Information Memorandum - Share Capital, Company Law | Company Law - B Com PDF Download

Introduction

The term Information Memorandum has been defined under the Companies Act of 2013 in Section 31(2). It includes within its ambit

• All material facts relating to new charges being created,
• Charges in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities or the succeeding offer of securities, and
• Such other changes as may be prescribed,

 which the company has to file with the Registrar within the prescribed time before the issue of a second or subsequent offer of securities under the shelf prospectus.

Now, a mere reading of this Section fails to provide the crux of what an information memorandum stands for and what purpose does it seeks to achieve. In layman’s terms, it is something which represents a resume of the company or corporate entity which is seeking investment from the prospective investors, be it the angel investors or the private equity investors or the venture capitalists.

Purpose

The purpose behind the existence of an information memorandum is to raise investment capital in case of start-ups and bring in fresh investment in case of established companies. The information memorandum provides to the prospective investor, a holistic view of the affairs of the company or any other corporate entity which seeks investments. It is more of what may also be called a vision–mission document of the company as to what are its immediate and future goals and what benefits would the investor acquire if he considers investing in the company. This has been referred to by different names all around the globe, for example, in the case of capitalist countries of the west, it is called an information memorandum but elsewhere, it is referred to as an investment business teaser.

The other matter of concern while referring to an information memorandum is that the difference between it and a business plan. Now, speaking from the point of view of the purpose it seeks to achieve, there can be no broad distinction between them. The only underlying quality which the memorandum seeks to convey is that it puts before the investor the revenue model of the company or the entity, taking into consideration the fixed and the variable costs involved in the business so that it becomes simpler for the investor to assert the validity of their claim based on his prudence.

Moreover, when an information memorandum is being constructed by a Start-up or a company which has been recently floated, then the entire scheme of things involved in the subject has to be more comprehensive and should be aimed at dismissing all the doubts of the investor which arise as to the feasibility of the business.

Important clauses or contents to be present

Now let us discuss what an information memorandum should consist of or what the essential clauses have to be present in a standard information memorandum, keeping in mind the global view. So typically it must contain –

• An introduction to the company or the corporate entity i.e. what is the name of the company? What sort of business does it undertake? Whether it is a fresh company or has been in existence for quite some time? Whether it is part of a group of companies or not etc. Thus, all these questions must be dealt with in the introduction clause.
• Next, we have a clause relating to the profile of the promoters of the company and those of the key shareholders along with these respective inputs being supplied in the day to day activities of the company.
• Next, the profile of the management of the company is to be brought into light i.e. if any person has been appointed as director for the sole purpose of management. Moreover, in case of directors of a company, their past experiences and completed projects also become a subject matter of the memorandum. This can be explained by an example; suppose an IT professional starts his company then the work he had done with the IT firms prior to the starting of this company also must form a part of his details. This is solely for the purpose of instilling more confidence in the investor that his money is being passed into safe hands and return on investment is assured.
• Now, we arrive at a clause which is somewhat tricky and varies from a case to case basis. This is the commercial aspect of the investment. Every investor seeks to make a profit on investment, if not then at least to break even, so no loss is suffered. So startup’s they must incorporate this principle of commercial viability into their products and ideas to lure investors. Again, in the case of companies seeking to provide technology-based solutions, the memorandum must be so structured as to provide the entire idea of the product in simple generic terms.
• Another important clause which has to be present in the information memorandum is a statement of accounts of the company along with a copy of annual returns of the previous three years filed with the MCA and with Income Tax. If these records are not present, then the copies of whatever documents it has relating to compliance must be attached. This is not all, along with these statements of returns the project turnover of the company in the future is also to be attached.

Now having discussed the important clauses to be inserted in the information memorandum, it must be mentioned that while seeking investment from foreign investors, certain things must be kept in mind while providing estimates as to the investment sought or the project cost. The valuation must be expressed regarding the currency of the respective foreign investor. It is also of tantamount importance that the memorandum is drafted in simple language, legal and technical jargons are to be avoided.

It must be kept in mind that no specific law makes the presence of an information memorandum a compulsion in undertaking any investment and it can be practiced by both the private and public companies. But when a listed company undertakes such a memorandum, it has to inform the Stock Exchange 24 hours before such undertaking, and it must also comply with SEBI (Securities and Exchange Board of India) Guidelines, 2015. This is primarily for the reason that with a foreign investor entering the picture, the prices of the shares of the company will fluctuate to a great extent on the Stock Exchange, and vested interests may be involved in taking advantage of such a situation.

An information memorandum may include some element of confidential information, be it relating to the product specifications or to the idea behind the product. This may require the investor to sigh a Non-Disclosure Agreement (NDA) before the memorandum is presented. Now, there may be circumstances when investment is only required for a particular project, it is then titled Project Information Memorandum.

An information memorandum is different from a prospectus which is regulated by the Companies Act 2013 and the ICDR regulations. An information memorandum unlike a prospectus is a commercial document.

Conclusion

Thus, it can be concluded that what an information memorandum does is that it lays down for a prospective investor, in simple words, why he may invest in a particular company by providing the necessary details of the company. The memorandum is to be made in accordance with Rule 10 of the Companies (Prospectus And Allotment of Securities) Rules 2014. The memorandum shall be prepared in Form PAS-2 and filed along with fees as provided in the Companies (Registration Offices and Fees) Rules 2014 within 1 month prior to the issue of second or subsequent offer of securities under the shelf prospectus.