Chapter seven prospectus 1 Definition and nature of

Chapter seven prospectus 1. Definition and nature of Prospectus • Prospectus means any notice, circular, advertisement or other invitation offering to the public for subscription or purchase any shares or debentures of a company. • Prospectus is not an offer but a mere invitation to treat. • The objective of prospectus is to arouse public interest in the proposed company and induce the general public to buy its shares and debentures.

Contents of Prospectus (i) Directors and auditors of the Company Names, occupations, postal address, directors’ qualification shares, directors’ remuneration and directors interest in the company’s promotion. (ii) Formation Expenses Benefits paid to promoters underwriting commission etc. (iii) Investor Information • The minimum subscription • The amount payable on application • The time of opening of the subscription lists • Voting and dividend rights attached to different classes of shares.

(iv) Company’s Business and Assets - Venders of property of the company - Amount paid for property bought or goodwill - Length of time business has been carried on. 4. Reports to be set out in Prospectus The prospectus also contains reports such as: (i) Auditor’s report showing profit and loss in each of the last five years, rates of dividend paid during the last five years, assets and liabilities at the date of last accounts and details relating to subsidiary companies.

(ii) Where the proceeds of the issue are to be used to buy a business, a report by named accountants on profit and loss of the business for each of the last five years. (iii) Where the proceeds of the issue are to be used to buy shares in any other body corporate, a report by named accountants on profit or loss of that body corporate for each of the last five years.

5. prospectus and disclosure Information in prospectus must be true, accurate and give right picture of the company. 6. Effect of Disclosure -The prospectus should not contain any misrepresentation of material and misleading information. - The subscriber may rescind if there is discovered misrepresentation of facts with following conditions: § When misrepresentation of facts influence the judgment of the subscriber.

• It must have induced to shareholder to take shares. • It must be untrue • The deceived shareholder is an allottee and he must have relied on the statement of the prospectus which means that he did not purchased shares in the open market. • The omission of material fact must be misleading before rescission is granted.

6. Right of rescission As soon as the subscriber get to know the misleading of the prospectus; the proceeding of rescission should start. § Affirmation Attempts to sell the shares, executes a transfer, pays calls or receive dividends and attends at general meeting of the company in person or by proxy § Unreasonable delay § Winding up

7. statement in lieu of prospectus Statement in lieu of prospectus is required to be filed with registrar for registration on two occasion which are: • when public company arranges privately for its capital subscription. • when a private company becomes a public company shall deliver to the Registrar a statement in lieu of prospectus.

Form of statement in lieu of prospectus must be signed by every person who is named therein as a director or a proposed director of the company or by his agent authorized in writing and any allotment of shares before registration of statement in lieu of prospectus shall be void at the discretion of the applicant. The statement must be the form and contain the same information of prospectus. 8. stock exchange requirement Stock exchange is a place where stocks or shares are bought and sold through stockbrokers.

Conditions required for the permission of dealing with stock exchange: § completion of agreement § history of the company § Company must be public company § Satisfaction of the council of stock exchange on share offered § Paying hearing fees and quotation fees § Copies of company’s articles

9. Underwriting commission Company pays certain commission to everyone who guarantees that the shares and debentures offered by the company will not be taken by the public but he will take it. The commission paid under this agreement is called underwriting commission. Underwriting commission has to fulfill the following conditions: • articles of the company authorizes the payment • it can not exceed certain amount on the price of the shares issued disclosure of amount and rate of the commission and number of the shares that the

• underwriter has agreed to subscribe in the prospectus or statement in lieu of prospectus. Brokerage • Company pays such brokerage as has been recognized as usual for the companies to pay to brokers. • Brokerage is payable to a broker for services as a broker which means that he exercise brokerage as his profession.

Underwriters Brokers They take up shares or They do not take any debentures which is shares or debentures. under-subscribed They get under writing commission and only when the articles authorizes. They get brokerage on those shares and debentures for which they procure subscription. Brokerage is payable even if the articles are silent. They entitled to a certain underwriting commission. They entitled to get as such brokerage as companies pay t. Underwriting commission is only payable on those shares and debentures offered to the public. Brokerage is payable only on those shares and debentures which subscription is procured.