Page 178 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 9: Prospectus

The word ‘public’ includes any section of the public (s.67). It may, thus, include all registered Notes
medical practitioners in Delhi, all advocates of High Court of Delhi, all Englishmen living in
India.
However, in the following cases, the document inviting subscription to shares or debentures of a
company shall not be deemed as invitation to the public and hence shall not be a prospectus:
1. A circular inviting existing shareholders or debenture holders of the company. Although
s.67(1) provides that such an offer shall be an offer to the public yet in view of the provisions
of s. 67 (3) and (4) and that of s. 56 (5), considered view of the authors on the subject is
that it does not amount to a public offer. The circular containing offer of rights shares is,
therefore, not a prospectus.
2. The offering of shares to the kith and kin of a director is not an invitation to the public to
buy shares [Rattan Sigh v. Moga Transport Co. Ltd. (1959)]. Such an offer, therefore, shall not
be deemed as prospectus.
3. Where an invitation is made by the management of a company to selected persons for
subscription or purchase by the persons receiving the offer or invitation, the shares or
debentures and such invitation or offer is not calculated directly or indirectly to be availed
of by other persons, such invitation or offer shall not be deemed as prospectus [s.67(3)].
However, this is in applicable in a case where the offer or invitation to subscribe for shares
or debentures is made to fifty persons or more. In Nash v. Lyne (1929), a document marked

‘strictly confidential’ containing particulars of a proposed issue of shares was sent by the

managing director to a co-director and through him passed on privately to a small circle of
friends of the director. The House of Lords held that it was not a prospectus, as there had
been no issue to the public.
4. Where a new company, by a circular, offered to buy all the shares of two existing companies
and issued its own shares in exchange of those shares, it does not amount to an offer to the
public as it neither involves an offer for the purchase of shares for money, nor an invitation
for subscription of shares.
Is the issue of prospectus compulsory? When prospectus is not required to be issued? No, issue
of prospectus by a company is not compulsory in the following cases:
(i) A private company is not required to issue a prospectus.
(ii) Even a public company need not issue a prospectus if the promoters or directors feel that
they can mobilise resources through personal relationship and contacts. In such cases, the
company is required to file a statement called ‘statement in lieu of prospectus’ with the

Registrar of Companies.
(iii) A company may issue any forms of application for shares or debentures accompanied
by a memorandum containing the prescribed salient features of prospectus (instead of
prospectus). However, in such a case, a copy of the prospectus must be made available to
any person on request [s.56 (3)].

(iv) Where the application form is issued in connection with a bona fide invitation to a person

to enter into an underwriting agreement with respect to the shares or debentures (s.56
(3)].
(v) Where the application form is issued in relation to shares or debentures not offered to the
public [s.56 (3)].
(vi) Where the shares or debentures are offered to existing holders of shares or debentures (i.e.,
rights issue) with or without the right of renunciation in favour of other persons [s.56 (5)].
(vii) Where invitation to the public for subscription to the shares or debentures of a company
is made in the form of an advertisement, ordinarily called as “prospectus announcement”
[s.66].

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