Capital Subscription

A public company can raise the funds it needs from the public by issuing securities (shares, debentures, etc.). To do so, it must issue a prospectus — an invitation to the public to subscribe to the company's capital — and complete several other formalities. The steps involved in raising funds from the public are as follows.

• (i) SEBI approval: the Securities and Exchange Board of India (SEBI) is the regulatory authority and has issued guidelines for disclosure of information and investor protection. A public company inviting funds from the public must disclose all relevant information and conceal no material facts, so as to protect investors. Prior approval from SEBI is therefore required before raising funds from the public.
• (ii) Filing of prospectus: a copy of the prospectus (or a statement in lieu of prospectus) is filed with the Registrar of Companies. A prospectus is any document described or issued as a prospectus — including any notice, circular or advertisement — inviting deposits from the public or inviting offers from the public to subscribe for or purchase the securities of a body corporate. Since investors decide primarily on the basis of its contents, a prospectus must contain no mis-statement and must fully disclose all material, significant information.
• (iii) Appointment of bankers, brokers and underwriters: raising public funds is a huge task.
  • Bankers of the company receive the application money.
  • Brokers help sell the shares by distributing forms and encouraging the public to apply.
  • Underwriters undertake to buy the shares that are not subscribed by the public, in return for a commission. If the company is reasonably assured of a good public response, appointing underwriters is not necessary.
• (iv) Minimum subscription: to stop companies from starting with inadequate resources, the company must receive applications for a certain minimum number of shares before proceeding to allotment. Under the Companies Act this is called the minimum subscription, and as per SEBI guidelines it is 90 per cent of the size of the issue. If applications received are for less than 90 per cent of the issue, allotment cannot be made and all application money must be returned to the applicants.
• (v) Application to stock exchange: the company applies to at least one stock exchange for permission to deal in its shares or debentures. If permission is not granted within ten weeks from the date the subscription list closes, the allotment becomes void and all money received must be returned to applicants within eight days.
• (vi) Allotment of shares: until shares are allotted, the application money must be kept in a separate bank account and not used by the company.
  • If the number of shares allotted is less than applied for, or if no shares are allotted, the excess application money is returned to the applicant or adjusted towards the allotment money due.
  • Allotment letters are issued to the successful allottees.
  • A 'Return of Allotment', signed by a director or secretary, is filed with the Registrar of Companies within 30 days of allotment.

Memorandum of Association vs Articles of Association

• Objectives: the Memorandum defines the objects for which the company is formed; the Articles are the rules of internal management that indicate how those objects are to be achieved.
• Position: the Memorandum is the main document, subordinate only to the Companies Act; the Articles are a subsidiary document, subordinate to both the Memorandum and the Act.
• Relationship: the Memorandum defines the company's relationship with outsiders; the Articles define the relationship between the members and the company.
• Validity: acts beyond the Memorandum are invalid and cannot be ratified even by a unanimous vote of members; acts beyond the Articles can be ratified by the members, provided they do not violate the Memorandum.
• Necessity: every company must file a Memorandum; filing Articles is not compulsory for a public limited company, which may instead adopt Table F of the Companies Act, 2013.

Types of contracts (by timing)

• Preliminary (pre-incorporation) contracts: signed by promoters with third parties before the incorporation of the company.
• Provisional contracts: signed after incorporation but before the commencement of business.

(Note: a public company raising funds from friends or relatives rather than the public files a statement in lieu of prospectus with the Registrar at least three days before allotment, and files the return of allotment after completing allotment.)

| Basis of Difference | Memorandum of Association | Articles of Association |

|---|---|---| …