Matters to be stated in the Prospectus

3.1 The Committee noted that SEBI is in the process of simplifying the contents of the prospectus/offer document by amending the provisions of SEBI (ICDR) Regulations, 2009 so as to reduce the volume of disclosures following suggestions from the stakeholders that those offer documents are becoming too long, too detailed, and repetitive as also too difficult to understand. The Committee felt, however, that this objective could be achieved only if Section 26(1) of the Companies Act, 2013 is modified to empower SEBI to prescribe the contents in consultation with MCA. Further, MCA and SEBI may workout the minimum disclosures to be included in the prospectus so that the regulatory objectives of both the regulators are achieved while achieving the end purpose of reduction in the size of the prospectus.

Civil Liability for Mis-statements in Prospectus

3.2 Section 35 of the Act prescribes civil liability for directors, promoters and experts for issuing misleading statements in a prospectus; and the defences available to them. During the process of public consultation, the stakeholders suggested that directors could not rely on the statements made by experts in a prospectus, as a defence for civil liability, although such defence was available to them under Section 62(2)(d)(ii) of the Companies Act, 1956. In the United States, under the Securities Exchange Act, 1934, named experts (including accountants, engineers and appraisers) who prepare or certify a portion of the registration statement, or any report supporting the registration statement, are subject to liability for the portions they prepare. The English

Companies Act, 2006 provides for director’s liability in case of untrue or misleading statements, but also provides for a safe harbour provision, such that the director is only liable to compensate the company for the loss suffered by the company in reimbursing an investor if the director knew, or was reckless in not checking whether the statement was untrue or misleading or knew the omission to be dishonest concealment of a material fact. The Committee acknowledged that it would be appropriate to hold experts liable for statements prepared by them, and which the directors relied upon (as long as such experts were identified in the prospectus). Accordingly, an amendment in the provision was recommended.

Private Placement

3.3 Section 42 of the Act, in conjunction with Section 62, lays down the framework for private placement of securities. Further, while Section 62 governs preferential allotment; Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, cross-refers to the procedure under Section 42. A few of the issues raised were with regard to the compliance with some of the requirements provided under Section 42 of the Act, and Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014. These requirements, it was suggested, were cumbersome, time consuming; requiring elaborate, sensitive and significant public disclosures. Difficulties had been expressed with regard to the offer letter, opening of a separate account, time period for allotment of shares, size of minimum investment, making of a fresh offer etc. The Committee noted that changes had been made in the current provisions to check the gross misuse of earlier provisions relating to private placement under the Companies Act, 1956, and felt that such requirements, which were procedural in nature and did not cause great difficulty, ought to be retained.

3.4 The Committee also deliberated on the contents of the ‘Private Placement Offer Letter’ (‘PPOL’) (PAS-4 form), which were required to be circulated, to identified investors/persons, and filed with the Registrar. The Committee noted that the form mandated disclosures of extensive information relating to the company, particulars of the offer, details about directors, financial position of the company, declarations by directors with respect to compliances under the Act, etc. The Committee felt that the requirement under Section 42 and Rule 14 with regard to preparation and filing of Private Placement Offer Letter (PPOL) should be done away with and Form PAS-4 should be discontinued. In order to ensure that investor gets adequate information about the company which is making private placement, the disclosures made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, should be embodied in the Private Placement Application Form.

3.5 Important information presently provided in Form PAS-4 can be shifted as disclosure requirement under the said Rule 13(2)(d). In case of private placement of non-convertible debentures within the ceiling specified under Section 180(1)(c), the Board resolution under Section 179(3)(c) should provide for reasonable details about the proposed offer which should be specified in the application form in such cases.

3.6 The Committee also deliberated on Section 42(3), which prohibits the making of any fresh offer or invitation, when there are allotments pending for an earlier offer or invitation. It was pointed out that companies might be required to simultaneously issue, different forms of instruments, such as preference shares or non-convertible debentures, for meeting their financial requirements that had been clarified to an extent under Explanation (ii) below sub-rule 14(2)(b). The Committee recommended that, subject to the limit on the number of persons who could be made the offer of securities as prescribed under Section 42(2), a company could, at the same time keep open more than one issue of securities (that is, of equity share or preference share or debenture) in a year to such classes of investors as may be prescribed by Rules in order to provide greater flexibility in raising capital/loans while not compromising on regulatory concerns. Section 42(3) would also need to be made explicit about the simultaneous offering of securities of different kinds, as currently prescribed in the Rules.

3.7 The Committee felt that Section 42(7) could be modified to require that all offers covered under Section 42 shall be made only to such persons whose names, father’s names, addresses, phone numbers and email IDs, if any, or any other information as may be prescribed by rules are duly recorded by the company prior to the invitation to subscribe. These details need not, however, be filed with the Registry. The said information, however, could be asked by ROC/Inspector during any of the proceedings under Chapter XIV of the Act. However, in order to ensure that companies are accountable and transparent during private placement process, a new rule may be inserted in Chapter 3 Rules to the effect that companies would initiate circulation of application form and collect monies only after the relevant resolution (i.e. Special resolution or the Board resolution) is filed with the Registry. Consequential change in Rule 14(3) could also be made. Once the basic details like names, father’s names, addresses, phone numbers and email IDs, if any, are kept by the company, the requirement for PAS-5 can also be omitted.

3.8 At the moment, in case of non-convertible debentures a prior special resolution only once in a year has been prescribed. The Committee recommends that since Non-Convertible Debentures are pure borrowings and do not form part of equity capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This would also align the requirements with that of section 180(1)(c). It was, however, felt that the said Board resolution should clearly mention (in the body of the resolution) that the offer of debentures being approved by Board is through private placement under Section 42 and certain other minimum details as may be prescribed in the rules be provided in the Board resolution. Private companies (who have been given exemption from Section 117(3)(g) through section 462 notification) should either be required to file board resolutions under Section 179(3)(c) or pass a special resolution.

3.9 The Committee also felt that since the requirement for filing of PPOL and list/details of proposed offerees (i.e. PAS-5) with Registry within 30 days of circulation of PPOL is being dispensed with, companies should be required to file return of allotment (PAS-3) within the prescribed timeline, and should be liable for penalties under Section 42 in case of non-compliance. Further, it could be provided in the Act/Rules that companies would not be allowed to utilise the monies raised through private placement unless such return of allotment is filed. The underlying objective is to ensure that private placement process is completed within a finite period of 90 days.

3.10 The Committee further recommended that Section 42(1) may clearly provide that provisions of Section 42 and rules made thereunder shall also apply to offer of convertible securities referred to in Section 62(1)(c) read with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014.

3.11 Regarding valuation of convertible securities, the Committee felt that while the company should be mandated to get valuation done (in respect of equity and convertible securities), the report of the valuer should be made available to investors, and may not be filed/circulated. The company should retain the report with itself for making it available for regulatory purposes, as and when required. Further, Section 62(1)(c) and Rule 13(3) requiring price of securities to be decided in advance should be modified and provisions allowing pricing as per a formula (on the lines of RBI Regulation/FDI Policy) may be considered.

3.12 The Committee also felt that in case of equity or mandatorily convertible securities the minimum investment size can be twenty thousand rupees with no linkage to face value so that it can include premium amount as well. However, for private placement of non-convertible preference shares or non-convertible debentures the minimum investment size could be one lakh rupees with no linkage to face value.

3.13 It has been brought to notice that renunciation of rights is being used as a way to bypass the provisions of preferential allotment/private placement. The Committee, therefore, recommended that an accountable way of use of renunciation rights by shareholders needs to be prescribed. Reference was made to the principles contained in sections 755-756 of the English Companies Act, 2006, which could be used for regulation of private placement and preferential allotment under Companies Act, 2013 while making changes in Section 42/62 and rules made thereunder.

3.14 The suggestions to limit the scope of Section 23 to shares instead of securities, limiting the exit option under Section 27(2) to dissenting shareholders, who had expressed specific dissent; linking the requirement of obtaining minimum subscription in a public issue to the date on which the issue opened, increasing the time limit to forty-five days under Section 39(3), and increasing the time limit of sixty days for the allotment of securities to one hundred and eighty days under Section 42 were also considered by the Committee. However, as the suggestions made were not in tune with the underlying principles and/or out-of-sync with the greater efficiencies or speed of businesses on date, the Committee did not recommend for any change to these sections.