Unit-2

Documents
 Memorandum of association
• A Memorandum of Association (MOA) represents the
charter of the company. It is a legal document
prepared during the formation and registration
process of a company to define its relationship with
shareholders and it specifies the objectives for which
the company has been formed.
• The company can undertake only those activities that
are mentioned in the Memorandum of Association. As
such, the MOA lays down the boundary beyond which
the actions of the company cannot go.
• MOA must be signed by at least 2 subscribers in case
of a private limited company, and 7 members in case
of a public limited company.
• Memorandum of Association helps the
shareholders, creditors and any other person
dealing with the company to know the basic
rights and powers of the company.
• Also, the contents of the MOA help the
prospective shareholders in taking the right
decision while thinking of investing in the
company.
Format of Memorandum of Association

• The format of a MoA is specified in Table A to

Table E depending upon the type of company.
A company can adopt the table applicable to
it; for instance, Table A is for a company
limited by shares, and Table B is for a company
limited by guarantee and having share capital
etc.
Contents of Memorandum of Association
• As Memorandum of Association (MOA) is an important
documents which outlines the company laws under which
a company will work and function. It has several clauses
which defines some pertinent aspects under provision of
The Companies Act, 2013 which are as follows:-
1. Name Clause
2. Situation/ Registered State Clause
3. Object clause
4. Liability clause
5. Capital Clause
6. Subscriber Clause
 i. Name Clause
• The name of the company should be stated in this clause. A company
name should be which is not identical in any manner to any existing
company also, there are some words which are strictly prohibited to
be used in names of company in any manner. The Word “Private/PVT
Limited” should be in end of any private company. And the word
“Limited” should be in the end of every public limited Company.
• An section 8 or not for profit company are not required to use the
word “Private Limited/ pvt. Limited or Limited” at the end of their
company name.
• It should not also use words like King, Queen, Emperor, Government
Bodies and names of World Bodies like U.N.O., W.H.O., World Bank
etc. which are misleading.
 ii. Situation Clause
• In this clause the state name of company’s registered office is
mentioned. The Company should intimate the location of registered
office to the registrar within thirty days from the date of
incorporation in case the permanent address of company is not given.
•  It is one of important aspects as all the correspondence for company
will be sent on this.
• Once a company has been registered, it should have a proper
registered office until, the company is closed.
• The registered office clause lists the name of the state where the
company's registered office is physically located.
• The registered office's physical location determines which jurisdiction
the Registrar of Companies and which court the company would fall
under.
• It also confirms the company's nationality.
 iii. Object Clause
• The objects clause, also called the objective clause, is
considered the most important in the MOA.
• It defines and limits the scope of the company's
operations.
• It details the company's scope of activity for the members
and explains how the members' capital will be used.
• It protects shareholders funds and ensures the funds will
be used for the specific business purposes for which they
were raised and that they won't be risked in other
endeavors.
• The object clause explained why the company is
establishing. Companies aren't legally allowed to do any
kind of business other than the kind of business that is
specifically stated in this clause. An object clause should
contain:
• A list of the main objects the company will be pursuing
after it's Incorporated
• Incidental objects that are necessary to achieve the main
object
• Any other objects that aren't included in the main objects
or incidental object
• Nothing illegal
• Nothing that's against the public interest
• Nothing that's against the country's general rule of law
 iv. Liability Clause
• The liability clause explains what liability each of
the company's members faces. If the company is
limited by shares, the liability that each member
faces can be no more than the face value of shares
that he or she holds. If it's a company that's
limited by guarantee, this clause must define how
much liability each individual company member
holds. If it's an unlimited company, this particular
clause would not be included in the MOA.
 v. Capital Clause
• The capital clause lists information about the total
capital held by the proposed company. This amount is
called the company's authorized capital. Companies
aren't permitted to collect more money than the
amount listed under authorized capital.
• The way the capital is divided into equity share capital
and preference share capital also needs to be listed in
the capital clause. The number of shares the company
puts in equity share capital and preference share capital,
alongside their value, needs to be included in the MOA.
 vi. Association Clause
• The association clause explains that any individual signing
the bottom of the MOA wants to be part of the
association that's being formed by the memorandum.
• The subscribers to the Memorandum must take at least
one share. The MOA has to be signed by at least seven
people or more if it's a public company. It has to be signed
by at least two or more people if it's a private company.
• The signatures also have to be affirmed by witnesses.
There can be one witness for all of the signatures, but
none of the subscribers can witness the signatures of the
others. All subscribers and witnesses must provide their
addresses and occupations in writing.
 Provisions relating to alteration of
Memorandum of Association
• Any Company which intended to make any change to
the Memorandum of Association (MOA) of its
company, will have to comply with the provisions of
Section- 13 of Companies Act, 2013.
• Company can alter its Memorandum by way of
alteration in following clause of Memorandum of
Association:
Name Clause Registered Office Clause
Object Clause Liability Clause
Capital Clause
 1. Alteration in the Name clause of
Memorandum
• The name of the company can be altered at any time. For
the purpose, a special resolution has to be passed and a
written approval of the Central Government is to be
obtained. A copy of the special resolution should be filed
with the Registrar within 30 days of its passing.
• On conversion of a private limited company into a public
limited company and vice versa, the addition or deletion
of the word ‘Private’ is to be made. It requires no
Government’s approval.
Steps taken by ROC (Registrar of Companies)
• On any change in the name of the company, the Registrar
will enter the new name in the register of companies in
place of the previous name. And after that, it will issue a
fresh certificate of Incorporation with the new name and
the change in the name shall be complete and valid only
on the issue of the fresh certificate of incorporation.
• If by mistake or otherwise a company has been
registered by a name, which the Central
Government thinks, is identical with or closely
resembles the name of an existing company, the
Government may direct the company to change
its name. The direction of the Central
Government is required to be complied with,
within a period of 3 months from the date
thereof.
• The following procedure should be followed-
 The company should pass an ordinary resolution.
 The company should get the written approval of
the Central Government.
 A copy of the ordinary resolution has to be filed
with the Registrar within 30 days of its date.
 2. ALTERATION OF THE SITUATION/RO CLAUSE OF
MOA
• The procedure for altering the situation clause can be studied under the
following heads:
I) CHANGE OF REGISTERED OFFICE IN THE SAME TOWN OR VILLAGE
• A mere resolution of the Board of Directors is enough for the change. A
notice of the change should be filed with the Registrar within 30 days of
the change. This does not involve alteration of Memorandum
II) CHANGE OF REGISTERED OFFICE FROM ONE PLACE TO ANOTHER WITHIN
A STATE
• A company can change the place of its registered office from one place to
another within a State, if
1) SR has been passed and filed within 15 days.
2) the Regional Director confirms it. For this purpose, the company has to
make an application to the Regional Director for confirmation. This
confirmation shall be communicated to the company within four weeks.
• The company shall then file with the Registrar a certified copy of the
confirmation by the Regional Director, within 2 months from the date of
confirmation, together with a printed copy of the Memorandum of
Association as altered. The Registrar shall register the same within one
month from the date of filing of such document.
• Note- In the state of Maharshtra(Mumbai and Pune) and Tamil Nadu
(Chennai and Coimbatore) , there are more than 1 regional director.
III) CHANGE OF REGISTERED OFFICE FROM ONE STATE TO
ANOTHER
• The change of registered office from one state to another
state involves alteration of Memorandum, and the change
can be effected by a special resolution of the company
which must be confirmed by the Central Government.
• The following procedure should be followed for the
purpose:
 A special resolution must be passed.
 A copy of the special resolution should be filed with the
Registrar within one month of its passing.
 The alteration is to be confirmed by the Central
Government.
 A certified copy of the Central Government’s order and a
copy of the altered Memorandum should be filed with the
Registrar within 3 months.
 3. ALTERATION OF THE OBJECTS CLAUSE OF MOA
• The company can make a change in the objects clause only
by the following procedure:
1. A special resolution should be passed.
2. The alteration must be confirmed by the Central
Government. The Central Government will confirm the
alteration if the Registrar, creditors, members and others
interested in the company do not object it.
The details of the objective must be published in the
newspaper that too in different languages (one in English
and other in the vernacular language) where the registered
office of the company is situated and also on the website of
the company.
3. The Central Government will confirm the alteration if it is
made for any one of the following purposes:
• To carry on its business more economically and efficiently.
• To attain its main purpose by new or improved means.
• To enlarge or change the local area of its operations.
• To restrict or abandon any of the objects specified in the
Memorandum.
• To carry on some business which under existing
circumstance may conveniently or advantageously be
combined with the business of the company.
• To sell or dispose of the whole or any part of the
undertaking.
• To amalgamate with any other company or body-corporate.
4. Finally, all dissenting shareholders should be given an
opportunity to exit by the promoters and shareholders
possessing control of the company.
5. A certified copy of the order of the Central Government
must be filed with the Registrar within 3 months from the date
of the order.
 4. ALTERATION OF THE LIABILITY
CLAUSE OF MOA
• The liability clause cannot be altered to make the liability of
the members unlimited. But if all the members agree, and if
the Articles permit, the liability of all the directors or any of
the directors can be altered. A special resolution must be
passed for this purpose.
• In such case, however, the liability of the person holding
office as Director or Manager before such alteration shall not
be made unlimited until the expiry of his present term. His
liability for the unexpired period of the present term can be
made unlimited only if he gives his consent to his liability
becoming unlimited. Therefore, alterations resulting in
additional liability on a member cannot be made except with
the written consent of the member concerned.
5. ALTERATION OF THE CAPITAL CLAUSE OF MOA
• The capital clause of a company can be altered for any one of the
following purposes:
• By this alteration, the company can-
 Increase its share capital by new issue.
 Consolidate or sub-divide all or any of its share capital.
 Convert the fully paid up shares into stock or reconvert stock into
shares.
 Cancel the unissued shares and to that extent diminish the
amount of its share capital.
• If the Articles of Association permits, a company can make an
alteration under this head by passing an ordinary resolution if
authorised by articles. If articles do not authorise it the articles
need to be changed by passing a special resolution.
• File it with the registrar within 30 days of passing resolution.
 Articles of Association
• Every company is required to file Articles of Association
along with the Memorandum of Association with the
Registrar at the time of its registration.
• Articles of Association are the rules, regulations and bye-
laws for governing the internal affairs of the company.
They may be described as the internal regulation of the
company governing its management and embodying the
powers of the directors and officers of the company as
well as the powers of the shareholders. They lay down the
mode and the manner in which the business of the
company is to be conducted.
Contents of Articles of Association
Articles generally contain provision relating to the following matters;
• share capital different classes of shares of shareholders and
variations of these rights
• execution or adoption of preliminary agreements, if any;
• allotment of shares;
• lien on shares
• calls on shares;
• forfeiture of shares;
• issue of share certificates;
• issue of share warrants;
• transfer of shares;
• transmission of shares;
• alteration of share capital;
• borrowing power of the company;
• rules regarding meetings;
• voting rights of members;
• notice to members;
• dividends and reserves;
• accounts and audit;
• arbitration provision, if any;
• directors, their appointment and remuneration;
• the appointment and reappointment of the managing director,
manager and secretary;
• fixing limits of the number of directors
• payment of interest out of capital;
• common seal; and
• winding up.
 Alteration of Articles
• The alteration of the Articles should not sanction anything
illegal. They should be for the benefit of the company.
They should not lead to breach of contract with the third
parties.
• A company may alter its Articles with a special resolution.
Due importance and care should be given to ensure that
the alteration of AOA does not conflict with the provisions
of the Memorandum of Association or the Companies Act.
A copy of every special resolution altering the Articles
must be filed with the Registrar within 30 days of its
passing.
 Limitations of AOA
The fundamental right of a company to alter its articles is subject to
the following limitations:
• The alteration must not exceed the powers given by the
Memorandum of Association of the company or conflict with the
provisions thereof.
• It must not be inconsistent with any provisions of Companies Act or
any other statute.
• It must not be illegal or against public policies
• The alteration must be bona fide for the benefit of the company as a
whole.
• The alteration must not deprive any person of his rights under a
contract.
• It should not be a fraud on minority, or inflict a hardship on minority
without any corresponding benefits to the company as a whole.
• The alteration must not be inconsistent with an order of the court.
 Binding effect of Memorandum and Articles of
association
• The discussion on legal effect of memorandum and
articles may be made under the following heads-
1. Members bound to the company
2. Company bound to its members
3. Members bound to members
4. Company and the outsiders
1. Members bound to company- Each member must
observe the provisions of the articles and memorandum.
For instance, a company has right of lien on members’
shares, or to forfeit the shares on non-payment of calls.
Every member is bound by whatever is contained in the
memorandum and articles.
2. Company bound to its members: The company is
bound to the members to observe and follow the
articles. In case the company commits a breach of
the articles, members can restrain the company
from doing so, by bringing an injunction against the
company. Members may sue to restrain a company
from doing any ultra-vires or illegal acts or from
acting on a resolution obtained by fraud or which is
inconsistent with the Articles.
3. Members bound to other members: members
can take action only through the company but not
directly.
4. Company and the outsiders-The articles do not constitute any
binding contract as between a company and an outsider. An outsider
cannot take advantage of the articles to found a claim against the
company. This is based on the general rule of law that a stranger to a
contract cannot acquire any rights under the contract. Thus if a right
is conferred by the articles on a person in any capacity other than
that of the member, it cannot be enforced against the company.

Case- In Eley vs Positive Govt. Life Assurance Co. Ltd., the articles of
a company provided that E should be the solicitor of the company for
life and could be removed from office only for misconduct. E took
office and became a shareholder. But after sometime the company
dismissed him. E sued the company for damages for breach of
contract. It was held that the articles did not constitute any contract
between the company and the outsider and as such he had no cause
of action.
Distinction between articles of association and
memorandum of association
Memorandum of Association Articles of Association
1. It is character of company indicating nature of They are the regulation for the internal management
business & capital. It also defines the company’s of the company and are subsidiary to the
relationship with outside world memorandum.

2. It defines the scope of the activities of the They are the rules for carrying out the objects of the
company, or the area beyond which the actions of company as set out in the Memorandum.
the company cannot go.
3. It, being the charter of the company, is the They are subordinate to the Memorandum.
supreme document
4. Any act of the company which is ultra vires the Any act of the company which is ultra vires the
Memorandum is wholly void and cannot be ratified articles can be confirmed by the shareholders if it is
even by the whole body of shareholders. intra vires the memorandum.

5. Every company must have its own memorandum. A company limited by Shares need not have Articles
of its own. In such A case, Table A Applies.

6. There are strict restrictions on its alteration. They can be altered by a special resolution, to any
Some of the conditions of incorporation contained extent, provided they do not conflict with the
in it cannot be altered except with the sanction of Memorandum and the Companies Act.
the Central Government.  
Moa Aoa
 Doctrine of Ultra Vires
• The term “Ultra” means beyond and “Vires” means powers.
The term, therefore, means the doing of an act, which is
beyond the legal power, and authority of the company. It is
considered as an act outside the scope of the object of the
company.
• The Memorandum, being the constitution of the company
sets out the principal objectives, powers, scope and its area
of operation, both internal and external. A company,
therefore, can do anything within the scope of the powers
specified in the Memorandum.
• It has also an implied power to do all such things that are
fairly incidental to its main objects. If the company does
anything which is beyond the powers specified in the
Memorandum it shall be construed as an Ultra Vires act.
 Why the Doctrine?
• The objective of the Doctrine of Ultra Vires is to
ensure the shareholders and the creditors that the
fund and assets of the company will not be used for
any purpose other than those specified in the
Memorandum.
• Especially the creditors, while dealing with the
company can make themselves aware of the fact
whether his transaction with the company is ultra
vires or not. If it is found ultra vires, he can avoid
such transaction and thereby safeguard his interest.
• An act, legal in itself, but not authorized by the object
clause of the Memorandum of Association of a
company or statute, is Ultra Vires the company. Hence,
it is null and void.
• An act ultra vires the company cannot be ratified even
by the unanimous consent of all shareholders.
• If an act is ultra vires the directors of a company, but
intra vires the company itself, then the members of the
company can pass a resolution to ratify it.
• If an act is Ultra Vires the Articles of Association of a
company, then the same can be ratified by a special
resolution at a general meeting.
 Effect of Ultra Vires Acts
As stated, an ultra vires act is considered void ab initio. The
doctrine has the following effects in the given situations:
1. Personal Liability of Directors: It is the duty of the
Directors to see that the investors’ money is utilized for the
purposes laid down in the memorandum. On failure of the
duty, resulting in money being used for other objects they
can be sued personally without making the company a
party, and be made liable for compensation. If the ultra
vires act is proved to be deliberate or mala fide, criminal
action may also be brought.
2. Contracts Void: Any contract which is ultra-vires the
company, will be void and of no effect whatsoever. “An ultra
vires contract being void ab initio cannot become intra vires
by reason of estoppel, lapse of time, ratification, or delay”.
 However, if the contract is only ultra-vires the powers of the
directors but not ultra-vires the company, it may ratify such a
contract in the general meeting and thereby be bound by it.
3. Injunction: Any member of the company can bring injunction
against the company to restrain it from doing ultra-vires acts.
4. Ultra-vires Acquisition of Property: When money of a
company is spent ultra vires in acquiring a property, the right of
the company over that property would be secure. This is because
the property represents corporate capital, though acquired
wrongly.
• However, where the payment for an ultra vires acquired
property/asset has not been made, the vendor can obtain a
tracing order to recover the property from the hands of the
company. A company cannot be allowed to benefit from such
transactions at the cost of the other party.
5. Ultra vires lending- A person borrowing
money from the company under a contract
which is ultra vires, can be sued by the company
to recover the amount so lent.
6. Ultra vires torts- A company cannot be made
liable for torts committed by its officers in
connection with a business which is entirely
outside its objects. It can be made liable in torts
only if these are committed in the course of
intra vires activities by its servants or officers
within the course of their employment.
 Doctrine of Constructive Notice
• Section 399 of the Companies Act, 2013 states that any person
may, after payment of the prescribed fees:
- Inspect by electronic means any documents kept with the
registrar.
- Require a copy of any document including certificate of
incorporation.
• In line with this provision, the Memorandum of Association and
the Articles of Association are public documents once filed with
the registrar. Any person may inspect the same after payment
of the fees prescribed.
• The doctrine presumes that every person has knowledge of the
contents of the Memorandum of Association, Articles of
Association and every other document such as special
resolutions.
• The special resolutions are required to be
registered with the Registrar under the
Companies Act, 2013.Thus, if any person
enters into a contract, which is inconsistent
with the company’s Memorandum and Article,
he shall not acquire any rights against the
company and shall bear the consequences
himself.
• This doctrine protects the company from
outsiders.
 Doctrine of indoor management
• Various principles in the corporate world help to ensure the safety of
stakeholders. The doctrine of indoor management is exactly the
opposite of the doctrine of constructive notice. It provides some
protection to the outsiders against the company as it softened the
hardships that are faced by the outsiders while dealing with the
company.
• According to Turquand’s rule which is also known as the doctrine of
indoor management, it is not the responsibility of the person who is
dealing with the company to enquire those internal proceedings
related to the contract are followed if such person is satisfied that the
transaction he/she enters into is in accordance with the
memorandum and articles of association. This doctrine states that
the people who are dealing with the company to presume that the
internal proceedings are according to the document which is
submitted to the Registrar.
Origin of doctrine of indoor management
• From Royal British Bank vs. Turquand, the doctrine of indoor
management was originated. In this case, there was a
provision in the articles of association which states that the
borrowing of money can be done on bonds and for this, a
special resolution needs to be passed in a general meeting.
• The company said that they are not bound to pay the
money as no such resolution was passed in a general
meeting. But it was held that the company is bound to pay
back the money as the plaintiffs have a right to infer that a
resolution was passed related to this in a general meeting as
directors could borrow subjected to the resolution.
 Exceptions to the Doctrine of indoor
management
Following are the exceptions to the doctrine of indoor management:
1. Knowledge of irregularity: if the person who is dealing with the
company has knowledge about the fact that there is a lack of
authority of the person who is acting on behalf of the company. The
outsider is well known about the irregularity so this doctrine will not
apply in this case.
Case- In Howard V Patent Ivory Manufacturing Company , the
Articles of the company empowered the directors to borrow up to
1,000 pounds. The limit could be raised provided consent was given
in the General Meeting. Without the resolution being passed, the
directors took 3,500 pounds from one of the directors who took
debentures. Held, the company was liable only to the extent of
1,000 pounds. Since the directors knew the resolution was not
passed, they could not claim protection under the Turquand’s rule.
2 Forgery: Transactions involving forgery are void ab
initio since it is not the case of absence of free consent;
it is a situation of no consent at all. This has been
established in the Ruben V Great Fingall Consolidated
case. The facts of the case –
A person was issued a share certificate with a common
seal of the company. The signature of two directors and
the secretary was required for a valid certificate. The
secretary signed the certificate in his name and also
forged the signatures of the two directors. The holder
contented that he was not aware of the forgery, and he
is not required to look into it. The Court held that the
company is not liable for forgery done by its officers.
3. Negligence: if the person dealing with the company
behaves negligently then, in that case, this doctrine will
not apply. Thus when an officer does something which
he should not have done it and the person dealing with
such officer rely on him rather than making proper
enquiries then the person cannot take the help of the
doctrine of indoor management.
Case- In the case of Anand Bihari Lal V Dinshaw & Co,
the plaintiff accepted a transfer of property from the
accountant. The Court held that the plaintiff should
have acquired a copy of the Power of Attorney to
confirm the authority of the accountant. Thus, the
transfer was considered void.
 Prospectus
• The promoters of a public company will have to take steps
to raise the necessary capital for the company, after having
obtained the Certificate of Incorporation. A public company
may invite the public to subscribe to its shares or
debentures. Prospectus are to be issued for this purpose. To
issue a prospectus is very essential for a public company.
• If the promoters of the company are confident of raising the
required capital privately from their friend or relatives, they
need not issue a prospectus. In such a case, a statement in
lieu of prospectus must be filed with the Registrar.
• A private company is not allowed to issue a prospectus since
it cannot invite the general public to subscribe to its shares
and debentures.
 Define prospectus
• Section 2(36) defines a prospectus an “any document described
as issued as a prospectus and includes any notice, circular,
advertisement or other document inviting deposits from the
public or inviting orders from the public for the subscription or
purchase of any share in, or debentures of, a body corporate”.
• In simple words, a prospectus may be defined as an invitation
to the public to subscribe to a company’s shares or debentures.
By virtue of the Amendment Act of 1974, any document inviting
deposits from the public shall also come within the definition of
prospectus. The word “Prospectus” means a document which
invites deposits from the public or invites offers from the public
to buy shares or debentures of the company. A document will
be treated as a prospectus only when it invites offers from a
public.
 OBJECTS OF PROSPECTUS
The main objects of a prospectus are as follows:
1. To bring to the notice of public that a new
company has been formed.
2. To preserve an authentic record of the terms of
allotment on which the public have been invited to
but its shares or debentures.
3. To secure that the directors of the company
accept responsibility of the statement in the
prospectus
 CONTENTS OF PROSPECTUS
• Registered company office address.
• Company secretary, auditors, bankers, underwriters, etc., their respective names and
address.
• Opening and closing dates of the issue.
• Allotment letters and refunds declaration within the prescribed time.
• A statement by the board of directors about the separate bank account where all monies
received out of shares issued are to be transferred.
• Underwriting of the issue their details.
• Directors, auditors, bankers Consent to the issue, expert’s opinion if any.
• The authority for the issue and the details of the resolution passed thereof.
• Procedure and time schedule for allotment and issue of securities.
• The Capital structure of the company with a comprehensive outlook.
• Main objects and location of the present business of the company.
• Public offer and terms of the present issue and its objective.
• Minimum subscription, amount payable by way of premium, issue of shares otherwise than
on cash.
• Appointment and remuneration details of the director
• Sources of promoter’s contribution.
• Declaration that all the provisions of companies act have been complied with.
 Types of prospectus
• Red Herring Prospectus
• Shelf Prospectus
• Abridged prospectus
• Deemed Prospectus
 Red Herring Prospectus:
• It is the offer document which contains all the details about the offer of
securities. However it does not include quantum of issue and the price of
securities.
• Furthermore, it is not the final prospectus as Company can update it several
times before the final issue.
• Issuer company needs to file it with Registrar at least 3 days prior to the
opening of offer.
• It is named in such a way because it contains a para in Red ink. That states
that Company is not attempting to sell the shares before approval of SEBI.
• A red herring prospectus shall carry the same obligations as are applicable to
a prospectus and any variation between the red herring prospectus and a
prospectus shall thus highlighted as variations in the prospectus.
• Upon the closing of the offer of securities, the final prospectus stating therein
the total capital raised, whether by way of debt or share capital, and the
closing price of the securities and any other details as not included in the red
herring prospectus shall then filed with the Registrar and the Securities and
Exchange Board.
 Shelf Prospectus
• Company can issue more than one issue from the single document which
we call Shelf Prospectus.
• Furthermore, banks and financial institutions usually issue it.
• In this case once the company files it with ROC, there is no need to file
fresh prospectus at every issue.
• However it has the validity of up to one year.
• A company filing a shelf prospectus shall be required to file an information
memorandum containing all material facts relating to new charges created,
changes in the financial position of the company as have occurred between
the first offer of securities or the previous offer of securities and the
succeeding offer of securities and such other changes as may be
prescribed, with the Registrar within the prescribed time, prior to the issue
of a second or subsequent offer of securities under the shelf prospectus.
• Where an information memorandum then filed, every time an offer of
securities is made, such memorandum together with the shelf prospectus
shall constitute the prospectus.
 Abridged Prospectus
• Abridged Prospectus is the actual summary of a prospectus. It contains
all the salient features of a prospectus. The original prospectus that a
company files to the exchange regulator is too large. Reading the entire
prospectus may be too much time consuming for an investor. Instead,
they go through the abridged prospectus, which gives them the basic
idea about the company.
• The abridged prospectus contains all the important and materialistic
information. No company will issue the share buying from without the
abridged prospectus attached to it so that investors can take a well-
informed decision.
• A copy of the prospectus shall, on a request being made by any person
before the closing of the subscription list and the offer, be furnished to
him.
• If a company makes any default in complying with the above provisions,
it shall be liable with a penalty of fifty thousand rupees for each default.
 Deemed Prospectus
• It is a document which the company issues in case of offer for sale of
securities to the public.
• Moreover this document is an invitation to public to purchase the shares of
company through an intermediary such as Issuing House.
• Section 64(1) provides that where a company allots or agrees to allot any
shares or debentures with a view to these being offered for sale to the
public, any document by which the offer of sale to the public is made, shall
for all purposes be deemed to be a prospectus issued by the company.
• Further, an allotment of, or an agreement to allot, shares or debentures
shall be deemed to have been made with a view to the shares or
debentures being offered for sale to the public, if it is shown;
(i) That the offer of the shares or debentures for sale to the public was made
within six months after the allotment or agreement to allot;
(ii)That at the date when the offer was made, the whole consideration to be
received by the company in respect of the shares or debentures had not
been received by it.
 Mis-statement in Prospectus
• A prospectus is an invitation to the public to subscribe to the
shares or debentures of a company. Every person authorizing
the issue of prospectus has a primary responsibility to ensure
that the prospectus contains the true state of affairs of the
company and does not give any fraudulent picture to the public.
• People invest in the company on the basis of the information
published in the prospectus. They have to be safeguarded
against all wrongs or false statements in prospectus. Prospectus
must give a full, accurate and a fair picture of material facts
without concealing or omitting any relevant fact.
• The statements which do not qualify to the particulars
mentioned in the prospectus or any information is intentionally
and willfully concealed by the directors of the company, would
be considered as misstatement.
Remedies for Mis-statement in Prospectus

The remedies available to a person who has

Subscribed for shares on the faith of a
misleading prospectus, ,may be grouped into
two categories-
1. Remedies against the company.
2. Remedies against the directors, promoters
and experts.
 1. Remedies against the company
• The following two remedies are available to an injured party against the
company for misrepresentation in the prospectus under general law :
i) Rescission of the contract to take or accept shares: contract based on
misleading prospectus is voidable at the option of aggrieved party. For this,
the shareholder has to seek the remedy within a reasonable time and has
to surrender the shares to the company. Further, these conditions must be
satisfied:
• The prospectus was issued by the company or on its behalf by the
directors or it was deemed to be a ‘prospectus issued by the company by
implication’ under Section 25 or Section 28.
• The prospectus contained a misrepresentation of facts, and not of law or
of opinion.
• The misrepresentation was material and related to such facts as likely to
influence the judgement of the prospective investor
• It must be proved that the subscriber actually relied upon the mis-
statement while applying for shares.
 Contd..
Loss of the right of rescission : The right of rescinding the contract
however, is lost under the following circumstances.
• If the allottee does not start the proceedings within a reasonable
time after coming to know of the misrepresentation.
• If he expressly or impliedly affirms his contract after becoming
aware of the falsity of the statement e.g., accepts dividend, pays
calls money or tries to sell the shares.
• If the company goes into liquidation before he has started the
proceedings to rescind the contract.
• If he is a man of such experience that he is not likely to be misled
by the mis-statements.
ii) Damages for fraudulent mis-statement or concealment-Any
such person induced by such statement or omission is also entitled
to sue the company for damages. For this, he has to first rescind his
contract and give up or surrender his shares to the company.
 Contd..
• As an allottee of the shares he cannot claim damages
and also, side by side, retain his shares. But to avail this
remedy, the subscriber must prove :
 that the mis-statements were made fraudulently, and
 that he has actually been deceived, in addition to proving
other facts necessary to succeed in a suit of rescission.
• The usual claim against the company is for rescission of
the contract of allotment. Damages are generally claimed
from the Directors, Promoters and other persons who
had authorized the issue of the prospectus personally, or
from experts who had signed the report referred to in
the prospectus.
 2. Remedies against the directors, promoters and
experts
The liability of the directors, promoters, etc. for a misleading
prospectus can be studied under the following heads:
i) Civil liability
ii) Criminal liability

i) Civil liability: 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 every person who-
• Is a director of the company at the time of the issue of the
prospectus.
• Has authorised 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. 
• Is a promoter of the company;
• Has authorised the issue of the prospectus; and
shall be liable to pay compensation to every person who has
sustained such  loss or damage.

Defence against Civil Liability- Every person made liable to pay

compensation for any loss or damages may escape such liability
by proving that:
i) Having consented to become a director of the company, he
withdrew his consent before the issue of the prospectus and that
it was issued without his authority or consent.  
ii) The prospectus was issued without his knowledge or consent
and that on becoming aware of its issue he forth with gave
reasonable public notice that it was issued without his knowledge
or consent.
 Contd..
ii) Criminal liability: Criminal liability involves a fine or a term of
imprisonment or both on the guilty party. Section 34 states that
where a prospectus includes an untrue statement,  every person
who authorizes the issue of such prospectus shall be liable” under
Section 447, unless he proves either-
 That the statement or omission was immaterial, or
 That he had reasonable grounds to believe it to be true.
• As per Section 447, any person who is found to be guilty of fraud,
shall be punishable with imprisonment for a term ranging from
six months to ten 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.
• Where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
 Statement in Lieu of Prospectus
• The Statement in Lieu of Prospectus is a document filed with the
Registrar of the Companies (ROC) when the company has not
issued a prospectus to the public for inviting them to subscribe
for shares
• The statement must contain the signatures of all the directors or
their agents authorized in writing. It is similar to a prospectus but
contains brief information.
• It is essential for a public company to issue prospectus only if
they wish to invite public to raise the company’s capital. It must
be submitted to the registrar’s office before publication.
• If they don’t necessitate public for raising capital and can
formulate arrangements of raising capital with the support of
their friends, relatives or underwriters, it is not necessary for
them to issue a prospectus. But as a substitute, they have to file a
statement in lieu of Prospectus with the Registrar.