Unit 3:- Fund Raising in Company Shares and Share Capital 

3.1 Prospectus: Contents, Misstatements in prospectus Statement In lieu of Prospectus
3.2 Share Capital: Raising of share capital

3.3 Kinds of Shares
3.4 Issue of Shares and further issue of share

3.5 Allotment and Transfer of shares

3.6 Restrictions on transfer

3.7 Procedure of transfer

3.8 Refusal of transfer 

3.9 Debentures: Nature, issue, class and kinds

3.10 Kinds of debenture holders, Remedies of debenture holder 

 

3.1 Prospectus and Misstatements

Sections 23 to 38

Introduction & Definition

A Prospectus is a document described or issued as a prospectus and includes any notice, circular, advertisement, or other document inviting offers from the public for the subscription or purchase of any securities.

Statutory Provisions

• Section 26: Matters to be stated in the prospectus.
• Section 34: Criminal liability for misstatements.
• Section 35: Civil liability for misstatements.

Essential Ingredients of a Prospectus

• It must be an invitation to the public.
• The invitation must be on behalf of the company.
• It must relate to securities (shares or debentures).
• It must be in writing.

Landmark Case Laws

1. Derry v. Peek (1889):
   • Facts: A company stated in its prospectus that it had the right to use steam-powered trams. In reality, the permission was subject to government approval, which was later refused.
   • Issue: Does an honest but mistaken belief constitute fraud?
   • Judgment: The House of Lords held that for a civil action of deceit, it must be proved that a statement was made knowingly, without belief in its truth, or recklessly. (Note: This led to stricter statutory rules under Company Law).
2. Rex v. Kylsant (1932):
   • Facts: A prospectus stated the company paid dividends every year during the war, implying it was profitable. However, it had incurred heavy losses and was paying dividends from old reserves.
   • Judgment: The court held that even a literally true statement is a “misstatement” if the omission of facts creates a false impression.

Exam-Style Conclusion

A prospectus is the window through which the public looks at a company. Any “clouding” of this window via misrepresentation attracts both civil and criminal liability under Sections 34 and 35 of the Companies Act, 2013.

3.2, 3.3 & 3.4 Share Capital and Kinds of Shares

Sections 43 to 72

Introduction & Definition

Share Capital refers to the funds raised by a company by issuing shares. A Share represents a bundle of rights and obligations and is treated as movable property under Section 44.

Statutory Provisions

• Section 43: Kinds of Share Capital.
• Section 62: Further issue of share capital (Rights Issue).

Kinds of Shares

1. Equity Shares:
   • With voting rights.
   • With differential rights as to dividend/voting (DVRs).
2. Preference Shares:
   • Preferential right to receive dividends.
   • Preferential right to repayment of capital during winding up.

Comparison Table: Equity vs. Preference Shares

Feature	Equity Shares	Preference Shares
Dividend Rate	Fluctuating (based on profit).	Fixed rate.
Voting Rights	Full voting rights.	No voting rights (except on matters affecting them).
Risk	High risk (last to get paid).	Low risk (paid before equity).
Repayment	At the time of winding up.	After a fixed period (Redeemable).

Exam-Style Conclusion

While Equity shares provide the “ownership” and “control” of the company, Preference shares serve as a “hybrid” instrument for investors seeking fixed income. Mastery of Section 43 is essential for understanding this classification.

3.5 to 3.8 Transfer and Allotment of Shares

Sections 56 to 59

Introduction & Definition

Allotment is the appropriation of a certain number of shares to an applicant. Transfer is the voluntary passing of property in shares from an existing member to a third party.

Statutory Provisions

• Section 56: Transfer and transmission of securities.
• Section 58: Refusal of registration and appeal against refusal.

Restrictions on Transfer

• Private Companies: Must restrict the right to transfer shares in their Articles (AoA).
• Public Companies: Shares are freely transferable (Section 58(2)).

Refusal of Transfer

A company can refuse to register a transfer for a “sufficient cause.”

• The transferee must be given a notice of refusal within 30 days.
• The aggrieved party can appeal to the NCLT (National Company Law Tribunal).

Landmark Case Laws

1. Bajaj Auto Ltd v. N.K. Firodia:
   • Judgment: The Supreme Court held that the directors’ power to refuse transfer is fiduciary. It must be exercised in the “interest of the company” and not arbitrarily or for personal reasons.

3.9 & 3.10 Debentures

Section 71

Introduction & Definition

A Debenture is an instrument issued by a company acknowledging a debt. It typically includes a charge on the company’s assets and carries a fixed rate of interest.

Statutory Provisions

• Section 71: Provisions for issue of debentures.
• Section 2(30): Definition of Debentures.

Classification of Debentures

• On the basis of Security: Secured vs. Unsecured.
• On the basis of Convertibility: Convertible vs. Non-convertible.
• On the basis of Registration: Registered vs. Bearer.

Remedies of Debenture Holders

If a company defaults in paying interest or principal, the debenture holder can:

1. Sue the company for the debt.
2. Petition for winding up of the company.
3. Appoint a Receiver (if secured).
4. Apply to the NCLT to direct the company to redeem debentures.

Comparison Table: Share vs. Debenture

Feature	Share	Debenture
Status	Owner of the company.	Creditor of the company.
Income	Dividend (Variable).	Interest (Fixed).
Security	Never secured.	Usually secured by a charge on assets.
Voting	Has voting rights.	No voting rights (Section 71(2)).

Exam-Style Conclusion

Debentures represent the loan capital of a company. Under the 2013 Act, the protection of debenture holders has been strengthened through the mandatory appointment of a Debenture Trustee for public issues.