By Shreya Routh (firstname.lastname@example.org)
The Ministry of Corporate Affairs vide its notification dated 7th May, 2018 notifies further 28 sections of the Companies Amendment Act, 2017 (‘Amendment Act’). With such enforcement, Rules 3, 4, 5 and 6 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules) have also been omitted vide MCA notification dated 7th May, 2018.
Rule 3, 4, 5 and 6 of the Companies (Prospectus and Allotment of Securities) Rules, 2014:
The PAS Rules contained provisions with respect to the items required to be stated in the prospectus for the purpose of issue and subsequent allotment of securities.
Rule 3 of the PAS Rules contained the information to be stated in the prospectus. Primary things to be included in the prospectus have been inter alia mentioned herein:
- the names, addresses and contact details of the corporate office of the issuer company, compliance officer of the issuer company, merchant bankers and co-managers to the issue, registrar to the issue, bankers to the issue, stock brokers to the issue, credit rating agency for the issue, arrangers, if any, of the instrument, names and addresses of such other persons as may be specified by the Securities and Exchange Board in its regulations
- the dates relating to opening and closing of the issue
- a declaration which shall be made by the Board or the Committee authorised by the Board in the prospectus that the allotment letters shall be issued or application money shall be refunded within fifteen days from the closure of the issue or such lesser time as may be specified by Securities and Exchange Board or else the application money shall be refunded to the applicants forthwith, failing which interest shall be due to be paid to the applicants at the rate of fifteen per cent. per annum for the delayed period.
- a statement given by the Board that all monies received out of the issue shall be transferred to a separate bank account maintained with a Scheduled Bank
- the details of all utilized and unutilised monies out of the monies collected in the previous issue made by way of public offer shall be disclosed and continued to be disclosed in the balance sheet till the time any part of the proceeds of such previous issue remains unutilized indicating the purpose for which such monies have been utilized, and the securities or other forms of financial assets in which such unutilized monies have been invested
- the names, addresses, telephone numbers, fax numbers and e-mail addresses of the underwriters and the amount underwritten by them
- the consent of trustees, solicitors or advocates, merchant bankers to the issue, registrar to the issue, lenders and experts
Apart from the above, the prospectus is also supposed to include the capital structure of the company, objects of the issue, purpose for which there is a requirement of funds, funding plan, source of promoter’s contribution, full particulars of the nature and interest of the directors etc.
Rule 4 of the PAS Rules contains details regarding the Reports to be set out in the Prospectus. The relevant extract of the Rule has been stated herein for ready reference:
The following reports shall be set out with the prospectus, namely:—
(1) The reports by the auditors with respect to profits and losses and assets and liabilities. Explanation.- For the purposes of this sub-rule, the report shall also include the amounts or rates of dividends, if any, paid by the issuer company in respect of each class of shares for each of the five financial years immediately preceding the year of issue of the prospectus, giving particulars of each class of shares on which such dividends have been paid and particulars of the cases in which no dividends have been paid in respect of any class of shares for any of those years: Provided that if no accounts have been made up in respect of any part of the period of five years ending on a date three months before the issue of the prospectus, a statement of that fact accompanied by a statement of the accounts of the issuer company in respect of that part of the said period up to a date not earlier than six months of the date of issue of the prospectus indicating the profit or loss for that period and assets and liabilities position as at the end of that period together with a certificate from the auditors that such accounts have been examined and found correct and the said statement may indicate the nature of provision or adjustments made or which are yet to be made.
(2) The reports relating to profits and losses for each of the five financial years or where five financial years have not expired, for each of the financial year immediately preceding the issue of the prospectus shall-
- if the company has no subsidiaries, deal with the profits or losses of the company (distinguishing items of a non-recurring nature) for each of the five financial years immediately preceding the year of the issue of the prospectus; and
- if the company has subsidiaries, deal separately with issuer company’s profits or losses as provided in clause (a) and in addition, deal either –
- as a whole with the combined profits or losses of its subsidiaries, so far as they concern members of the issuer company; or
- individually with the profits or losses of each subsidiary, so far as they concern members of the issuer company; or
- as a whole with the profits or losses of the company, and, so far as they concern members of the issuer company, with the combined profits or losses of its subsidiaries.
(3) The reports made by the auditors in respect of the business of the company shall be stated in the prospectus in the manner provided in sub-rule (2).
While Rule 5 of the PAS Rules contains other matters and reports to be included in the prospectus and Rule 6 stipulates the period for which information is to be provided in certain cases.
Rule 6 specifically provides “For the matters specified in rules 3 to 5, which require a company to provide certain particulars or information relating to the preceding five financial years, it shall be sufficient compliance for a company which has not completed five years, if such company provides such particulars or information for all the previous years since its incorporation.”
Section 26 stands amended
The Amendment Act, 2017 has brought in changes in the extant Section 26 of the Companies Act, 2013 (‘Act, 2013’). The amended text has been stated herein:
“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.”
Nature of Amendment
As mentioned above, the amendment has been enforced for the purpose of omitting Rule 3, 4, 5 and 6 of the PAS Rules. Such omission has been done to align the Rules with the Amendment Act, 2017.
The Amendment Act, 2017 specifically states that the prospectus shall contain such information and reports therein as prescribed by the Securities and Exchange Board of India (‘SEBI’) in consultation with the Central Government. Accordingly, to maintain harmonisation and uniformity between the Rules and the Amendment Act, 2017 such omission was necessary.
Impact of amendment
A vital point involved in the process of issue and allotment of securities is the information stated in the prospectus. Prospectus serves as an open book to the investor, who makes his investment decision on the basis of the information stated in such statement. Prospectus serves like an invitation card. Accordingly, a company must frame its prospectus in a manner which attracts the investors instantly. Rule 3, 4, 5 and 6 of the PAS Rules contains the detailed disclosure contents in the prospectus.
Post such omission, companies coming up with public issue will be required to disclose such information and reports as prescribed by SEBI.
As a matter of bringing in parity w.r.t. disclosure of information and reports while coming up with public issue, companies will now be required to refer to the provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 or any amendment thereto.