Bhagya Achiever Test Series

CA inter

Paper 2: Corporate and Other Laws

Chapter 3: Prospectus and Allotment of Securities

Total Marks: 30

Time: 54 min

Question1. (5 Marks)

Examine the validity of the following statement with reference to the

provisions of the Companies Act, 2013.

The Articles of Association of X Limited contained a provision that the

underwriting commission may be paid up to 4% of the issue price of the
shares. However, the Board of Directors have decided to pay the underwriting
commission of 5% to Deal & Co., the underwriters."

Answer1. (5 Marks)

Section 40 (6) of the Companies Act 2013, provides that a company may pay
commission to any person in connection with the subscription to its securities,
subject to the conditions prescribed under the Companies (Prospectus and
Allotment of Securities) Rules, 2014. Rule 13 states that the rate of commission
paid or agreed to be paid shall not exceed, in case of shares, five percent (5%)
of the price at which the shares are issued or a rate authorised by the articles,
whichever is less.

In the given problem, the Articles of X Ltd. have prescribed 4% underwriting

commission but the directors decided to pay 5% underwriting commission.

Therefore, the decision of the Board of Directors to pay 5% underwriting

commission to the underwriters (i.e. Deal & Co.), is invalid.

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Question2. (6 Marks)

Johnson Limited goes for Public issue of its shares. The issue was over
subscribed. A default was committed with respect to allotment of shares by
the officers of the company. There were no Managing Director, Whole time
Director or any other officer/person designated by the Board with the
responsibility of Complying with the provisions of the Act. State, who are the
persons considered as officers in default under the Companies Act, 2013.
Examine who will be considered in default in the instant case?
Answer2. (6 Marks)

As per section 39 of the Companies Act, 2013, which deals with the allotment
of securities, states that in case of any default related to minimum subscription
and of return of allotment money under subsection (3) and (4), the company
and its officer who is in default shall be liable to a penalty, for each default, of
one thousand rupees for each day during which such default continues or 1
lakh rupees, whichever is less.
As per section 2(60) of the Act, Officer who is in default, has been described as:
For the purpose of any provision in this Act which enacts that an officer of the
company who is in default shall be liable to any penalty or punishment by way
of imprisonment, fine or otherwise, means any of the following officers of a
company, namely:—
(i) whole-time director (WTD);
(ii) key managerial personnel (KMP);
(iii) where there is no key managerial personnel, such director or
directors as specified by the Board, or all the directors, if no director
is so specified;
(iv) any person who, under the immediate authority of the Board or any
key managerial personnel, is charged with any responsibility.
(v) any person in accordance with whose advice, directions or
instructions the Board of Directors of the company is accustomed to
act,
(vi) every director, in respect of a contravention of any of the provisions
of this Act,

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 (vii) in respect of the issue or transfer of any shares of a company, the
share transfer agents, registrars and merchant bankers to the issue or
transfer;
conclusion
In the given case, as stated Johnson Limited, committed a default with
respect to the allotment of shares by the officers. As in company there were
no managing director, whole time director, or any other officer/person
designated by the Board with the responsibility of complying with the
provisions of the Act. Therefore, in such situation, all the directors of the
company may be treated as officers in default.

Question3. (5 Marks)

What is a Shelf-Prospectus? State the important provisions relating to the

issuance of Shelf-Prospectus under the provisions of Companies Act, 2013.
Answer3. (5 Marks)

Shelf prospectus – As per the Explanation given in Section 31 of the Companies

Act, 2013, the expression “shelf prospectus” means a prospectus in respect of
which the securities or class of securities included therein are issued for
subscription in one or more issues over a certain period without the issue of a
further prospectus.
A company is required to issue a prospectus each time it accesses the capital
market. It leads to unnecessary repetition for a company which makes more
than one offer of securities in a year to mobile funds from the public. A way
out is shelf prospectus which remains valid (on the shelf) a specified time
period during which offers for securities may be made by a company to the
public without going through the arduous exercise of issuing fresh prospectus
every time.
Provisions relating to issue of Shelf-prospectus:
1. Filing of shelf prospectus with the Registrar
Shelf prospectus may be filled with the Registrar at the stage of first
offer of securities, by class or classes of companies as the Securities and
Exchange Board may provide by regulations in this behalf.

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 It has to indicate a period not exceeding one year as the period of
validity of such shelf prospectus.
The period of validity is to commence from the date of opening of the
first offer of securities under such prospectus.
In respect of any second or subsequent offer of such securities issued
during the period of validity of such prospectus, no further prospectus is
required.
2. Filing of ‘Information Memorandum’ with the Shelf Prospectus
A company filing a shelf prospectus shall be required to file an
information memorandum with the Registrar within the prescribed time,
prior to the issue of a second or subsequent offer of securities under the
shelf prospectus containing;
a. All material facts relating to new charges created
b. 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
c. Such other changes as may be prescribed,

The information memorandum shall be prepared in Form PAS-2 and filed

with the Registrar along with the fee as provided in the Companies
(Registration Offices and Fees) Rules, 2014 within one month prior to
the issue of a second or subsequent offer of securities under the shelf
prospectus.

3. Safeguard (in case of changes) to applicants who made payment in

advance
It is provided that where a company or any other person has received
applications for the allotment of securities along with advance payments
of subscription before the making of any such change, the company or
other person shall intimate the changes to such applicants and if they
express a desire to withdraw their application, the company or other
person shall refund all the monies received as subscription within fifteen
days thereof.

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 4. Information Memorandum together with Shelf Prospectus is deemed
Prospectus
Where an information memorandum is filed, every time an offer of
securities is made under sub-section (2), such memorandum together
with the shelf prospectus shall be deemed to be a prospectus.

Question4. (5 Marks)

A Ltd. issued 1,00,000 equity shares of Rs. 100 each at par to the public by
issuing a prospectus. The prospectus discloses the minimum subscription
amount of Rs. 15,00,000 required to be received on application of shares and
share application money shall be payable at Rs. 20 per share. The prospectus
further reveals that A Ltd. has applied for listing of shares in recognized stock
exchanges of which 1 application has been rejected. The issue was fully
subscribed and A Ltd. received an amount of Rs. 20,00,000 on share
application. A Ltd., then proceeded for allotment of shares.

Examine the three disclosures in the above case study which are the deciding
factors in an allotment of shares and the consequences for violation, if any
under the provisions of the Companies Act, 2013.

Answer4. (5 Marks)

Relevant Provision:

As per the requirement of the question, disclosures which are the deciding
factors in an allotment of shares are laid down in section 39 of the Companies
Act, 2013.
According to Section 39(1), no allotment of any securities of a company offered
to the public for subscription shall be made unless-

i. the amount stated in the prospectus as the minimum amount has been
subscribed, and
ii. the sums payable on application for the amount so stated have been paid
to, and received by the company by cheque or other instrument

The amount payable on application on every security shall not be less than five
per cent of the nominal amount of the security or such other percentage or
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amount, as may be specified by the Securities and Exchange Board by making
regulations in this behalf.

Given Case and Analysis:

In the question, A Ltd. issued shares to public by issuing of prospectus,

disclosing minimum subscription, sum payable on application for the amount;
and the amount received on share application is more than 5% of the nominal
amount of the security.

Further, it revealed that A Ltd. has applied for listing of shares in 3 recognized
stock exchanges of which one application was rejected.

In the given instance, there is compliance to section 23, as nothing is talked

about matters required to be included in the prospectus under section 26 (1)
and about filing with the registrar: assuming that the said requirements have
been complied with, requirement of section 39 as regards obtaining of
minimum. subscription and the minimum amount receivable on application
(not less than 5% of the nominal value of the securities offered) are fulfilled.

The provisions of section 40 of the Companies Act, 2013 states that every
company making public offer shall, before making such offer, make an
application to one or more recognized stock exchange or exchanges and obtain
permission for the securities to be dealt with in such stock exchange or
exchanges.

The above provision is very clear that not only the company has to apply for
listing of the securities at a recognized stock exchange, but also obtain
permission thereof from all the stock exchanges where it has applied, before
making the public offer,

Since one of the three recognized stock exchanges, where the company has
applied for enlisting, has rejected the application and the company has
proceeded with making the offer of shares, it has violated the provisions of
section 40. Therefore, this shall be deemed to be irregular allotment of shares.

Conclusion:

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Consequently, A Ltd. shall be required to refund the application money to the
applicants in the prescribed manner within the stipulated time frame.

Question5. (5 Marks)

TDL Ltd., a public company is planning to bring a public issue of equity shares in
June, 2018. The company has appointed underwriters for getting its shares
subscribed. As a Chartered Accountant of the company appraise the Board of
TDL Ltd. about the provisions of payment of underwriter's commission as per
Companies Act, 2013,

Answer5. (5 Marks)

The provisions of the Companies Act, 2013 regarding the payment of

underwriter's commission are as follows:

Payment of commission: A company may pay commission to any person in

connection with the subscription to its securities, whether absolute or
conditional, subject to such conditions as given in Rule 13 of the
Companies (Prospectus and Allotment of Securities) Rules, 2014.Conditions for
the payment of commission:
(a) the payment of such commission shall be authorized in the company's
articles of association;
(b) the commission may be paid out of proceeds of the issue or the profit of
the company or both;

Rate of commission: The rate of commission paid or agreed to be paid shall

not exceed, in case of shares, 5% of the price at which the shares are issued or
a rate authorised by the articles, whichever is less, and in case of debentures,
shall not exceed two and a half per cent of the price at which the debentures
are issued, or as specified in the company's articles, whichever is less.

Disclosure of particulars: the prospectus of the company shall disclose the

following particulars-

(a) the name of the underwriters

(b) the rate and amount of the commission payable to the underwriter; and

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(c) the number of securities which is to be underwritten or subscribed by the
underwriter absolutely or conditionally.

No commission to be paid: There shall not be paid commission to any

underwriter on securities which are not offered to the public for subscription;

Copy of contract of payment of commission to be delivered to registrar: a

copy of the contract for the payment of commission is delivered to the
Registrar at the time of delivery of the prospectus for registration.

MCQ’s

1. Under Section 41 of the Companies Act, 2013, who is authorized to issue

Global Depository Receipts (GDRs)?
A) Any private limited company
B) Only public companies as per prescribed conditions
C) Government authorities
D) Only SEBI-registered foreign banks (2 Marks)

Answer: B

Explanation: As per Section 41(1) of the Companies Act, only public

companies are allowed to issue GDRs as per SEBI guidelines and prescribed
conditions.

2. Section 40 of the Companies Act, 2013 requires every company shall make
an application to one or more Recognized Stock Exchange or Exchanges
before making public offer. Madhav Casting Limited filed an application to
three exchanges for the securities to be dealt with in such stock exchanges,
it received permission from couple of them and proceed with public issue.
There will be:
(a) No penalty, as application has been filed
(b) Penalty on Madhav Casting Limited ranging from Rs. 5 lakhs to Rs. 50
lakhs

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 (c) Penalty on Madhav Casting Limited ranging from Rs. 5 lakhs to Rs. 50
lakh and every officer of the company who is in default ranging from Rs.
50 thousand to Rs. 3 lakhs
(d) Penalty on Madhav Casting Limited ranging from Rs. 5 lakhs to Rs. 50
lakhs and every officer of the company who is in default ranging from Rs.
50 thousand to Rs. 3 lakh and/or Imprisonment upto one year.

(2 Marks)

Answer: (c)

Explanation:

Penalty on Madhav Casting Limited ranging from Rs. 5 lakh to Rs. 50 lakh and
every officer of the company who is in default ranging from Rs. 50 thousand to
Rs. 3 lakh.

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