1,00,000 Equity shares of 100 each were issued at a premium of 2 per share by PQR Limited after offer for the same was received from the…

According to section 27 (1) of the Companies Act, 2013 (the Act), the terms of a contract referred to in the prospectus or objects for which the prospectus has been issued can be varied, but only with the authority of the company given by it in a general meeting by way of a special resolution passed through Postal Ballot. The first proviso to sub-section (1) requires that prescribed details of the notice which has been given to the shareholders are to be published in newspapers (one in English and one in vernacular language) circulating in the city where the registered office of the company is situated indicating clearly the justification for such variation. The second proviso to sub-section (1) also prescribes that such company is not to use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. Section 27 (2) of the Act provides that the dissenting shareholders (i.e. those who did not agree to the variation) are to 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 SEBI by making regulations for this purpose. In the given question, PQR Limited has raised amount through issue of equity shares. It was specified that the amount so received will be used exclusively for manufacturing and distributing some life saving drugs. However, now the company wants to use the surplus money left from the mentioned issue of shares, for development of Artificial Intelligence software and for investing in Equity Shares of X Limited (a listed company). As per facts of the question and the provisions of the Act: The company called an extraordinary general meeting for the above proposals of using the surplus amount. In this meeting, votes cast in favor were in excess of votes cast against. Section 27 (1) requires that a special resolution be passed in case of variation of terms of objects for which the prospectus has been issued can be varied. In view of the above provisions, the contentions of the shareholders are discussed as below: (i) In terms of the provisions of sub-section (1) of section 27 stated above, the first contention of the shareholders is tenable since the resolution passed in the extra ordinary general meeting was not proper as it was not passed by the required majority. (ii) In terms of the first proviso to sub-section (1) of section 27 stated above, the second contention of the shareholders is also tenable since the required publication was not made in the newspapers as mentioned in the above referred proviso. (iii) In terms of the second proviso to sub-section (1) of section 27 stated above, the third contention of the shareholders is also tenable since the Act prohibits the company to use any amount raised by it through the prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. In the given case, X Ltd., is a listed company, hence PQR Ltd., cannot invest in the equity shares of X Ltd. Hence, the resolution passed for investing - 5,00,000 in the equity shares in X Limited is not valid.