VARIATION IN TERMS OF CONTRACT OR OBJECTS IN PROSPECTUS

[DR.MARIAPPAN GOVINDARAJAN]

A company especially a public limited company after its incorporation under the Companies Act, 2013 is entitled to raise money from the public by means of initial public offer.  For this purpose, the companies issue prospectus.  A prospectus serves as a legally binding document that outlines a company’s purpose, goals, and contractual obligations when issuing securities to the public. The Companies Act, 2013 imposes stringent regulations on the use of funds raised through public offerings, mandating that the terms of the contract and the stated objects within the prospectus align with the company’s actions and financial goals.  The terms and objects stated in a prospectus are intended to guide how the company will use funds raised from the public. These specifics help investors assess the risk and purpose of their investments, ensuring transparency and accountability. By clearly defining the use of proceeds, the company establishes a contract of trust with investors.   Where the company has raised money from public through prospectus and has any unutilized amount out of the money so raised, it shall not vary the terms of contracts referred to in the prospectus or objects for which the prospectus was issued.   

Section 27 of the Companies Act, 2013 gives powers to the company to vary the terms of contract or objects in prospectus.  The company shall pass a special resolution of such variation.  Section 27(1) of the Act provides that 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.

The terms of a contract may be varied by a company by passing a special resolution through postal ballot.  The notice of the proposed special resolution shall contain the following particulars-

•  the original purpose or object of the Issue;
• the total money raised;
• the money utilised for the objects of the company stated in the prospectus;
• the extent of achievement of proposed objects (that is fifty percent, sixty percent, etc);
• the unutilised amount out of the money so raised through prospectus;
• the particulars of the proposed variation in the terms of contracts referred to in the prospectus or objects for which prospectus was issued;
• the reason and justification for seeking variation;
• the proposed time limit within which the proposed varied objects would be achieved;
• the clause-wise details as specified in sub-rule (3) of rule 3 as was required with respect to the originally proposed objects of the issue;
• the risk factors pertaining to the new objects; and
• the other relevant information which is necessary for the members to take an informed decision on the proposed resolution.

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. 

The abovesaid details 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.  The advertisement shall be in Form PAS-1.   Such advertisement shall be published simultaneously with dispatch of Postal Ballot Notices to Shareholders.  The notice shall also be placed on the web-site of the company, if any.

The model advertisement is as below-

Advertisement giving details of notice  of  special  resolution  for  varying  the terms of any contract referred to in the prospectus  or altering the  objects for which the prospectus was issued

Corporate Identification Number (CIN) -

Name of the company-

Registered office address-

Public Notice

Notice is hereby given that by a resolution dated..........., the Board has proposed to vary the terms of  the  contract  referred  to  in  the  prospectus  dated........  (or  to alter  the  object(s)  for  which  the  prospectus  dated.......  was  issued)  issued  in connection with issue of [number and description of

 securities] at an issue price of Rs. ___/- per [description of security] aggregating to Rs. __________________/.

In  pursuance  of  the  said  resolution,  further  notice   is  given  that  for  approving  the  said proposition, a special resolution is to be passed by postal ballot.

The details regarding such variation/alteration are as follows-

1. Particulars of the terms of the contract to be varied (or objects to be altered)-

      2. Particulars of the proposed variation/alteration-

      3. Reasons/justification for the variation-

      4. Effect of  the  proposed  variation/alteration  on  the financial  position  of  the company-

      5. Major Risk factors pertaining to the new Objects

      6. Names of Directors who voted against the proposed variation/alteration

Any interested person may obtain the copy of the special resolution along with the explanatory statement free of  charge  at  the  registered office  of  the  company  or  at the office of its Company Secretary Shri........... at.........

...... or visit the website of the Company viz. -------------- for a copy of the same.

Date:Signature

Place:

There may be some shareholders not accepting such variation.  Such dissenting shareholders 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.

If the company is a listed entity, it must also obtain regulatory clearance from the Securities and Exchange Board of India (SEBI) before proceeding. SEBI oversees public offerings and ensures that investor interests are safeguarded, with specific guidelines under the Issue of Capital and Disclosure Requirements (ICDR) Regulations.

Reference:

http://thelawcodes.com/variation-in-terms-of-contract-or-objects-in-prospectus/.