total period of not less than 182 days during the financial year. This provision ensures that there is at least one resident Indian director on the board.

9. Limit on Directorships

• A person cannot be a director in more than 20 companies at the same time, including private companies. Of these, they can only be a director in 10 public companies at most.
• This limit ensures that a director can effectively manage and fulfill their duties in all the companies they serve.

Position of Director:

1. Fiduciary Position

Directors hold a fiduciary position, meaning they are entrusted with the responsibility to act in good faith and prioritize the company’s interests over personal or third-party benefits. They must exercise care, diligence, and loyalty when making decisions that impact the company’s operations, financial health, and future.

2. Agent of the Company

As agents, directors act on behalf of the company in dealings with third parties. They represent the company in contractual matters, negotiations, and legal proceedings. The authority they exercise is governed by the company’s memorandum and articles of association. However, directors must always act within the scope of their authority to avoid personal liability.

3. Trustee of the Company’s Assets

Directors are considered trustees of the company’s assets and must manage them responsibly. They cannot misuse company funds or property for personal gain or purposes unrelated to the company’s objectives. As trustees, directors are expected to safeguard the company’s assets, ensuring they are used efficiently for business operations and in line with shareholder interests.

4. Corporate Decision-Maker

Directors play a pivotal role in the company’s decision-making processes. They are responsible for setting the company’s strategic direction, establishing policies, and making high-level decisions that shape the future of the company. Their decisions can include mergers, acquisitions, entering into contracts, approving financial statements, or appointing key management personnel.

5. Governance Role

The position of a director involves a strong governance function, ensuring that the company complies with legal, regulatory, and ethical standards. Directors are tasked with upholding corporate governance principles, maintaining transparency, and ensuring that the company adheres to rules and regulations, such as those outlined in the Companies Act, 2013 (India).

6. Individual and Collective Responsibility

Director operates within a board of directors, which means they share collective responsibility for the board’s decisions. While individual directors may have specific duties based on their role (executive, non-executive, independent), they are also responsible for the overall governance and outcomes of board decisions. Each director is expected to contribute to discussions and decision-making processes and share accountability.

7. Liaison Between Shareholders and Management

Directors serve as a bridge between shareholders and the company’s management. They represent shareholders’ interests by overseeing the performance of the company’s executive team and ensuring that management acts in accordance with the board’s directives. Directors must strike a balance between allowing management operational freedom and maintaining oversight.

8. Legal Status

The position of a director carries legal status under the Companies Act, 2013 (India). They are subject to statutory duties, including maintaining accurate financial records, submitting periodic reports, and ensuring the company follows legal compliance. Directors can be held legally liable for breaches of duty, negligence, or fraudulent activities within the company.

Rights of Director:

1. Right to Participate in Board Meetings

Directors have the right to participate in all board meetings, where they can discuss and make decisions on key business matters. They are entitled to be notified in advance about the meetings and must have access to the agenda and related documents. Participation allows directors to engage in decision-making, express their views, and vote on company policies, strategies, and resolutions.

2. Right to Access Financial Records and Information

Directors have the right to access the company’s books of accounts, financial records, and other key documents. This right ensures that they can evaluate the financial health of the company and make informed decisions. It also helps them oversee the management’s performance, monitor the use of company resources, and ensure compliance with financial regulations.

3. Right to Remuneration

Directors are entitled to receive remuneration for their services. The form and amount of this compensation are typically determined by the company’s articles of association or as decided by the shareholders. Remuneration can be in the form of salaries, fees, commissions, or bonuses. Non-executive and independent directors may receive sitting fees or other compensation for their involvement.

4. Right to Delegate Powers

Directors have the right to delegate certain powers and duties to committees or other directors, provided that the company’s articles of association permit such delegation. This right helps directors manage responsibilities more effectively by appointing specialists or experts to handle specific areas, such as finance, audit, or risk management.

5. Right to Indemnity

Directors have the right to be indemnified for liabilities incurred while performing their duties in good faith. Many companies provide indemnity insurance for directors to cover legal costs, settlements, or damages arising from lawsuits or claims made against them in their official capacity. This right protects directors from personal financial loss when acting in the company’s best interests.

6. Right to Seek Independent Professional Advice

If a director feels that expert guidance is necessary for decision-making, they have the right to seek independent professional advice at the company’s expense. This can include legal, financial, or technical advice, especially in complex matters requiring specialist knowledge. It helps ensure that directors make informed, well-considered decisions.

7. Right to Resist Unlawful Instructions

Directors have the right to refuse to follow any instructions from shareholders, other directors, or management that are illegal, unethical, or detrimental to the company. They must act in the company’s best interest and can challenge decisions or actions that violate the law or harm the company’s reputation or financial stability.

Whole-time Director (WTD) plays a crucial role in the overall management and functioning of a company. They are involved in the day-to-day affairs of the company and are an essential part of its leadership. According to the Companies Act, 2013, a whole-time director is defined as a director who is in full-time employment with the company and devotes their entire time and attention to managing its operations. The appointment, qualifications, and duties of a whole-time director are governed by the Companies Act, ensuring that the role is structured to meet corporate governance standards and to ensure effective management of the company.

Appointment of Whole-time Director:

The appointment of a whole-time director must follow a structured process that is outlined by the Companies Act, 2013, and subject to certain conditions. The whole-time director can be appointed by the board of directors, shareholders, or as per the company’s articles of association.

• Appointment by the Board of Directors:

The board of directors can appoint a whole-time director through a resolution passed at a board meeting. The company’s articles of association must authorize the appointment of a whole-time director. If the articles do not contain provisions for the appointment, they may need to be amended.

• Approval from Shareholders:

The appointment of a whole-time director also requires approval from the shareholders in the next general meeting. If the board appoints a whole-time director, the shareholders must confirm this appointment. It is also essential that the shareholders are informed about the terms and conditions of the appointment, including remuneration.

• Compliance with the Companies Act, 2013:

In accordance with Section 196 of the Companies Act, 2013, a whole-time director cannot be appointed for a period exceeding five years at a time. However, they may be reappointed after the end of their term. The act also specifies that a whole-time director should not hold office in more than one company at a time, except with the approval of the board and the shareholders.

• Listed Companies and SEBI Regulations:

In the case of listed companies, the appointment of a whole-time director must also comply with the guidelines laid down by the Securities and Exchange Board of India (SEBI). The appointment must be in line with corporate governance principles, and relevant disclosures must be made to the stock exchanges.

• Remuneration of Whole-time Director:

The remuneration paid to a whole-time director must comply with the provisions of the Companies Act, 2013 (specifically Section 197), which outlines the limits on managerial remuneration. Any remuneration exceeding the prescribed limits must be approved by the shareholders in a general meeting and be within the overall limit of managerial remuneration for the company.

Qualifications of Whole-time Director:

Companies Act, 2013 does not lay down specific educational or professional qualifications for a whole-time director. However, certain general qualifications and restrictions are necessary for an individual to be eligible for this role.

• Age Requirement:

As per Section 196(3) of the Companies Act, 2013, a whole-time director must be at least 21 years old and should not be more than 70 years old. However, an individual above 70 years of age can be appointed if the shareholders pass a special resolution with proper justification.

• Non-disqualification under Section 164:

The individual must not be disqualified under Section 164 of the Companies Act. This section specifies that a person who has failed to file financial statements or returns for a continuous period of three years, or who has been convicted of any offense involving moral turpitude, is disqualified from being appointed as a director.

• Professional Experience:

While the Act does not mandate specific qualifications, companies typically expect their whole-time directors to have significant experience in business management, finance, operations, or industry-specific expertise. Since whole-time directors are involved in the day-to-day management of the company, their expertise in operational matters is essential.

• Legal Eligibility:

Whole-time director must not have been declared bankrupt, must not be of unsound mind, and must not have been convicted of any fraud or financial irregularities. These legal requirements ensure that only individuals with a clean record are eligible for appointment to this key managerial position.

Duties of Whole-time Director:

The duties of a whole-time director encompass both operational and strategic aspects of the company. As full-time employees of the company, whole-time directors are expected to take an active role in ensuring the efficient running of the business. Some key duties are:

• Day-to-Day Management:

Whole-time director is responsible for managing the day-to-day affairs of the company. This includes overseeing various functions such as production, sales, marketing, human resources, and finance. They ensure that the company’s operations align with its objectives and strategies.

• Compliance with Laws and Regulations:

One of the primary duties of a whole-time director is to ensure that the company complies with all applicable laws and regulations. This includes filing statutory returns, adhering to tax laws, maintaining proper records, and ensuring compliance with corporate governance requirements as laid down by SEBI and the Companies Act, 2013.

• Reporting to the Board of Directors:

Whole-time director is required to report regularly to the board of directors regarding the company’s performance, challenges, and opportunities. The director provides the board with updates on operational matters, financial health, and any significant issues that may affect the company.

• Corporate Governance:

Whole-time directors play a crucial role in ensuring that the company adheres to strong corporate governance practices. They must ensure transparency in decision-making, fair dealings with stakeholders, and compliance with ethical standards. This also includes taking decisions that protect the interests of shareholders and stakeholders.

• Leadership and Employee Management:

Whole-time director provides leadership to the company’s employees. They are responsible for setting corporate culture, motivating employees, managing conflict, and ensuring that all employees are aligned with the company’s goals. Additionally, they oversee the performance of key managers and ensure efficient execution of corporate strategies.

• Strategic Planning and Implementation:

Whole-time directors are involved in the formulation and implementation of the company’s strategic plans. They work closely with the board to develop business strategies, set objectives, and identify areas for growth. They also ensure that the company is well-positioned to capitalize on opportunities and mitigate risks.

• Financial Oversight:

Whole-time directors are responsible for overseeing the financial performance of the company. This includes budgeting, managing cash flow, ensuring that financial records are accurate, and preparing financial statements. They must ensure that the company’s financial practices adhere to the regulations laid down by the Companies Act and other relevant authorities.

• Risk Management:

The whole-time director is also responsible for identifying and managing risks that could affect the company’s performance. This includes financial, operational, reputational, and compliance risks. By managing risks effectively, whole-time directors help protect the company’s assets and ensure long-term stability.

• Representing the Company:

In many instances, the whole-time director represents the company in external matters, such as negotiations with suppliers, business partners, investors, and regulators. They act as a spokesperson for the company and are expected to uphold its reputation in all dealings.

Companies Act, 2013, brought significant changes to Corporate Governance practices in India, one of which was the mandatory requirement for certain companies to appoint a Women Director on their board. This move aimed at enhancing diversity in corporate decision-making, promoting gender equality, and ensuring that women play a vital role in the management of large and listed companies.

Appointment of a Women Director:

Under Section 149(1) of the Companies Act, 2013, along with Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, specific classes of companies are mandated to appoint at least one woman director on their board. The companies required to have a woman director are:

• Listed Companies: Every listed company must have at least one woman director.
• Public Companies: A public company having a paid-up share capital of Rs. 100 crore or more, or a turnover of Rs. 300 crore or more, must appoint at least one woman director.

Securities and Exchange Board of India (SEBI), through its Listing Obligations and Disclosure Requirements (LODR) regulations, also mandates the appointment of a woman director in listed companies, thereby reinforcing this provision.

1. Timeline for Appointment

Newly incorporated companies that fall within the categories mentioned above must appoint a woman director within six months from the date of incorporation. If there is any vacancy in the position of the woman director, it should be filled within three months from the date of such vacancy or by the next board meeting, whichever is later.

Qualifications of a Women Director:

The Companies Act, 2013, does not prescribe any specific qualifications for a woman director. However, the general qualifications required for any director as per the Companies Act apply, which are:

• Eligibility under Section 164: The woman must not be disqualified from being appointed as a director. This includes not being an undischarged insolvent, having no conviction for a crime involving moral turpitude, and being mentally sound.
• Expertise and Experience: Ideally, the woman director should have relevant expertise, skills, or experience in areas that contribute to the company’s growth, such as finance, law, management, or industry-specific knowledge.
• Integrity: The individual must be a person of high integrity and ethical standards to contribute positively to the board’s functioning.

While no specific academic or professional qualifications are mandated for the role of a woman director, companies often prefer individuals with significant experience in governance, leadership roles, or corporate management.

Duties of a Women Director:

The duties of a woman director are largely similar to those of any other director on the company’s board. The Companies Act, 2013, outlines several key responsibilities for directors under Section 166. These duties are aimed at ensuring that directors act in the best interests of the company, its shareholders, and other stakeholders.

1. Fiduciary Duty

A woman director, like any other director, must act in good faith and in the best interest of the company. This involves:

• Acting in Good Faith: The woman director must exercise her powers honestly and sincerely, prioritizing the company’s success and welfare.
• Avoiding Conflicts of Interest: The woman director should avoid situations where her personal interests conflict with the company’s interests. She should not use her position to gain undue advantages for herself or her associates.

2. Duty of Care

The woman director is expected to take reasonable care, skill, and diligence in the execution of her duties. She must ensure that:

• Active Participation: She participates actively in the company’s board meetings and contributes to discussions on key decisions.
• Informed Decisions: She makes informed decisions by staying updated on the company’s financial position, regulatory environment, and market trends.
• Risk Management: She must consider the risks associated with business operations and contribute to implementing appropriate risk mitigation strategies.

3. Compliance with Laws

As a director, a woman director has a duty to ensure that the company complies with all applicable laws, including corporate laws, taxation laws, labor laws, and environmental regulations. Some specific compliance duties:

• Corporate Governance: Ensuring that the company follows the corporate governance norms prescribed under the Companies Act and SEBI’s regulations.
• Financial Reporting: Ensuring that accurate financial statements are prepared and filed with the Registrar of Companies (RoC), along with other necessary documents.
• Statutory Filings: Ensuring timely filing of all necessary reports and disclosures with regulatory authorities, such as SEBI or the Ministry of Corporate Affairs (MCA).

4. Protecting the Interests of Stakeholders

A woman director has a duty to act in the best interests of all stakeholders, including:

• Shareholders: She must ensure that shareholder interests are protected, and the company acts in a transparent and accountable manner.
• Employees: She should also safeguard the interests of employees and ensure that the company follows labor laws and ethical practices.
• Environment and Society: Under the principles of corporate social responsibility (CSR), the woman director may play a key role in steering the company’s initiatives towards environmental sustainability and social welfare.

5. Ensuring Transparency

The woman director is responsible for ensuring that the company’s decision-making processes are transparent. This includes ensuring the disclosure of all material information to shareholders and regulatory authorities. She should actively participate in the approval of company reports, financial statements, and policy disclosures.

6. Code of Conduct

If the company has adopted a specific code of conduct for directors, the woman director must abide by the same. SEBI’s LODR guidelines require companies to have a code of conduct that applies to directors, including the woman director, which sets out ethical standards, conflict-of-interest policies, and responsibilities.

7. Additional Role in Committees

Women directors may also be appointed to various board committees, such as:

• Audit Committee: Oversight of financial reporting and ensuring that financial statements present a true and fair view.

• Nomination and Remuneration Committee: Evaluating the remuneration of executives and key managerial personnel.
• Corporate Social Responsibility Committee: Involved in the planning and execution of CSR activities under Section 135 of the Companies Act.

Prospectus is a vital document that provides potential investors with essential information about a company and its offerings. The accuracy and completeness of the information contained in a prospectus are paramount, as investors rely on this information to make informed decisions. Misstatements in a prospectus can occur due to errors, omissions, or misleading information, and they can have serious legal and financial implications for the company and its promoters.

Types of Misstatements in Prospectus:

1. Factual Misstatements:

These involve incorrect or false information presented in the prospectus. For example, a company might misrepresent its financial performance by inflating revenue figures or underreporting liabilities. Such misstatements can lead investors to believe that the company is more profitable or financially stable than it actually is.

2. Omissions:

This type of misstatement occurs when the prospectus fails to disclose material information that could influence an investor’s decision. For instance, if a company has pending litigation or regulatory investigations but does not mention these in the prospectus, it can mislead investors about the company’s risk profile.

3. Misleading Statements:

These involve statements that, while factually correct, can mislead investors regarding the overall picture of the company. For example, highlighting a recent successful product launch without mentioning significant operational issues or competition can create a distorted view of the company’s future prospects.

4. Unverified Information:

Sometimes, companies may include projections or forecasts in their prospectus that are not backed by credible data. If these projections are overly optimistic or based on flawed assumptions, they can mislead investors regarding the potential for growth.

Legal Consequences of Misstatements:

Misstatements in a prospectus can lead to various legal consequences for the company and its directors, including:

1. Liability Under the Companies Act:

In India, the Companies Act, 2013, imposes strict liabilities on companies and their promoters for misstatements in a prospectus. Section 35 of the Act states that if a prospectus contains a misstatement, any person who authorized the issue of the prospectus, including directors, can be held liable for damages.

2. Civil Liability:

Affected investors may file civil suits against the company and its promoters for losses incurred due to reliance on the misleading information. They can seek to recover damages for financial losses suffered as a result of the misstatement.

3. Criminal Liability:

In more severe cases, misstatements may lead to criminal charges against the company’s directors or promoters. If it is found that the misstatements were made knowingly or with the intention to deceive investors, the responsible parties can face imprisonment or fines as per provisions under the Companies Act.

4. Regulatory Actions:

Regulatory authorities, such as the Securities and Exchange Board of India (SEBI), may take action against companies for violations related to misstatements in a prospectus. This can include penalties, sanctions, and restrictions on future capital-raising activities.

5. Loss of Reputation:

Misstatements can significantly harm a company’s reputation and credibility in the market. This loss of trust can lead to a decline in share prices, affecting existing shareholders and making it challenging for the company to raise funds in the future.

Consequences for Investors:

The consequences of misstatements in a prospectus primarily affect investors who rely on the information provided. Some of the impacts are:

1. Financial Losses:

Investors may incur substantial financial losses if they make investment decisions based on inaccurate or misleading information. If the company’s actual performance fails to meet the expectations set by the prospectus, investors could lose their entire investment.

2. Informed Decision-Making:

Misstatements can undermine the ability of investors to make informed decisions. When critical information is omitted or misrepresented, investors may not be able to assess the risks and rewards associated with the investment adequately.

3. Diminished Investor Confidence:

Repeated incidents of misstatements in prospectuses can lead to a general decline in investor confidence in the market. This erosion of trust can discourage investment in not just the company in question but also in the broader market.

Recourse Available to Affected Parties:

Investors who suffer losses due to misstatements in a prospectus have several options for recourse:

1. Legal Action:

Affected investors can file civil suits against the company and its promoters for damages. They must demonstrate that they relied on the misstatements in the prospectus when making their investment decisions.

2. Regulatory Complaints:

Investors can lodge complaints with regulatory authorities such as SEBI, which may investigate the matter and take action against the company or its promoters.

3. Class Action Suits:

In cases where a significant number of investors are affected, they may band together to file a class action lawsuit against the company. This collective approach can increase the chances of recovery and provide a stronger legal standing.

4. Mediation and Settlement:

In some cases, companies may opt for mediation or settlement discussions to resolve disputes with affected investors, especially if they acknowledge the misstatements.

It means a formal document that a Public Company issues to invite offers from public for subscribing its shares. It includes all the material information related to shares that a Company offers to the public. Furthermore, it usually help the investors to take investment decisions.

The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.

Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.

• To notify the public of the issue.
• To put the company on record with regards to the terms of the issue and allotment process.
• To establish accountability on the part of the directors and promoters of the company.

Types of prospectus

According to Companies Act 2013, there are four types of prospectus.

Deemed Prospectus: Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.

Shelf prospectus: Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.

Red Herring Prospectus: Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.

Abridged Prospectus: Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.

Registration of Prospectus

(1) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing, and having endorsed thereon or attached thereto:

(a) Any consent to the issue of the prospectus required by section 58 from any person as an expert; and

(b) In the case of a prospectus issued generally, also:

(i) a copy of every contract required by clause 16 of Schedule II to be specified in the prospectus, or, in the case of a contract not reduced into writing, a memorandum giving full particulars thereof ; and

(ii) Where the persons making any report required by Part II of that Schedule have made therein, or have, without giving the reasons, indicated therein, any such adjustments as are mentioned in clause 32 of that Schedule, a written statement signed by those persons setting out the adjustments and giving the reasons therefor.

(2) Every prospectus to which sub-section (1) applies shall, on the face of it,

(a) State that a copy has been delivered for registration as required by this section ; and

(b) Specify any documents required by this section to be endorsed on or attached to the copy so delivered, or refer to statements included in the prospectus which specify those documents.

(3) The Registrar shall not register a prospectus unless the requirements of sections 55, 56, 57 and 58 and sub-sections (1) and (2) of this section have been complied with and the prospectus is accompanied by the consent in writing of the person, if any, named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that capacity.

(4) No prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration, and if a prospectus is so issued, it shall be deemed to be a prospectus a copy of which has not been delivered under this section to the Registrar.

(5) If a prospectus is issued without a copy thereof being delivered under this section to the Registrar or without the copy so delivered having endorsed thereon or attached thereto the required consent or documents, the company, and every person who is knowingly a party to the issue of the prospectus, shall be punishable with fine which may extend to fifty thousand rupees.

The Companies Act, 2013 clarifies that a company is a separate entity distinct from its members. But practically, it is an association of persons who are the beneficial owners of the company and its corporate assets. This fiction is created by a veil termed the corporate veil.

Here, lifting the corporate veil under the Companies Act, 2013 means ignoring that a company is a separate legal entity and has a corporate personality. Lifting of corporate veil as per Companies Act, 2013 ignores the separate identity of the company and looks back at the true owners who are in control of the company.

The separate personality is a regulatory advantage, and it must be used for a lawful purpose only. Whenever and wherever a fraudulent use is made of the legal establishment, the individuals will not be permitted to hide behind the curtain of corporate personality.

The concerned authority will break this company’s shell and sue the individuals who have committed such an offence. This lifting of the curtain is called lifting the corporate veil under the Companies Act, 2013.

Corporate Veil:

A legal concept that separates the personality of a corporation from the personalities of its shareholders, and protects them from being personally liable for the company’s debts and other obligations.

Lifting Of Corporate Veil:

At times it may happen that the corporate personality of the company is used to commit frauds and improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the façade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting of corporate veil’.

It refers to the situation where a shareholder is held liable for its corporation’s debts despite the rule of limited liability and/or separate personality. The veil doctrine is invoked when shareholders blur the distinction between the corporation and the shareholders. A company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law: firstly through direct liability (for direct infringement) and secondly through secondary liability (for acts of its human agents acting in the course of their employment).

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or other self-theory and the other is the “instrumentality” theory.

The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders.

The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation. It is up to the court to decide on which theory to apply or make a combination of the two doctrines.

The basis on which Corporate Veil is Lifted under Companies Act,2013

Misstatement in Prospectus

In a case where the company’s prospectus is misrepresented, the company and every director, promoter, and every other individual, who authorized such issue of prospectus shall be liable to compensate the loss to every person who subscribed for shares on the faith of misstatement.

Also, these individuals may be punished with a jail term for duration of not less than six months. This duration may be extended to ten years. The concerned company and person shall also be liable to a fine that shall not be less than the sum involved in the fraud but may extend to three times the amount involved in the fraud.

Misdescription of Name

As per the Companies Rule, 2014, a company shall have its name printed on every official document, including (hundis, promissory notes, BOE, and such other documents) as may be mentioned.

Thus, where a company’s officer signs on behalf of the company any contract, BOE, Hundi, promissory note or Cheque or order for money, that individual shall be liable to the holder if the name of the company is not properly mentioned.

Fraudulent conduct

In case of winding up of a company, it comes out that any business has been carried on with intent to cheat the creditors or any other individual, or for any illicit purpose, if the Tribunal thinks it proper so to do, be directed in person liable without limitation to obligation for all or any debts or other obligations of the company.

Liability under the fraudulent conduct may be imposed if it is proved that the company’s business has been carried on misguiding the creditors.

Ultra-Vires Acts

Directors and other officers of a company will be held liable for all those acts they have performed on the company’s behalf if the same is ultra vires the company.

Failure to return the application Money

In case of Public Issue, if minimum subscription, as per the prospectus, has not been received within thirty days of the issue of prospectus or such other period as may be mentioned, the application money shall be returned within fifteen days from the closure of the issue.

However, suppose any the application money is not so repaid within such specified time. In that case, the directors/officers of the company shall jointly and severally be liable to pay that money with 15% per annum.

Additionally, the defaulter company and its officer shall be liable for a penalty of 1000rs/day during which such default continues or Rs. 100000, whichever is less.

Under other Statues:

Apart from the Companies Act, 2013, the directors & other officers of the company may be held personally accountable under the provisions of other statutes. For Instance, under the Income-tax Act, 1962, where any private company is wound-up and if tax arrears in respect of any income of any previous year cannot be recovered, every individual who was director of that company during the relevant preceding year shall be jointly and severally accountable for payment of tax.

Under Judicial Interpretation

While initially the court, based on the principle of the separate entity as well as a district corporate persona, refused to lift the veil of corporate governance, However, due to the rise of corporations and the ever-growing conflict between corporations and their different stakeholders, courts have taken a more pragmatic strategy and have lifted the veil of corporate governance.

It isn’t easy to record every court decision in which the veil was lifted. However, there are various circumstances where the veil of corporate character can be taken off, and the people who are behind the corporate entities could be found out and punished.

• Improper conduct and Prevention of Fraud.
• Formation of the Subsidiary company to act as Agent.
• Economic offence
• Revenue Protection
• The company used it for illegal purposes.
• Company ignoring welfare legislations.
• Company acting a mere fraud.

Book building is a price discovery mechanism that is used in the stock markets while pricing securities for the first time. When shares are being offered for sale in an IPO, it can either be done at a fixed price. However, if the company is not sure about the exact price at which to market its shares, it can decide a price range instead of an exact figure. This process of discovering the price by providing the investors with a price range and then asking them to bid on it is called the book building process. It is considered to be one of the most efficient mechanisms of pricing securities in the primary market. This is the preferred method which is recommended by all major stock exchanges and as a result is followed in all major developed countries in the world.

Book Building Process:

• Appointment of Investment Banker:

The first step starts with appointing the lead investment banker. The lead investment banker conducts due diligence. They propose the size of the capital issue that must be conducted by the company. Then they also propose a price band for the shares to be sold. If the management agrees with the propositions of the investment banker, the prospectus is issued with the price range as suggested by the investment banker. The lower end of the price range is known as the floor price whereas the higher end is known as the ceiling price. The final price at which securities are indeed offered for sale after the entire book building process is called the cut-off price.

• Collecting Bids:

Investors in the market are requested to bid to buy the shares. They are requested to bid the number of shares that they are willing to buy at varying price levels. These bids along with the application money are supposed to be submitted to the investment bankers. It must be noted that it is not a single investment banker who is engaged in the collection of bids. Rather, the lead investment banker can appoint sub-agents to tap into their network especially for receiving the bids from a larger group of individuals.

• Price Discovery:

Once all the bids have been aggregated by the lead investment banker, they begin the process of price discovery. The final price chosen in simply the weighted average of all the bids that have been received by the investment banker. This price is declared as the cut-off price. For any issue which has received substantial publicity and which is being anticipated by the public, the ceiling price is usually the cut-off price.

• Publicizing:

In the interest of transparency, stock exchanges all over the world require that companies make public the details of the bids that were received by them. It is the lead investment banker’s duty to run advertisements containing the details of the bids received for the purchase of shares for a given period of time (let’s say a week). The regulators in many markets are also entitled to physically verify the bid applications if they wish to.

• Settlement:

The application amount received from the various bidders has to be adjusted and shares have to be allotted. For instance, if a bidder has bid a lower price than the cut-off price then a call letter has to be sent asking for the balance money to be paid. On the other hand, if a bidder has bid a higher price than the cut-off, a refund cheque needs to be processed for them. The settlement process ensures that only the cut-off amount is collected from the investors in lieu of the shares sold to them.

Partial Book Building

Partial book building is another variation of the book building process. In this process, instead of inviting bids from the general population, investment bankers invite bids from certain leading institutions. Based on their bids, a weighted average of the prices is created and cut-off price is decided. This cut-off price is then offered to the retail investors as a fixed price. Therefore, the bidding only happens at an institutional level and not at a retail level.

This is also an efficient mechanism to discover prices. Also the cost and complications involved in conducting a partial book building are substantially low.

First of all, the book building process brings flexibility to the pricing of IPO’s. Prior to the introduction of book building, a lot of IPO’s were either underpriced or overpriced. This created problems because if the issue was underpriced, the company was losing possible capital. On the other hand, if the issue was overpriced it would not be fully subscribed. In fact, if it was subscribed below a given percentage, the issue of securities had to be cancelled and the substantial costs incurred over the issue would simply have to be written off. With the introduction of book building process, such events no longer happen and the primary market functions more efficiently.

Other Subtypes of Book Building

The following are subtypes of book building:

• Accelerated Book Building

The companies can use an accelerated book-building process to acquire quick capital market. That can be the case when a company cannot finance its short-term project via debt financing. So, the issuing company contacts several investment banks that can act as underwriters the evening before the intended placement. Under this process, the offer period is open only for a day or two days, and you have no time for marketing for an issue. So, instead, the underwriter overnight contacts their networks and details the current topic to institutional investors. If this investor finds this issue interesting, then allotment happens overnight.

• Partial Book Building

As the partial book building says, that issue book is built partially, where the investment banker only invites bids from the selected investors. Based on their bids, they take the weighted average of the prices to finalize the cut-off price. Then other investors, such as retail investors, take this cut-off price as a fixed price. So, the bidding happens with a selected group of investors under the partial book-building process.

Advantages of Book Building

• The most efficient way to price the share in the IPO market.
• The share price is finalized by investors’ aggregate demand, not by the fixed price set by the company management.

Disadvantages of Book Building

• High costs are involved in the book-building process compared to the fixed-price mechanism.
• The period is also more in the book booking process than the fixed-price mechanism.

Subscription shares are shares that investors subscribe to for a purchase price in exchange for equity in the company. These shares can take the form of ordinary or preference shares with an option of being bought back by the company at a later date for a fixed conversion price and within a fixed period of time. This issuance of shares can only be done by the company itself and such shares are bought by a potential investor that is commonly known as a subscriber. In the case of subscription shares, the funds invested by the investor will be deposited directly into the company’s account for the issuance of the new shares. This is different from share purchase agreements, whereby the purchasers and vendors sell and transfer the sale shares and the purchase price is paid to the vendor.

A subscription of shares may be used at any stage of a business for a private limited company. The nature of the subscription agreement will differ depending on the type of share being issued such as ordinary, preference or convertible redeemable preference shares. It is important to differentiate between a sale and purchase/share sale agreement on the one hand and a share subscription agreement on the other. The former relates to sale and transfer of shares in a company from an existing shareholder and from existing share capital in the company. The latter relates to subscriptions where there is an issuance of new shares or classes of shares in a company meaning the share capital of the company is increased to cater for the new shares.

Minimum Subscription

Minimum subscription refers to the minimum amount required by the company for its preliminary functions. It has been provided by the Companies Act, that the company must receive applications for a certain minimum number of shares before going ahead with the allotment of shares in order to prevent companies from commencing business with inadequate resources. This is called the ‘minimum subscription’. The limit of minimum subscription is 90% of the size of the issue.

• The infrastructure companies that have a public issue, for them 90% of minimum subscription are not compulsory and are to be given by an alternative source through which the fund will be available to the company.
• A legal precedent for Minimum Subscription was created under the Companies Act of 1956. It states that the company is allowed to offer only a certain amount of shares to the public, for which the company can actually pay.

Over Subscription

When a company receives applications for shares more than the number of shares it has offered to the public, it is known as over-subscription of shares. Usually, the companies with strong financial background or good reputation in the market or profitable future prospects receive over-subscription of shares.

According to the guidelines of SEBI, a company cannot out-rightly reject any application. However, it can do so where the information is incomplete, the signature is not there or the application money is insufficient.

Alternatives for Over Subscription

Over subscription, there are three alternatives available to the company with respect to the allotment:

1. Full Allotment and Rejection of Excess Application: Rejection of some excess applications and allotment is made in full to other applicants. Those applicants whose applications are rejected are sent a letter of regret along with the refund of the money paid by them. Also, the applicants whose applications are accepted are sent a letter of allotment.
2. Pro-rata Allotment: Proportionate distribution of available shares can be made by the Board of Directors for allotment among applicants. The applicants get a lesser number of shares than the shares they have applied for, proportionately, which is called a pro-rata allotment. The allotment is based on the ratio between the number of shares to be allotted and the number of shares applied for.
3. Combination of the above two alternatives:

• Reject some applications and make pro-rata allotment of the remaining applicants: In this case letter of regret is sent to the rejected applicants and a letter of allotment is sent to the ones accepted over.
• Full allotment to some applicants and making pro-rata allotment of the left ones: In this case letter of allotment is sent to all the applicants.
• Rejection of some applications, full allotment to some applicants, and making pro-rata allotment to the remaining ones: Letter of regret is sent to the rejected ones. And the letter of allotment is sent to the applicants whose applications have been accepted.

SEBI Guidelines for Over Subscription

• There should be a categorization of the applicants on the basis of the number of shares they have applied for.
• Half of the net offer of shares to the public should be made to those companies or organizations that have made applications for more than 1000 shares.
• Half of the net offer of shares to the public should be given to those applicants, who have made applications of 1000 or less than 1000 shares.
• The Board of Directors has the authority to reject some applications on the grounds of a technicality like incomplete application forms or forms not bearing signatures or applications with less money.
• Any basis for allotment of shares can be adopted, but allotment has to be made in tradable lots, and the amount over and above received at the time of application should be adjusted towards allotment and calls, while the remaining excess sum is to be refunded.

Under subscription

A company offers shares to the public inviting applications for their subscription. When the number of shares applied for by the public is less than the number of shares issued by the company, it is a situation of under-subscription.

Generally, a company that is newly set up or does not have a good reputation in the market receives under-subscription. Usually, such companies opt for underwriting of the shares.

However, if a company receiving under-subscription receives the minimum subscription, it can allot the shares for which it receives the application.

Accounting Treatment for under subscription

Accounting is done in the basic manner as no special treatment is given. Further, journal entries are made as per the actual number of shares applied for and allotted to the public. By doing so the company can satisfy all the applicants.

SEBI Guidelines for Under Subscription

When the company has not received 90% of the amount issued from public subscription and accepted devolvement of shares from underwriters and other sources, in case of under subscription, within a period of 60 days, counting from the date of closure of share issue, the company is required to refund the full amount of subscription to the applicants within 78 days without interest and with interest for the delayed period past 78 days, @ 15% per annum.

Differences:

Over Subscription:

1. Applications received are more than the shares issued
2. In this case the application money is refunded on the rejected applications
3. Pro-rata allotment is made in this case
4. Minimum subscription is automatically received
5. Over subscription conveys that the position of company in capital market is very good
6. Issued Capital and subscribed capital are equal.

Under Subscription:

1. Applications received are less than the shares issued
2. Generally, the refund situation does not arise
3. No pro-rata allotment
4. Under subscription may not satisfy the requirement of minimum subscription
5. It sends a message that the company does not enjoy full confidence of investors in capital market
6. Subscribed capital is less than the Issued capital.