Section 27 of Companies Act 2013. Variation in terms of contract or objects in prospectus.

(1) A company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in general meeting by way of special resolution: Provided that the details, as may be prescribed, of the notice in respect of such resolution to shareholders, shall also be published in the newspapers (one in English and one in vernacular language) in the city where the registered office of the company is situated indicating clearly the justification for such variation: Provided further that such company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. 

(2) The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the Securities and Exchange Board by making regulations in this behalf.”

Brief understanding of Section 27 of Companies Act

Section 27, talks about variation in terms of contract or objects in the prospectus. 

1.  Variation in terms of a contract referred to in the prospectus or objectives for which the prospectus was issued, in such case, a company shall not alter the details of the contract and business objectives. This approval shall be in a general meeting with the highest majority of votes.

2. Unless the company has opted for such voting, it must clearly state the objective of why it wants to make the changes by publishing it in a newspaper in English or the local language where the company has a registered office located or website of the company.

3. A company shall not use money raised through a prospectus to buy or trade shares of other companies.

4. If dissenting shareholders disagree with the changes, they can get an “exit offer” from the company’s promoters or Controlling shareholders to sell their shares at a specific price and under certain conditions. These details will be defined by the Securities and Exchange Board.

Example of Variation in terms of contract or objects in prospectus.

Let’s assume there is a company named  “XYZ” that issues a prospectus to raise a fund to develop an electric bike with a specific range and battery life. The prospectus mentions key contracts with technology suppliers and specific goals like the specific range and battery life of the product. 

Scenario 1: Change of objective without approval

The said company “XYZ” reduced the range and battery life to cut costs without informing shareholders, which led to a violation of Section 27 of the Companies Act because the company has changed objectives without the approval of shareholders.

Scenario 2: Changing goal with proper approval 

“XYZ”  realizes and proposes using a different battery technology offering a slightly lower range but it can improve safety for end users. They explain the market shift and their changed objective. If a sufficient majority of shareholders approve it through a special vote, the company publishes a clear jurisdiction in the newspaper, they can proceed as per the provision mentioned in section 27.

If shareholders disagree with scenario 2, they can opt for the exit offer and sell their shares at a specific price as per provisions of Section 27, subsection 2.

Statutory objectives [under Section 27 of Companies Act ]

    Section 27 of the Companies Act, 2013, variation in terms of contract or    objects in prospectus serves different key objectives in the provisions laid down under this Section.

1. Transparency and Full Disclosure

Provision laid down under this Act in Section 27 of subsection 1  mandates Variation in terms of contract or objects in prospectus mandates the disclosure of variation to the shareholders and the regulatory authorities. It helps to bring transparency among investors and ensures that they have accurate information about it.

2. Protection of Shareholders Rights:

Provision laid down under this Act in Section 27 of subsection 1, intent to  protect the interest of shareholders in decision making process related to variation in contract and object in prospectus which promotes the democratic principales of corporate governance. 

3. Promoting Stable and Predictable Markets:

Section 27 retains the rights of arbitrary changes to the shareholders which helps them to get all reliable information and prevent from misleading information which implies maintaining a fair market and preventing illegal activities.

Limitations of Section 27 of Companies Act 

As limits imposed by  the section in the provision of variation in terms of contract as stated below

a.                Compliance with Regulatory Procedures

b.               Legitimate and Justifiable Reason

c.                Shareholder Approval Requirement

Other laws and provisions may attract to Section 27 of the Companies Act and also provide arbitrary changes in procedure and approval to and also provide safeguards to for corporate governance.  Let’s overview it.

Companies Act, 2013( Sections 48-58)

These Sections dealing with shareholder’s rights, meetings, and approvals may be relevant when considering variations in terms of contracts or objects that require shareholder consent.

SEBI Act, 1992

Section 27,Variation in terms of contract and object in prospectus may intersect with some of the provisions of the SEBI Act, 1992 as SEBI has govern provisions regarding Security Market in I ndia.

Indian Contract Act, 1872

There are contractual agreement  between company and investors takes place between the parties for making the like shareholder agreements, Bonds it attract the contractual liabilities under Indian Contract Act, 1872 with section 27 of the company law.

Competition Act, 2002

The competition Act, 2002 may be intersect with the section 27 of the companies Act if there is variation in terms of contract and object in prospectus leads to impact market dynamics.

Income Tax Act, 1961

Potential generating Income for Tax deduction, tax on transfer of securities, tax exemption or benefit on the alteration of the Income linked to it lead to tax implications, if variation in terms of contract and object under Income Tax Act.

Conclusion

Provision given the Section 27 of the Companies Act gives a broader goal to corporate governance by promoting transparency and accountability, protecting shareholder rights, ensuring responsible decision-making, and maintaining market integrity. A flexibility given the section 27 increases the effectiveness of the process and corporate governance. The cost associated with Section 27 can create burden for smaller companies, it may also affect the growth and competitiveness of such companies. Ultimately, Intention of the section 27, variation in terms of contract and objective in prospectus minimise the risk of legal liabilities by giving a specific approval process.

FAQs

1. What are the primary objectives of Section 27 within the broader context of the Indian Companies Act?

Section 27 balances companies’ flexibility with investor protection by requiring approval for changes to core objectives or capital structure, aligning with the Act’s overall aim of fair and transparent markets.

2. Can you identify any specific categories of alterations to a company’s memorandum that require approval under Section 27?

Altering object clauses, changing authorised share capital, and converting equity into debt typically require approval under Section 27.

3. What is the process for obtaining shareholder approval for alterations under Section 27? Are there different procedures depending on the type of alteration?

Companies must hold a special resolution with specified notice and disclosure, then file the approved alteration with the Registrar of Companies. Specifics may vary depending on the change.

4. What role does the Registrar of Companies play in the context of Section 27, if any?

 When company obtains shareholders approval  they shall file necessary forms and documents with the ROC and ROC shall ensure the compliance with filing and public disclosure, compliance monitoring and enforcement.

5. Can you think of any instances where the limitations imposed by Section 27 might hinder a company’s ability to adapt to changing market conditions?

The limitations imposed by Section 27 might hinder a company’s ability to adapt to changing market conditions in following instances like,

1.Rapid market shift by time consuming approval process

2. Section 27 can create complexity when merger and acquisition of the companies takes place.

3. In case of financial restructuring,the approval process under section 27  could create burden and delay due to critical turnaround time.

6. Are there any safeguards built into Section 27 to protect dissenting shareholders from potential harm during the alteration process?

Dissenting shareholders remain vulnerable during the alteration process. Below are the safeguards to protect dissenting shareholders from potential harm:

1.They retain appraisal rights to obtain fair market value for their shares if they disagree with the change.

2.  Controlling shareholders from determined price regulations mandate an exit offer for them by offering alternative exit offers.

7. Has there been any legal challenges surrounding the interpretation or application of Section 27? If so, what were the key points of contention?

Yes, some debate surrounds the scope of “objects” and exceptions for specific industries. Challenges focused on procedural compliance and shareholder rights have also occurred.

8. In your opinion, how does Section 27 compare to similar provisions in other major company law jurisdictions around the world?

Similar provisions exist in other jurisdictions, often with variations in approval thresholds and exceptions. Some offer more flexibility, while others prioritize investor protection.

9. Do you think there are any potential reforms or improvements that could be made to Section 27 to better balance the needs of various stakeholders?

Streamlining approval processes, clarifying ambiguity around “objects,” and considering industry-specific exceptions could balance stakeholder needs better.

10. Considering the practical realities of doing business in India, how do you think companies can effectively comply with Section 27 while also maintaining agility and responsiveness to market needs?

Companies can effectively comply by engaging in thorough planning, transparent communication with shareholders, and seeking legal guidance to navigate procedures efficiently while minimizing business disruption.