Prospectus and Statement in lieu of Prospectus:

A prospectus is a legal document issued by companies that

are offering securities for sale. Mutual funds also provide a prospectus to
potential clients, which includes a description of the fund's strategies, the
manager's background, the fund's fee structure and a fund's financials
statements.

HOW IT WORKS (EXAMPLE):

To get an idea of the role of the prospectus, let's assume Company XYZ is
pursuing an IPO. Before launching the IPO, Company XYZ must first file a
registration statement, which discloses all material information about the
company, with the SEC. Part of the registration statement is the prospectus,
which must be provided to all purchasers of the new issue.

After Company XYZ files the registration statement with the SEC for review, a
cooling-off period begins. During this 20-day period, securities brokers can
discuss the new IPO with clients, but the only information that can be
distributed is the preliminary prospectus.

When the registration statement becomes effective, Company XYZ will amend
the preliminary prospectus to add such important information as the offering
price and the underwriting spread. This final prospectus must contain:

 Description of the offering

 History of the business

 Description of management

 Price

 Date

 Selling discounts

 Use of proceeds
 Description of the underwriting

 Financial information

 Risks to buyers

 Legal opinion regarding the formation of the company

 SEC disclaimer

When the final prospectus is released, brokers can take orders from those
clients who indicated an interest during the cooling-off period. A copy of the
final prospectus must precede or accompany all sales confirmations.

The Statement in Lieu of Prospectus is a document filed with the Registrar

of the Companies (ROC) when the company has not issued prospectus to the
public for inviting them to subscribe for shares. The statement must contain
the signatures of all the directors or their agents authorised in writing. It is
similar to a prospectus but contains brief information.

The Statement in Lieu of Prospectus needs to be filed with the registrar if the
company does not issues prospectus or the company issued prospectus but
because minimum subscription has not been received the company has not
proceeded for the allotment of shares.
Difference in both:

BASIS FOR STATEMENT IN LIEU OF

PROSPECTUS
COMPARISON PROSPECTUS

Meaning Prospectus refers to a legal- Statement in lieu of

document published by the prospectus is a document
company to invite general issued by the company
public for subscribing its when it does not offer its
shares and debentures. securities for public
subscription.

Objective To encourage public To be filed with the registrar.

subscription.

Used when Capital is raised from general Capital is raised from known
public. sources.

Content It contains details prescribed It contains information

by the Indian Companies Act. similar to a prospectus but in
brief.

Minimum Required to be stated Not required to be stated

subscription

Shares:

A unit of ownership that represents an equal proportion of a company's

capital. It entitles its holder (the shareholder) to an equal claim on the
company's profits and an equal obligation for the company's debts and losses.
Two major types of shares are (1) ordinary shares (common stock), which
entitle the shareholder to share in the earnings of the company as and when
they occur, and to vote at the company's annual general meetings and other
official meetings, and (2) preference shares (preferred stock) which entitle the
shareholder to a fixed periodic income (interest) but generally do not give him
or her voting rights.
Share Capital:

Share capital consists of all funds raised by a company in exchange for

shares of either common or preferred shares of stock. The amount of share
capital or equity financing a company has can change over time. A company
that wishes to raise more equity can obtain authorization to issue and sell
additional shares, thereby increasing its share capital.

Authorized, Issued and Paid Share Capital

Before a company can raise equity capital, it must obtain permission to
execute the sale of stock. The company must specify the total amount of
equity it wants to raise and the base value of its shares, called the par value.
The total par value of all the shares a company is permitted to sell is
called its authorized share capital. While a company may elect not to sell
all its shares of stock during its initial public offering (IPO), it cannot generate
more than its authorized amount. If a company obtains authorization to raise
$5 million and its stock has a par value of $1, for example, it may issue and
sell up to 5 million shares of stock.

The total value of the shares the company elects to sell is called its
issued share capital. Not all these shares may sell right away, and the par
value of the issued capital cannot exceed the value of the authorized capital.
The total par value of the shares that the company sells is called its paid
share capital. This is what most people refer to when speaking about share
capital.

Debenture:
A debenture is a type of debt instrument that is not secured by physical
assets or collateral. Debentures are backed only by the general
creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond to secure capital. Like other
types of bonds, debentures are documented in an indenture.

Convertible and Nonconvertible Debentures

There are two types of debentures:

Convertible debentures are bonds that can convert into equity shares of
the issuing corporation after a specific period of time. These types of
bonds are the most attractive to investors because of the ability to convert,
and they are most attractive to companies because of the low interest rate.
Nonconvertible debentures are regular debentures that cannot be
converted into equity of the issuing corporation. To compensate, investors
are rewarded with a higher interest rate when compared with convertible
debentures.

Debenture Bond:
Bonds are the most frequently referenced type of debt instrument, serving as
an IOU between the issuer and the purchaser. An investor loans money to an
institution, such as a government or business; the bond acts as a written
promise to repay the loan on a specific maturity date.

Normally, bonds also include periodic interest payments over the bond's
duration, which means that the repayment of principal and interest occur
separately. Bond purchases are generally considered safe, and highly rated
corporate or government bonds come with little perceived default risk.

Classification of Company Securities:

Corporate securities or company securities are known to be the documentary

media for mobilising funds by the joint stock companies. The need for the

issue of corporate securities arises in the following two situations: (i) For the

initial successful establishment of business activities; and (ii) For the financing

of major expansion programmes requiring immediate funds.

These are of two classes:

(a) Ownership securities

(b) Creditorship securities

(1) Ownership Securities-Shares:

Issue of share is the best method for the procurement of fixed capital

requirements because it has not to be paid back to shareholder within the life

time of the company. Funds raised through the issue of shares provide a

financial floor to the capital structure of a company.

Under the provisions of Section 86 of the Indian Companies Act, 1956, a

public company or a private company which is subsidiary of a public company

can issue only two types of shares i.e. equity shares and preference-shares.

However, an independent private company can issue deferred shares as well.

Preference Shares:

Preference Shares are those shares which carry priority rights with regard to

payment of dividend and return of capital.

According to Sec. 85 of the Indian Companies Act, preference share is

that part of the share capital of the company which is endowed with the

following preferential rights:

(1) Preference with regard to the payment of dividend at fixed rate; and

(2) Preference as to repayment of capital in the event of company being

wound up.

Types of Preference Shares:

(i) Cumulative and non-cumulative preference shares:

The holders of cumulative preference shares are sure to receive dividend on

the preference shares held by them for all the years out of the earnings of the

company. Under this the amount of unpaid dividend is carried forward as

arrears and becomes the charge on the profits of the company.

(ii) Redeemable and irredeemable preference shares:

Redeemable preference shares are those which, in accordance with the terms

of issue, can be redeemed or repaid after a certain date or at the discretion of

the company. The preference shares which cannot be redeemed during the

life time of the company are known as irredeemable preference shares.

(iii) Convertible and non-convertible preference shares:

If the preference shareholders are given the option to convert their shares into

equity shares within a fixed period of time such shares will be known as
convertible preference shares. The preference shares which cannot be

converted into equity shares are called non- convertible preference shares.

Advantages of preference shares:

(1) Suitable to Cautious Investors. Preference shares mobilise the funds from

such investors who prefer safety of their capital and want to earn income with

greater certainty.

(2) Retention of Control. Control of the company is vested with the

management by issuing preference shares to outsiders because such share-

holders have restricted voting rights.

(3) Increase in the Income of Equity Shareholders. Preference shares bear a

fixed yield and enable the company to adopt the policy of “trading on equity”

to increase the rate of dividend on equities out of profits remaining after

paying fixed rate of dividend on preference shares.

Disadvantages of preference shares:

(1) Permanent Burden:

Preference Shares Impose permanent burden on the company to pay fixed

dividend prior to its disbursement among other types of shareholders.

(2) No Voting Right:

The preference shares may not be advantageous from the point of view of

investors because they do not carry voting rights.

(3) Costly:

Compared to debentures and Govt., securities, the cost of raising the

preference share capital is higher.

(4) Income Tax:

Since preference dividend is not an admissible deduction for income tax

purposes, the company has to earn more, otherwise the dividend on equity

shareholders will be affected.

Equity Shares: Sec. 85(2)

Equity shares or ordinary shares are those ownership securities which do not

carry any special right in respect of annual dividend or the return of capital in

the event of winding up of the company.

Advantages of Equity Shares:

(1) No Charge on Assets:

The company can raise the fixed capital without creating any charge over the

assets.

(2) No-Recurring Fixed Payments:

Equity shares do not create any obligation on the part of company to pay fixed

rate of dividend.

(3) Long term Funds:

Equity capital constitutes the permanent source of finance and there is no

obligation for the company to return the capital except when the company is

liquidated.

Disadvantages of Equity Shares:

(1) Difficulty in Trading on Equity:

The company will not be in a position to adopt the policy of trading on equity if

all or most of the capital is raised in the form of equity shares.

(2) Speculation:

During the period of boom, higher dividends on equity shares results in the

appreciation of the value of shares which in turn leads to speculation.

(3) Manipulation:

As the affairs of the company are controlled by equity shareholders on the

basis of voting rights, there are chances of manipulation by a powerful group.

Deferred Shares:

The shares which are issued to the founders or promoters are called deferred

shares or founders shares. The promoters take these shares for enabling

them to control the company. These shares have extra ordinary rights though

their face value is very low.

(2) Creditorship Securities or Debentures:Sec. 2 (12)

A company can raise finances by issuing debentures. A debenture may be

defined as the acknowledgement of debt by a company. Debentures

constitute the borrowed capital of the company and they are known as

creditorship securities because debenture holders are regarded as the

creditors of the company.

Inter Corporate Loans:

All companies have a restriction and ceiling on the maximum amount of inter-
corporate loan and investment. A company should not provide loans or
guarantee or purchase securities of any other body corporate exceeding 60%
of its paid-up share capital, free reserves and security premium account or
100% of its free reserves and security premium account, whichever is more.
If the aggregate of inter-corporate loan, investment, guarantee and securities
in connection with loan already made and proposed to be made together is
not above the specified limit, inter-corporate loan and investment can be
processed by passing board resolution with consent of all directors present at
the board meeting. If the same is beyond the specified limit, prior special
resolution must be passed and prior approval of the financial institution should
be obtained, the latter if term loan is subsisting.

Role of Court to Protect Interests of Creditors

and Shareholders:
Protection of investors means safeguard and enforcement of the rights and
claims of a person in his role as an investor. The capital of a company may be
divided into Equity capital and Debt capital. The persons who contribute to the
equity capital of a company are called investors. Investors have the voting
rights in every matter of the company and are entitled to get dividend. It is
different from the creditors who contribute to the debt capital of the company,
who in turn get fixed rate of interest on the money so lent. Moreover, creditors
have limited voting rights only with respect to those matters which directly
affect their interest such as reduction of capital, winding up of company etc.

Various provisions incorporated for the protection of investors under

Companies Act, 1956 and the Companies Act, 2013 are-

(1) Civil Liability for Misstatement in Prospectus.

Section 62 of the Companies Act, 1956 lays down civil liability for
misstatement in prospectus. Where a prospectus invites persons to
subscribe for shares in or debentures of a company, the director, promoter
(i.e. party to the preparation of prospectus) and person who has authorised
the issue of the prospectus, shall be liable to pay compensation to every
person who subscribes for any shares or debentures on the faith of the
prospectus for any loss or damage he may have sustained by reason of any
untrue statement included therein.

Any person who has subscribed for shares against public issue and sustained
loss or damage due to such misstatement is entitled to relief under this
section.

Section 35 of the Companies Act, 2013 provides for the civil liability for
misstatement in prospectus. Where a person has subscribed for securities of
a company acting on any statement included, or the inclusion or omission of
any matter, in the prospectus which is misleading and has sustained any loss
or damage as a consequence thereof, the company and the following persons
given below shall be liable to pay compensation to every person who has
sustained such loss or damage. The persons liable, along with the Company
are-
(a) Director of the company at the time of the issue of the prospectus;

(b) Has authorized himself to be named and is named in the prospectus as a

director of the company, or has agreed to become such director, either
immediately or after an interval of time;

(c) Promoter of the company;

In R. v. Lord Kylsant[v], a table was set out in the prospectus showing that
the company had paid dividends varying from 8 to 10 percent in the preceding
years, except for two years where no dividend was paid. The statement
showed that the company was in a sound financial position but the truth was
that the company had substantial trading loss during the seven years
preceding the date of prospectus and the dividends had been paid, not out of
the current earnings, but out of the funds which had been earned during the
abnormal period of war. The prospectus was held to be untrue due to the
omission of the fact which was necessary to appreciate the statements made
in the prospectus.
(2) Criminal Liability for Misrepresentation in Prospectus

Section 63 of the Companies Act, 1956 lays down criminal liability for
misrepresentation in prospectus. Every person who has authorised the issue
of the prospectus containing any untrue statement shall be punishable with
the imprisonment which may extend to two years, or with fine which may
extend to Rs. 50,000 or both.

Section 34 of the Companies Act, 2013 provides that where a prospectus

contains any statement which is untrue or misleading in form or context in
which it is included or where any inclusion or omission of any matter is likely
to mislead, then every person who authorizes the issue of such prospectus
shall be punishable with imprisonment for a term which shall not be less than
6 months but which may extend to 10 years and shall also be liable to fine
which shall not be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud

(3) Advertisement of prospectus.

Section 58A of the companies Act, 1956, as inserted by Companies

Amendment Act, 1974, states that deposits should not be invited without
issuing an advertisement. There should be an advertisement, including
therein a statement showing the financial position of the company and that the
company is not in default in the repayment of any deposit or the interest
charged with respect to such deposit.

Section 30 of the Companies Act, 2013 lays down the provision for
advertisement of prospectus. Where an advertisement of any prospectus of a
company is published in any manner, it shall be necessary to specify therein
the contents of its memorandum as regards the objects, the liability of
members and the amount of share capital of the company, and the names of
the signatories to the memorandum and the number of shares subscribed for
by them, and its capital structure.

Section 205C of the companies Act, 1956 provides for the establishment of
Investor Education and Protection Fund by the Central Government. It is a
mandatory duty on the Government.[vii] The amounts that shall be credited to
the Fund are –

(a) Amounts in the unpaid dividend accounts of companies;

(b) The application moneys received by companies for allotment of any

securities and due for refund;

(c) Matured deposits with companies;

(d) Matured debentures with companies

Class Action Suits:

A class action, class suit, or representative action is a type of lawsuit where
one of the parties is a group of people who are represented collectively by a
member of that group. The class action originated in the United States and is
still predominantly a U.S. phenomenon, but Canada, as well as several
European countries with civil law have made changes in recent years to allow
consumer organizations to bring claims on behalf of consumers.

In a typical class action, a plaintiff sues a defendant or a number of

defendants on behalf of a group, or class, of absent parties.[1] This differs
from a traditional lawsuit, where one party sues another party for redress of a
wrong, and all of the parties are present in court. Although standards differ
between states and countries, class actions are most common where the
allegations involve a large number of people (usually 40 or more) who have
been injured by the same defendant in the same way.[1] Instead of each
damaged person bringing his or her own lawsuit, the class action allows all
the claims of all class members—whether they know they have been
damaged or not—to be resolved in a single proceeding through the efforts of
the representative plaintiff(s) and appointed class counsel.

Derivative Action:
A shareholder derivative suit is a lawsuit brought by a shareholder on behalf
of a corporation. Generally, a shareholder can only sue on behalf of a
corporation when the corporation has a valid cause of action, but has refused
to use it. This often happens when the defendant in the suit is someone close
to the company, like a director or a corporate officer. If the suit is successful,
the proceeds go to the corporation, not to the shareholder who brought the
suit.