Companies Act Section 26

Companies Act Section 26: Matters to be Stated in Prospectus

Section 26 of the Companies Act establishes the essential requirements for the contents of a prospectus issued by public companies. 

This section aims to ensure transparency and provide potential investors with the necessary information to make informed decisions regarding the securities being offered. 

Below is a detailed breakdown of the provisions outlined in this section.

1. Contents and Requirements of Prospectus

a. Issuance

Every prospectus that is issued by or on behalf of a public company whether during the company's formation or subsequently must meet certain standards:

Dating and Signing: 

The prospectus must be dated and signed. 

This ensures that the document is officially recognized and can be traced back to a specific time and responsible parties.

b. Information and Reports

Inclusion of Information: The prospectus must contain specific information and financial reports as determined by the Securities and Exchange Board of India (SEBI), in consultation with the Central Government. 

Regulations and Compliance: Until SEBI specifies these requirements, the regulations that SEBI has enacted under the Securities and Exchange Board of India Act, 1992, regarding financial information and reports will remain in effect. 

This means that companies must comply with existing regulations while awaiting new directives from SEBI.

c. Compliance Declaration

Declaration of Compliance: 

The prospectus must also include a declaration affirming that the company has complied with the provisions of the Companies Act, the Securities Contracts (Regulation) Act, 1956, and the Securities and Exchange Board of India Act, 1992, along with all relevant rules and regulations. 

This declaration serves to reassure investors that the company has adhered to all applicable legal standards.

2. Exemptions from Prospectus Requirements

a. Existing Members or Debenture Holders

Exemptions for Current Stakeholders: 

The provisions outlined in subsection (1) do not apply when issuing a prospectus or application form to existing members or debenture holders of a company concerning shares or debentures of that company, even if the applicant has the right to renounce the shares. 

This recognizes the established relationship between the company and its current stakeholders, minimizing unnecessary regulatory burdens.

b. Uniform Shares or Debentures

Uniform Securities: 

The provisions also do not apply to a prospectus or application form related to shares or debentures that are uniform with those previously issued and traded on a recognized stock exchange. 

This provision acknowledges that existing securities that are already recognized and traded do not require the same level of disclosure as new offerings.

3. Application of Prospectus Provisions

a. General Application

Broad Scope: 

Subject to the exemptions stated in subsection (2), the requirements laid out in subsection (1) are applicable to all prospectuses or application forms issued, whether they pertain to the company’s initial formation or subsequent issues of securities. 

This ensures comprehensive oversight of all offerings.

b. Publication Date

Effective Date: The date on the prospectus is considered its official date of publication. This is important for establishing timelines and obligations related to the prospectus.

4. Delivery and Filing Requirements

a. Delivery to Registrar

Filing Requirement: No prospectus may be issued by or on behalf of a company, or in relation to an intended company, unless a copy has been delivered to the Registrar for filing on or before its publication date. 

Signature Requirement: 

This copy must be signed by every person named as a director or proposed director, or by their duly authorized attorney. This requirement ensures that the individuals responsible for the prospectus are clearly identified and accountable.

5. Statements by Experts

a. Expert Statements

Inclusion of Expert Statements: 

A prospectus cannot include statements made by an expert unless the following conditions are met:The expert is not involved in the company’s formation, promotion, or management. This helps maintain the objectivity and independence of the expert's opinion.

The expert has provided written consent for the inclusion of their statement in the prospectus.The expert has not withdrawn their consent prior to the prospectus being delivered to the Registrar for filing. This guarantees that the expert remains committed to their statements until the prospectus is formally filed.

b. Consent Statement

Disclosure Requirement: 

The prospectus must include a statement indicating that the expert has given consent to include their statement and has not withdrawn it. This further reinforces the integrity of the information presented in the prospectus.

6. Face of the Prospectus

a. Statements Required

Mandatory Statements: 

Every prospectus must include certain statements:

It must state that a copy has been delivered to the Registrar for filing as required under subsection (4).

It should specify any documents required to be attached to the filed copy or refer to statements in the prospectus that indicate these documents. 

This ensures clarity and completeness in the documentation associated with the prospectus.

7. Validity of Prospectus

a. Validity Period

Validity Duration: 

A prospectus is considered invalid if it is issued more than ninety days after the date a copy was delivered to the Registrar in accordance with subsection (4). 

This provision emphasizes the importance of timely disclosures and ensures that information remains current for potential investors.

8. Penalties for Non-Compliance

a. Company Penalty

Company Liability: 

If a prospectus is issued in violation of this section, the company may face a fine ranging from fifty thousand rupees to three lakh rupees. 

This financial penalty serves as a deterrent against non-compliance and reinforces the importance of adhering to the regulatory framework.

b. Personal Penalty

Individual Accountability: 

Individuals who are knowingly involved in issuing a noncompliant prospectus are also subject to a fine ranging from fifty thousand rupees to three lakh rupees. 

This provision holds individuals accountable for their actions and encourages compliance with the requirements set forth in this section.