Section 27 of the Companies Act, 2013: Variation in Terms of Contract or Objects in Prospectus
Section 27 regulates a company's power to change the terms of a contract referred to in a prospectus or the objects for which the prospectus was issued. The provision protects shareholders by requiring approval through a special resolution and, where applicable, an exit opportunity for dissenting shareholders.
What does Section 27 mean?
Under Section 27(1), a company cannot vary the terms of a contract referred to in its prospectus, or alter the objects for which the prospectus was issued, unless the variation is approved or authorised by the company in general meeting by way of a special resolution.
The notice requirements are intended to ensure that shareholders receive the reasons and material particulars of the proposed variation before voting. The statutory framework also restricts the use of money raised through a prospectus for buying, trading or otherwise dealing in equity shares of another listed company.
Rule 7: procedure where public issue money remains unutilised
Rule 7 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 applies where money has been raised from the public through a prospectus and an amount remains unutilised. The variation is to be approved by special resolution through postal ballot. The notice should disclose information necessary for members to make an informed decision.
- Original purpose or object of the issue.
- Total money raised and the amount already utilised.
- Extent to which the original objects have been achieved and the unutilised amount.
- Particulars of the proposed variation and the reasons and justification for it.
- Proposed time limit for achieving the varied objects.
- Relevant details concerning the proposed objects, associated risk factors and other material information.
The advertisement relating to the proposed special resolution is prescribed in Form PAS-1 and is to be published in accordance with Rule 7.
Newspaper publication and justification
Section 27 requires prescribed details of the notice concerning the special resolution to be published in one English newspaper and one vernacular-language newspaper in the city where the company's registered office is situated. The publication must clearly indicate the justification for the proposed variation.
Exit offer to dissenting shareholders
Section 27(2) provides protection to shareholders who do not agree with the proposal to vary the relevant contract terms or objects. Such dissenting shareholders are to be given an exit offer by the promoters or controlling shareholders at the exit price, and in the manner and subject to the conditions, specified by the Securities and Exchange Board of India.
For an issuer to which the SEBI requirements apply, the detailed conditions, eligibility, pricing and procedure for the exit opportunity must therefore be checked under the current SEBI regulations in addition to the Companies Act and the Rules.
Practical compliance checklist
| Step | Requirement |
|---|---|
| 1 | Identify the prospectus term, contract term or stated object proposed to be varied. |
| 2 | Determine the amount raised, amount utilised and unutilised balance, where Rule 7 applies. |
| 3 | Prepare the proposal, reasons, financial effect, risks and supporting disclosures. |
| 4 | Seek shareholder approval by special resolution and comply with the applicable postal-ballot requirements. |
| 5 | Publish the prescribed advertisement and disclosures, including Form PAS-1 where applicable. |
| 6 | For applicable listed issuers, comply with SEBI requirements concerning the exit offer to dissenting shareholders. |
Related provisions
Section 27 forms part of the Companies Act provisions governing prospectuses and public offers. It is useful to read it with Section 26 - matters to be stated in a prospectus, Section 28 - offer of sale of shares by certain members, and the other prospectus provisions in Sections 21 to 40 of the Companies Act, 2013.
Official resources
For the authoritative statutory text and regulatory material, refer to the Ministry of Corporate Affairs - Companies Act, 2013 and the SEBI Regulations page. Regulatory requirements should be checked as applicable on the date of the proposed variation.
Disclaimer: This article is for general legal information. Company-specific compliance may depend on the nature of the issue, listing status, offer document, unutilised proceeds and regulations in force at the relevant time.