Section 33: Issue of Application Forms for Securities

This article focuses on the issuance of securities by company under section 33 of the companies act, 2013 along with certain requirements which are to be fulfilled under the SEBI Regulations 2019.
Estimated Reading Time: 6 minutes

Introduction

Section 33 of Companies act, 2013 lay down the provision for issue of application forms for securities. This is a very brief section, laying down a requirement that has to be followed by every type of company that is raising capital by issuing security. The section itself lays down its two exceptions wherein the requirements of section 33 do not have to be followed by the company. The section came in force in two parts. Section 33 except section 33(3) came into force on 12th September 2013 and section 33(3) came into force from 1st January 2014. Section 33(3) lays down penalty for non-compliance of this provision and thus it came into force later giving time to companies to comply with requirements of the section. The analysis of this section is important to gain a more thorough understanding of the process of issuance of securities and raising money by company.

Purpose of Section 33

Section 18 of the act, 2013 provides the basic requirement for issuance of securities by company. The brief of the section is as follows:

  • The section states that a company cannot issue form of security c unless such a form is accompanied by an abridged prospectus. “Prospectus is a document inviting offer from public for subscription or purchase of any security of the company”. An abridged prospectus means a memorandum containing such salient features of a prospectus as may be specified by SEBI making regulations.
  • Nothing in this section would be applicable if the form of application is issued for the following purposes:

a)     For bona fide invitation to a person to enter into underwriting agreement with respect to such securities.

b)    For securities which are not to be offered to the public.

  • Copy of such prospectus has to be provided when asked by any person before the closing of the subscription list and offer.
  • If the company defaults in complying with this provision, it shall be liable to a penalty of fifty thousand rupees for each default.

An application form for securities cannot be issued unless they are accompanied by a memorandum containing such salient features of a prospectus as may be prescribed in form of an abridged prospectus. The purpose of doing so is to reduce the expense burden of a public issue. The full prospectus has to be maintained in the office of the company.

The definition of an abridged prospectus as given by the act, 2013 leaves it to SEBI to specify its requirements and its regulation. Pursuant to which SEBI ICDR Regulation 2019, lay down the requirements for disclosures that are to be made in relation to an abridged prospectus. SEBI to make sure that abridged prospectus themselves are not bulky but give a brief outline of important outlines, via notification amended SEBOI ICDR regulation, 2009 in the year 2015 to make abridged prospectus less voluminous and more friendly. The Amendment Regulations require disclosure of information, which is material and appropriate to enable the investors to make informed decisions. Regulation 58(1) read with schedule VIII provides for disclosure requirements of an abridged prospectus.

Pursuant to the amendment 2015 to ICDR regulations, SEBI issued a circular providing format of an abridged prospectus to surer this type of prospectus is itself not very bulky but at the same time provides all the relevant information to the investor, so he/she can make the right choice. This revised format of the abridged prospectus covers following amongst others (1) a brief related to top 5 material outstanding litigations against the company and the amount involved (2) if any disciplinary action by SEBI for stock exchanges against company/promoter in last 5 years (3) details on outstanding criminal proceedings if any. The abridged prospectus including the application form cannot exceed five sheets that would be printed on both sides.

According to SEBI ICDR amendment, 2015 the information that is material and appropriate to enable the investors to make an informed decision must be disclosed in the abridged prospectus. An issuer making a public issue of specified securities shall make the disclosures in the abridged prospectus as per the format specified by the Board from time to time, which for now is as per the circular cited above, of SEBI. Following as per the circular are general instructions that every issuer of public securities has to adhere to when it comes to their abridged prospectus:

  • One copy of the abridged prospectus has to be submitted to the board.
  • Information which is of generic nature and not specific to the issuer shall be brought out in the form of a general information document as specified by the Board by any company, to enable the investors to make the best possible decisions.
  • It has to be printed in a booklet form on A4 size paper.
  • The Abridged Prospectus shall be printed in a font size, which shall not be visually smaller than times new roman size 11 with 1.0 line spacing.
  • Information required to be given in tabular format shall not appear in running text format in the abridged prospectus.
  • The order in which items appear in the abridged prospectus shall be as specified by the Board.
  • The application form shall be so positioned that on the tearing-off of the application form, no part of the information given in the abridged prospectus is mutilated.

The above-mentioned disclosure requirements have to be adhered to make sure that the company does not face penalty for non-compliance of section 33.

Situation Before the Enactment of Section 33

In the previous companies act, 1956 there was not a separate section for this particular provision, but it was a sub part of section 56 which lay down the provision for matters to be stated and reports to be set out in the prospectus. The provision with respect to issuance of form of application for purchase of securities is given under section 56(3) of 1956 act and was on the same line as that of 2013 provision. The penalty is also the same both in the old and the new act. Further even in the act, 1956 the application form has to be accompanied by an abridged prospectus. The only difference is that in the act, 2013 there is a distinct section dealing with this issue in form of section 33.

Application of Section 33

Whenever a company has to issue securities, it has to issue an application form, which has to be done according to this section. So, the main application of this section comes into play during issue of security by companies to raise money. Whenever security is to be issued to public by any company, the application form for purchase of security is to be accompanied with abridged prospectus of the company, according to this section, doing so the company can make sure that the investor has all the necessary information before investing and all the compliances are taken care of by the company.

Amendments

This section is a newly added separate section by the companies act, 2013. It has not undergone any amendments till now.

Cases at a Glance

  • Fisherman Development Micro Finance Ltd. case: in this case the company in question issued equity shares of rupees 1000 to 3410 persons, raising amount 5.20 crores. This issuance of shares was challenged on variety of grounds including violation of section 33. The company did not adhere to the requirements of section 333 and did not issue an abridged prospectus with their application form to the investors and thus also violated SEDI ICDR regulations. The board held the company liable and they were penalized, as per section 33(3) as well as they had to receive all the monies received at a 15% interest. This case outlines the importance of following all the disclosure requirements, especially the requirement of abridged prospectus when issuing public shares.
  • Waris Agrotech (India) Limited and Directors case: SEBI received complaint from investors of this company that the company is illegally mobilizing the funds from public. The SEBI inquired on these complaints and prepared a questionnaire and sent it to the company to answer. During this time more complaints were issued against this company. SEBI came to know that the company had issued redeemable preference shares to 39 persons. The company did not deny that they did not follow the requirements of abridged prospectus as per section 56(3) of the act, 1956 (similar provision to section 33 of the act, 2013) and thus were held in violation of various of companies act, 1956 and had to return all the monies collected with interest.
  • Madurai Rural Development Benefit Fund (India) Limited: there were complaints to SEBI against this company and another company, which was related to this company. The complaint was that these companies were mobilizing funds under fixed deposit schemes and collecting monies from the public under various schemes. They had issued customer application forms for subscription to their equity shares. They used incorrect and false information to take advantage of people and induce them to invest in their scheme. They issued public shares so they should have complied with all the requirements of section 56 of the act, 1956 but they did not do so. They did not release any abridged prospectus. They also violated the ICDR regulation. The court noted that such activities pose serious threat to the integrity of the securities market in India and these types of activities that try to bypass SEBI regulation have to be curbed. The board ordered that the monies collected to be returned to the investors with interest.

Concluding Summary

This section is a very important and core section of companies act 2013, because it facilitates the issuance of security by a company. By putting up a requirement of an abridged prospectus to be there with the issuance of application form for purchase of security, the work of the company has become easier. The burden of public issue has been reduced by the way of this section, which shows the true importance of this section. The penalty of non-compliance of this section is also quite high and thus a company should always comply with the provision of this section, to make sure their public issue is not invalidated. The new regulations of SEBI with respect to disclosure requirements for an abridged prospectus have made sure that the burden on the company is lessened as well as the work of an investor is made easier. The new format is very compact and of course very beneficial for the investors; this makes the process of issuing security and the application form very efficient and effective.

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