Page 93 - DCOM106_COMPANY_LAW

Company Law

Notes 7.1 Prospectus – Definition and Meaning

A prospectus, as per s.2 (36), means “any document described or issued as prospectus and includes
any notice, circular, advertisement or other document, inviting deposits from the public or
inviting offers from the public for the subscription or purchase of, any shares in or debentures
of a body corporate”. Thus, a prospectus is not merely an advertisement; it may be a circular or
even a notice. A document shall be called a prospectus if it satisfies two things:
1. It invites subscriptions to shares or debentures or invites deposits.

2. The aforesaid invitation is made to the public.
What constitutes an offer to the public?

The following criteria is laid down as to what shall constitute an offer to the public:
An invitation to the public, shall include an invitation to any section of the public, whether
selected as members or debenture holders of the company concerned, or as clients of the person
issuing the prospectus or in any other manner.
In Rattan Singh vs. Moga Transport Co. Ltd. (1959) 20 Comp. Cas. 165, the learned judge held
that, in all cases, the determination of the question of an offer being made to the public depends
upon the facts and language of the notice, and the particular circumstances of each case.
In Nash vs Lynde (1929, A.C. 1585), Justice Viscount Summer observed: “The ‘public’ is of course
a general word. No particular numbers are prescribed. Anything from two to infinity may
serve; perhaps even one, if he is intended to be the first of a series of subscribers, but makes
further proceeding needless by himself subscribing the whole. The point is that the offer is as
such to be open to anyone, who brings his money and applies in due form, whether the prospectus
was addressed to him on behalf of the company or not.”
In this context it is relevant to discuss the concept of deemed prospectus.

7.1.1 Prospectus by Implication (Deemed Prospectus)

Section 64 has been designed to check the bypassing of the provisions of s.56 as given above, by
making an offer of sale of shares or debentures through the medium of Issue Houses. The
process involves allotment of shares to an Issue House who, in turn, will issue advertisement
offering shares for sale. Since the advertisement is not issued by the company, it does not
amount to a prospectus and thereby liability of non-compliance of s.56 provisions cannot be
invoked. To check this malady, s.64 provides that all documents containing offer of shares or
debentures for sale shall be included within the definition of the term ‘prospectus’ and, shall be
deemed as prospectus by implication of law. All enactments and rules of law as to the contents
of prospectuses and as to the liability in respect of statements and omissions from prospectuses
shall apply in respect of such documents.
Further, s.64 provides that unless the contrary is proved, an allotment of, or an agreement to
allot shares or debentures shall be deemed to have been made with a view to the shares or
debentures being offered for sale to the public, if it is shown:
that the offer of the shares or debentures for sale to the public was made within 6 months
after the allotment or agreement to allot; or
that at the date when the offer was made, the whole consideration to be received by the
company in respect of the shares or debentures had not been received by it.

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