This document provides an overview of oppression, mismanagement and investigation under company law in India. It defines key terms like prospectus, membership and shareholding. It explains the types of prospectuses a company can issue and the required contents. It also discusses oppression and mismanagement under section 241 of the Companies Act, and the rights and liabilities of shareholders. The roles of the company law board and central government in investigations are also mentioned.

1. Unit 3
Oppression, Mismanagement and Investigation

2. Topics
• Prospectus
• Membership
• Shareholding
• Oppression and Mismanagement
• Company law board
• Role and powers of central govt
• Meeting
• Corporate liquidation

3. Prospectus:
Section 2(70) of the Companies Act 2013, defines prospectus
as, “A prospectus means any document described or issued as a
prospectus and includes a red herring prospectus referred to in
section 32 or shelf prospectus referred to in section 31 or any
notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities
of a body corporate.”
Thus, it is clear from the above definition of the prospectus that,
a prospectus is a just an invitation to offer securities to the
public and not an offer in the contractual sense.

4. Companies that are required to issue a prospectus:
i. A public listed company who intends to offer
shares or debentures can issue prospectus.
ii. A private company is prohibited from inviting the
public to subscribe to their shares and thus cannot
issue a prospectus. However, a private company
which has converted itself into a public company
may issue a prospectus to offer shares to the
public.

5. Types of prospectus:
Red Herring Prospectus(SECTION 32):
• A prospectus for stocks and bonds are issued in different stages – the first
stage is the preliminary prospectus, which contains the details of the
business and proposed financial action. It is nicknamed as Red Herring.
• The word Red Herring means to distract or mislead someone from an
important issue. When a company decides to attract investors to invest in
their company, they use a prospectus named Red Herring Prospectus.
• It is basically a prospectus which is used in the public issue to attract
different investors. In this prospectus, the price and quantum are not
mentioned or disclosed.
• Here price means the actual price to be issued per share in the IPO
and quantum means the quantity or the total number of shares to be
offered in the IPO.

6. Shelf Prospectus (SECTION 31):
• Shelf means ‘life’ or ‘validity’ of a prospectus. Only selected companies bring
their shelf prospectus. All companies are not eligible for designing a shelf
prospectus. Normally finance-based companies are eligible for bringing out their
shelf prospectus.
• Shelf prospectus has validity with a maximum of one year. There are various
companies which frequently raise funds (ex. banks) for issuing loans.
• Every time they raise funds from the public, they require approval from the
Stock Exchange and Registrar of Companies(ROC).
• Also, every time a company wishes to raise funds again, they must file their
prospectus to the regulators for approval. If any company submits their Shelf
prospectus, they don’t have to file the prospectus again and again while raising
funds for that particular year.
• After the validity period is over, the company has to submit another prospectus
which will be valid for another one year.

7. Abridged Prospectus (SECTION 33):
• Abridged Prospectus is the actual summary of a prospectus. It
contains all the salient features of a prospectus. The original
prospectus that a company files to the exchange regulator is too
large. The abridged prospectus contains the summary of the same
prospectus.
• Reading the entire prospectus may be too much time consuming
for an investor. Instead, they go through the abridged prospectus,
which gives them the basic idea about the company.
• The abridged prospectus contains all the important and
materialistic information. No company will issue the share buying
from without the abridged prospectus attached to it so that
investors can take a well-informed decision.

8. Deemed Prospectus:
• Deemed means to presume something. When a company agrees to
allot shares to an issuing house( which is a different company) which
they will later sell to the public, then the document by which offer is
made is deemed to be a prospectus.
• The document by which the issuing house offers share to the public is
said to be deemed prospectus.
• Any one condition from the following two conditions should be
fulfilled:
a) The issuing house should issue the shares to the public 6 months
after the agreement with the company whose shares are to be
issued.
b) The issuing house shouldn’t give the share price to the company
until they bring it to the public.

9. Key factors related to a prospectus
• According to Section 26 of the Act, every prospectus issued by or
on behalf of a company must be dated and that date shall unless
the contrary is proved, be regarded as the date of its publication.
• It shall state such information and set out such reports on
financial information as may be specified by the SEBI in
consultation with the Central Government.
• A copy of the prospectus shall be signed by every director or
proposed director or by his agent must be delivered to the
registrar on or before the date of publication.
• Every prospectus issued to the public should mention that a copy
of the prospectus along with the specified documents has been
filed with the registrar.

10. • If prospectus includes a statement made by an expert,
the expert must not be engaged or interested in the
formation or promotion or in the management of the
company. A written consent of the expert should also
be obtained before the issue of prospectus with the
statement.
• A prospectus must not be issued more than 90 days
after the date on which a copy thereof is delivered for
registration. If a prospectus is issued it will be deemed
to be a prospectus a copy of which has not been
delivered to the registrar.

11. • A prospectus shall make a declaration about the compliance of
the provisions of the act and nothing contained in the
prospectus is in contravention of the provisions of the
Companies Act, Securities Contracts (Regulation) Act, 1956 and
Securities Exchange Board of India Act, 1992.
• Section 27 of the Act states that a company can vary the terms
of a contract referred to in the prospectus or objects for which
the prospectus was issued, subject to the approval of an
authority given by the company in general meeting by way of
special resolution. The details of the notice in respect of such
resolution to shareholders shall also be published in the
newspapers in the city where the registered office of the
company is situated.

12. Contents of a prospectus:
Rule 3 states that every prospectus issued shall contain the following information—
1. The names and addresses of the registered office of the
company, company secretary, Chief Financial Officer, auditors,
legal advisers, bankers, trustees, if any, underwriters and such
other persons as may be prescribed;
2. The dates of opening and closing of the issue;
3. A declaration made by the Board or the Committee authorized
by the Board in the prospectus that the allotment letters shall be
issued or application money shall be refunded within fifteen days
from the closure of the issue or such lesser time as may be
specified by SEBI;
4. A statement by the Board of Directors of separate bank account;

13. 5. The details of all the utilized and unutilized monies out of the monies
collected in the previous issue made by way of a public offer;
6. The details of the underwriters and the amount underwritten by
them;
7. The consent of trustees, advocates, merchant bankers, registrar,
lenders, and experts;
8. The authority for the issue and the details of the resolution passed,
therefore;
9. The capital structure of the company in the prescribed manner;
10.Procedure and time schedule for allotment and issue of securities;
11.Main objects of the issue, the purpose for requirements of funds,
funding plan, the summary of the project appraisal report and such
other particulars as may be prescribed;

14. 12.Minimum subscription, amount payable by way of premium,
issue of shares otherwise than on cash;
13.The details of any litigation or legal action pending or taken by
any ministry or department of the government or a statutory
authority against any promoter of the issuer company during the
last five years immediately preceding the year of the issue of the
prospectus;
14.The details of pending litigation;
15.The details of default and non-payment of statutory dues;
16.The details of directors including their appointment and
remuneration, and particulars of the nature and extent of their
interest in the company;
17.The disclosure for sources of promoters’ contribution;

15. The reports that the company needs to set out in the
prospectus, are given in Rule 4, which are as under:
1. Reports by the auditors with respect to profits and
losses and assets and liabilities of the company.
2. Reports relating to profits and losses for each of the
five financial years.
3. Reports about the business or transaction to which
the proceeds of the securities are to be applied.

16. Other matters and reports which are to be stated in the prospectus, are
given in Rule 5. They are as under:
i. Proceeds or any part of the proceeds, of the issue of the shares or
debentures, are applied directly or indirectly in the purchase of any
business, profits or losses of the business, assets, and liabilities of the
business, in purchase or acquisition of any immovable property.
ii. Acquisition by the company of shares in any other body corporate.
iii. Matters relating to terms and conditions of the term loans including re-
scheduling, prepayment, penalty, default.
iv. The aggregate number of securities of the issuer company and its
subsidiary companies purchased or sold by the promoter group and by the
directors of the company.
v. The Related Party Transactions(RPTs) entered during the last five financial
years.
vi. The details of acts of material frauds committed against the company.

17. Misstatements in the Prospectus:
•Contravention of Section 26 of the Companies Act, 2013
•If a prospectus is issued in contravention of the provisions
of this section, then the company shall be punishable with
a fine, not less than fifty thousand rupees which may
extend to three lakh rupees, and
•Every person who is party to the issue of the prospectus
shall be punishable with imprisonment for a term which
may to three years or with a fine, not less than fifty
thousand rupees which may extend to three lakh rupees,
or with both.

18. Criminal Liability for Misstatement in the prospectus:
• Where a prospectus is issued which includes any
statement which is untrue or misleading in form or
context or any matter is likely to mislead the investor,
then every person who authorizes the issue of
prospectus shall be punishable with imprisonment for
a term which may not be less than six months, but
which may extend to ten years; or a fine not less than
the amount involved in fraud but it may extend to
three times the amount of fraud; or with both.

19. Civil Liability for Misstatement in the prospectus:
•If there is any inclusion or omission of any matter in
the prospectus issued, which is misleading and the
person who has subscribed the securities has
sustained any loss or damage, then the company
and every person who is a director, promoter and
expert at the time of issue of prospectus, shall be
responsible and be liable for punishment under
section 36 of the act, and shall be liable to pay
compensation to every person who has sustained
such loss or damage.

20. Membership:
Section 2(55) member
“Member”, in relation to a company, means—
i. The subscriber to the memorandum of the company who shall be
deemed to have agreed to become member of the company, and
on its registration, shall be entered as member in its register of
members;
ii. Every other person who agrees in writing to become a member
of the company and whose name is entered in the register of
members of the company;
iii. Every person holding shares of the company and whose name is
entered as a beneficial owner in the records of a depository

21. Modes of Acquiring Membership
• By subscribing to the Memorandum of Association
• By agreeing to take qualification Shares
• By transfer of shares
• By application and allotment of shares
• By succession
• By estoppel or acquiescence

22. Who can become members?
•Company
•Partnership firm
•HUF
•Married woman
•Bankrupt
•Insolvent as member
•Minor as member
•Foreigners / non-resident as members

23. Termination of membership:
• 1. Voluntary/by act of the parties termination: A person ceases to be a
member of a company by doing the following act:
• • By transfer of shares
• • By forfeiture of shares
• • By surrender of shares
• • By exercising lien by the company.
• • By redemption of shares
• • By the buy back of shares by the company
• • By irregularity in allotment
• • By repudiating the contract on the ground of false or misleading statement
in the prospectus of the company.

24. 2. Compulsory/By operation of law termination:
A person ceases to be a member by operation of law in
the following cases:
• • By termination of shares
• • By insolvency of the person
• • By the order of court on acquiring shares
• • On winding up of a company
• • On the death of the person

25. Shareholding:
A shareholder, also referred to as a stockholder, is
any person, company, or institution that owns at
least one share of a company’s stock (equity).
Because shareholders are a company's owners,
they reap the benefits of the company's
successes in the form of increased stock
valuation or profits distributed as dividends.

26. Difference between Member & Shareholder
MATTER Member Shareholder
Meaning A person whose name is entered in the register of
members of a company.
A person who owns the shares of the company.
Definintion Companies Act, 2013 defines ‘Member’ under
section 2(55)
Shareholder is not listed under the Companies
Act, 2013
Share Warranges The holder of the share warrant is not a member. The holder of the share warrant is a
Shareholder.
Company Every company must have a minimum number of
members.
The Company limited by shares can have
shareholders
Memorandum A person who signs the memorandum of
association with the company becomes a member.
After signing the memorandum, a person can
become a shareholder only if shares are
allotted to him.

27. Things to know…..

28. Shareholders’ Rights:
•Appointment of directors
•Legal action against directors
•Appointment of company auditors
•Voting rights
•Right to call for general meetings
•Right to inspect registers and books
•Right to get copies of financial statements
•Winding up of the company

29. Shareholders liabilities:
Due to the separate legal existence of a company,
shareholders are not responsible for the company’s
obligations simply because they are a shareholder.
The liability of a shareholder is usually limited to:
•any unpaid amounts on the shares held by that
shareholder;
•any liability or obligations expressly provided for in
the company’s constitution or shareholders
agreement;

30. Oppression and mismanagement:
•Sec.397 and 398 of companies act 1956 are combined
into a single section in companies act 2013.
•• Sec.241 deals with oppression and mismanagement;
•• Clause (a) deals with oppression and
mismanagement;
•• Clause (b) deals with mis-management likely to
occur on account of change in management

31. Sec.241 (a)
Covers continuing acts and the acts which have
been concluded , Any member of a company who
complains that- the affairs of the company have
been or being conducted in a manner prejudicial
to public interest or in a manner prejudicial or
oppressive to him or any other member or
members or in a manner prejudicial to the
interests of the company;

32. Sec.241(b)
• Any member of a company who complaints that the material
change, not being a change brought about by, or in the interests of,
any creditors, including debenture holders or any class of
shareholders of the company has taken place in the management or
control of the Company whether by an alteration in the Board of
Directors, or manager, or
• in the ownership of the company’s shares, or
• if it has no share capital, in its membership or
• in any other manner whatsoever, and
• that by reason of such change, it is likely that the affairs of the
company will be conducted in a manner prejudicial to its interests
or its members or any class of them

33. Oppressive Acts
1. Company's conduct is against the principles of fair dealing
2. Depriving a member of his membership
3. Exercise of undue/harsh burden on a member
4. Acts of the company are against the provisions of the law
5. Transfer of shares in violation of articles
6. Conduction of Board Meeting without notice
7. Denial of right to appoint a director

34. 8. Usurpation of office of director/managing director
9. Declaration of board and general meetings held as
illegal and oppressive for want of proof of service of
notices of meetings
Act legal yet oppressive
1. Non declaration dividend/building reserves
2. Directorial complaint

35. Acts of Mismanagement:
1. Failure to protect the interest of the company
and records
2. Sale of assets at low price
3. Differences between the directors
4. Serving of the office by the director after the
expiration of the term
5. Neglect/ breach of duty by the director
6. Improper appointment of the director

36. Remedy at law
1. Under the provisions of Section 242 (2), the Tribunal
may allow relief to the complaining shareholders in case
of oppression or mismanagement, some of which
include
2. Regulation of the company's future affairs;
3. Direction to purchase the company's shares by other
members;
4. Restriction on transfer of allotment;
5. Termination, setting aside, modification of any
agreement between the company and its management;

37. 6. Termination, setting aside, modification of any agreement
between the company and any third person;
7. Setting aside of any transaction of transfer, delivery,
payment, execution, etc.;
8. Removal of any member of the management;
9. Recovery of undue gains made by the management;
10. Appointment of the members of the management;
11. Imposition of costs.
12. Interim Order (Section 242, Sub – Section 4)
13. Alteration in Memorandum or Articles (Section 242,
Sub – Section 5, 6, 7)