Section 27 Of Companies Act 2013: Variation In Terms Of Contract Or Objects In Prospectus

Variation in Terms of Contracts or Objects Stated in Prospectus

What is Section 27 of Companies Act 2013?

(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.

Section 27 of the Companies Act, 2013, talks about the variation in terms of the contract or the objects in the prospectus.

It states that a corporate firm shall do not modify the terms and conditions of the contract mentioned in the prospectus at any time unless it is approved by or authorized by the company at the general meeting of the shareholders by means of a special resolution method.

Any such change or variation in the terms and conditions can be approved by mail to vote for a special resolution, containing the following details –

i) details of the change of the terms and conditions of the contract;

ii) details of the suggested changes;

iii) reasons for such changes;

iv) impact of such suggested changes in the financial status of the company; and

v) the consequences pertaining to the new objects.

As set forth in subsection 70 of Section 2 of the Companies Act,2013, a prospectus may be defined as any document described or furnished or any other notice, circulars, announcements or other documents that invite the general public to subscribe for or purchase securities of corporate legal entities.

Shelf prospectus in Section 31 and Red herring prospectus in Section 32 of the Act, are also included. For any document to be considered as a prospectus, it should meet the following necessary conditions –

i) document must invite public investment or deposits in shares and debentures;

ii) invitations made to the general public;

iii) invitations made by the corporate firm or on behalf of the corporate firms;

iv) invitations must be related to stocks, bonds and other similar invoices.

Conditions to Issue a Prospectus

Section 26 of the Companies Act, 2013, provides for the matter or subjects to be considered in the prospectus with respect to the formation or setting up of a corporate firm. It includes subjects like –

i) names and addresses of the company secretary, financial controller, auditor, legal advisor and of such other personnel of the company’s registered office;

ii) dates of issuance of allotment letters and reimbursement statements;

iii) Board of Director’s statement on the independent bank account containing all the necessary information relating to funds, information such as where will it be transferred, where is it utilized, etc., including the details of the used and unused funds in the previous issuance;

iv) details of issuance and subscription;

v) consent of the directors, auditors, bankers to the release if required;

vi) authority of the issuance of shares and debentures and details of approved resolution;

vii) procedures and calendars for the grant and issuance of securities;

viii) company’s required capital structure;

ix) main subject of public issuance, terms of issuance and other necessary information;

x) company’s main target, current business location and data relating to project implementation;

xi) management’s awareness about the risk factor; project incubation period; degree of progress of the project; deadlines, etc.;

xii) any pending litigation or legal action against the company’s promoters by and Government department in the past five years prior to the issuance of the prospectus;

xiii) information regarding minimum subscription, payable premium and non-cash stock issuance;

xiv) and lastly, detailed information of the directors and disclosure about the sponsor’s source of funding in the manner as prescribed.