5 Main Criteria Required for Floatation of Companies

The following points highlight the five main criteria required for floatation of companies. The criteria are: 1. Documents 2. Prospectus 3. Deposits 4. Minimum Subscription 5. Certificate of Commencement of Business 6. Returns as to Allotment.

Floatation of Companies: Criteria # 1. Documents:

It is usually a “promoter” who thinks of the idea of a business to be run by a company. The promoter then makes detailed investigations to find out whether the idea is really a proposition; and if he thinks that the proposed company can run successfully, he takes such steps as will ensure its smooth running.

He then gets the following documents prepared and sends them to the Registrar of Companies together with the necessary fees:-

(a) The Memorandum of Association:

It contains six clauses:

(i) The name of the company with “Limited” as the last word if the liability of the members is limited (“Private Limited” has to be used by private limited companies);

(ii) The State in which the registered office is to be situated

(iii) The objects of the company;

(iv) A statement that the liability of the members is limited;

(v) The amount of authorized share capital and its divisions into shares; and

(vi) The declaration of association. The memorandum must be printed, divided into paragraphs, numbered consecutively, and must be signed by at least seven persons who each agree to take one share at least.

(b) The Articles of Association:

It contains the rules and regulations for the conduct of the company’s business. A private company has to prepare its own Articles of Association. But a public company may not prepare it, in which case provisions of Table A of the Companies Act will be applicable. Table A contains model articles.

(c) The agreement, if any which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager.

(d) In the case of a public company limited by shares, a list of the directors who have agreed to become the first directors of the company and their written consent to act as directors and take-up qualification shares, if any. This requirement does not apply to a private company. Further, if a separate list of directors is not filed, the subscribers to the memorandum will be deemed to be the first directors of the company.

(e) A declaration that all the requirements of the Companies Act and other formalities relating to registration have been complied with.

It has to be signed by any of the following persons:

(i) an advocate of the Supreme Court or of a High Court;

(ii) an attorney or a pleader entitled to appear before a High Court;

(iii) a secretary or a chartered accountant in whole-time practice in India, who is engaged in the formation of the company and

(iv) a person named in the articles of the company as a director, manager or secretary of the company

(f) Notice of the address of the Registered Office of the company. However, this notice may be given later within 30 days after registration.

Certificate of Incorporation:

The Registrar will issue the Certificate of Incorporation, if he is satisfied that the requirements of the Companies Act have been complied with. He will enter the company’s name in the Register. The company comes into existence.

Floatation of Companies: Criteria # 2. Prospectus:

A private limited company can commence business immediately after incorporation, but a public limited company has to wait till the Registrar grants to it the Certificate of Commencement of Business. For this purpose, the company has to issue a Prospectus (or prepare a Statement in lieu of Prospectus) signed by every director before its publication and file a copy with the Registrar.

Section 2 (36) defines a Prospectus as ” any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate”.

The main purpose of the Prospectus is to invite the public to make deposits and to subscribe for the shares and debentures of the company so that the company collects the necessary funds. Whenever the company invites deposits or makes a public issue of its shares or debentures, it will be required to publish a prospectus. It must be dated and that date, prima facie, will be the date of its issue.

The Prospectus must be issued within 90 days of its date by newspaper advertisement or otherwise. The prospectus is the basis of contract between the company and the person who ‘buys’ the shares on the strength of the Prospectus.

Therefore, if the Prospectus contains any misleading statement or if there is a material non-disclosure, the shareholder is entitled to rescind the contract within a reasonable time but before winding up of the company. In addition to the right of rescission, the allottee of shares is entitled to claim compensation from any director, promoter or any other person who authorised the issue of the Prospectus.

If the Prospectus contains a statement made by an expert, he must not be a person who is or has been engaged or interested in the formation or promotion of or in the management of the company. Further, the expert’s written consent to the inclusion of the statement (in the form and context in which it is included) must be obtained.

The Central Government vide Notification No, S.O.666 (E) dated October 3, 1991 has revised the format of the prospectus as given in Schedule II of the Companies Act to ensure greater information regarding the company, its management, the project for which the money is proposed to be raised by the issue, financial performance of the company during the five financial years immediately preceding the issue of prospectus and the management perception of the risk factors in the investment.

The company has also to furnish particulars as to other listed companies under the same management within the meaning of the Section 370 (IB), which have made any capital issue during the last three years. It will also have to state whether it has obtained credit rating in case the prospectus is in connection with the issue of debentures or preference shares.

The objective is to make the investor better placed to make an informed decision whether to invest or not to invest in shares or debentures offered by the company through a public issue. The draft prospectus is vetted by SEBI to ensure adequacy of disclosures.

Section 68A requires every prospectus to prominently reproduce the following:

“Any person who:

(a) Makes in a fictitious name an application to a company for acquiring, or subscribing for, any shares therein, or

(b) Otherwise induces a company to allot, or register any transfer of, shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend to five years.”

The Registrar may refuse to register a Prospectus, if:

(a) It does not show its date;

(b) It does not comply with requirements of Section 56 as to matters and reports to be set out;

(c) It contains statements of experts engaged or interested in the formation or management of the company;

(d) It does not contain the expert’s consent, when his opinion is permissible and is inserted.

(e) It does not contain the consent in writing of directors, and copy of the documents mentioned in section 60(1) or does not comply with the provisions of sections 60(2) with regard to statements that a copy of it has been filed with the Registrar; and

(f) It is not accompanied by the consent in writing of the auditor, legal adviser, etc., if named in the prospectus to act in that capacity.

A copy of every contract, or a memorandum giving full particulars of a contract not reduced to writing, and if any adjustment of figures has been made in any auditor’s and accountant’s report, then a written statement signed by the person making the report has to accompany the Prospectus.

Floatation of Companies: Criteria # 3. Deposits:

Section 58A provides that the Central Government, in consultation with the Reserve Bank of India, may make rules which must be followed by companies seeking to raise deposits from the public. The rules may provide the minimum limits for such deposits and also the form and the manner of the advertisement showing the financial position of the company.

Acceptance of new deposits and renewal of old deposits are governed by these rules.

As far as may be, the provisions of the Companies Act in respect of prospectus also apply to the advertisement for deposits. Every deposit accepted by a company after the commencement of the Companies (Amendment) Act 1988, shall be repaid in accordance with the terms and conditions of such deposits.

Floatation of Companies: Criteria # 4. Minimum Subscription:

For a new company issuing shares for the first time, minimum subscription means the amount which, in the opinion of the Board of Directors, is the minimum to be raised by the issue of shares so as to provide for the following:

(i) The price of any property purchased or agreed to be purchased;

(ii) All preliminary expenses, including underwriting commission and brokerage;

(iii) Repayment of money borrowed by the company for the above purposes;

(iv) Working capital; and

(v) Any other expenditure

The significance of the minimum subscription mentioned above is that if the newly incorporated public company fails to raise the minimum subscription, it will not be able to get certificate of commencement of business.

Obviously, the purpose of this provision is to ensure that only companies with sufficient capital are allowed to commence business. If the company fails to raise minimum subscription within 120 days from the date of the first issue of prospectus, it is required to return whatever amount it has received from the applicants within the next ten days i.e., within 130 days from the date of the issue of the prospectus.

There is another minimum subscription laid down by the SEBI for all the public and rights issues of shares. According to it, where a company does not receive 90% of the issued amount from public subscription plus accepted devolvement from underwriters or from other sources in case of under- subscribed issues, within 60 days from the date of closure of the issue, the company will refund the subscription amount in fall.

It applies to all cases of public and rights issue but is not mandatory in case of resale of securities.

Prospectus states the minimum period for which the company will continue to receive applications for shares. It is called keeping the subscription list open. Subscription list must be kept open for at least three days. It shall not open before the beginning of the fifth day from the date of issue of prospectus.

The moneys received from applicants of shares have to be kept deposited in a scheduled bank until the certificate of commencement of business is obtained.

In case a company has already received the certificate of commencement of business, application money has to be kept deposited in a scheduled bank until the entire amount payable on applications in respect of the minimum subscription has been received by the company.

Floatation of Companies: Criteria # 5. Certificate of Commencement of Business:

A private company, can commence business on incorporation but other companies having share capital cannot do so unless they also obtain a certificate of commencement of business.

This certificate will be granted if the following conditions have been fulfilled:

(1) The company has issued a Prospectus and has filed a copy with the Registrar or if it has not issued a Prospectus, a Statement in lieu of Prospectus has been prepared and filed with the Registrar.

(2) The minimum number of shares which have to be paid for in cash has been subscribed and allotted.

(3) Every director has paid, in respect of shares for which he is bound to pay, an amount equal to what is payable on shares offered to the public on application and allotment

(4) No money is, or may become, liable to be repaid to applicants for any shares or debentures offered for public subscription by reason of any failure to apply for, or to obtain, permission for the shares or debentures to be dealt with on any recognised stock exchange.

(5) A statutory declaration by the secretary or one of the directors that the aforesaid requirements have been complied with is filed with the Registrar.

Floatation of Companies: Criteria # 6. Returns as to Allotment:

Within 30 days of making any allotment, the company must:

(a) File with the Registrar a return of the allotment stating the number and nominal amount of the shares comprised in the allotment, the names, addresses and occupations of the allottees, and the amount, if any, paid or due to be paid on each share;

(b) In the case of shares (not being bonus shares) allotted as fully or partly paid-up otherwise than in cash, produce for the inspection and examination of the Registrar the contract in writing constituting the title of the allottees to the allotment together with any contract of sale, or a contract for services or the other consideration in respect of which that allotment was made, such contract being duly stamped, and file with the Registrar verified copies of all such contracts and a return stating the number and nominal amount of shares so allotted, the extent to which they are to be treated as paid up, and the consideration for which they have been allotted; and

(c) In the case of bonus shares, file with the Registrar a return stating the number and nominal amount of the bonus shares so allotted with the names, addresses, and occupations of the allottees together with a copy of the resolution authorizing the issue of such shares.

If shares have been issued at a discount the company must attach with the return the following:

(i) A copy of the relevant resolution of the company;

(ii) A copy of the order of the Central Government; and

(iii) A copy of the order of the Board if the discount offered exceeds 10%.

Notes:

(1) The return must not describe shares as having been allotted for cash unless cash has been actually received.

(2) The provisions as regards return as to allotment do not apply to reissue of forfeited shares.

Effect of Irregular Allotment:

If a company, without complying with any of the conditions contained in sections 69 and 71 of the Companies Act (these relate to minimum subscription, etc.), makes an allotment, the applicant of the shares may avoid the allotment within 2 months after the statutory meeting, but not later than that.

If the company is not required to hold a statutory meeting or if the allotment is made after such a meeting, the allotment can be avoided within 2 months of the allotment. The directors are liable to compensate the company or the allottee for any loss, damage, or costs suffered through irregular allotment.