Useful Notes on the “Prospectus” of a Company (Indian Companies Act, 1956)

Section 67 clarifies as to what will constitute an invitation to the public. It states that an offer or invitation to any section of the public, whether selected as members or debenture-holders of the company or as clients of the person making the invitation, will be deemed to be an invitation to the public.

The term ‘public’, therefore, includes any section of the public howsoever selected. It connotes persons not personally known to the promoter as distinguished from his own friends, relatives, connections and acquaintances. Even an offer to a limited class of people shall be an offer to public.

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Case:

Re. South of England Natural Gas and Petroleum Co. Ltd. 3,000 copies of document in the form of a prospectus were sent out and distributed among the members of certain gas companies only.

It was held that though the offer was only to limited class, it was nevertheless an “offer to the public,” as those persons were nonetheless “the public”, vis-a-vis the company, although they were not public at large, but selected portion of it. It must, therefore, contain the particulars as required by the Act.

In the following cases, however, the offer shall not be treated as made to the public:

(i) If it is not made in a way so as to result, directly or indirectly in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation provided the offer is made to less than 50 persons. [Section 67(3) a]

(ii) It is only a domestic concern of the persons making and receiving the offer or invitation provided the offer is made to less than 50 persons and each offer is made separately to a particular addressee. [Section 67(3) b]

Case:

Nash v. Lynde (1929) Nash applied for certain shares in a company on the basis of a document sent to him by Lynde, the managing director of the company. The document was marked “strictly private and confidential.”

The document did not contain all the material facts required by the Act to be disclosed. Nash filed a suit for compensation for loss suffered by him by reason of the omissions.

The suit was dismissed. The court observed, “The public is of course a general word. No particular numbers are prescribed. Anything from two to infinity may serve. The point is that the offer as such is 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. A private communications is not thus open and does not construe to be a prospectus”.

(iii) If shares are offered to a few issue houses or Qualified Institutional Investors (iv) which have agreed to hold the sections as long term investments.

(iv) If on the conversion of proprietary business into company, the vendor has offered shares to a small circle of friends, relations or customers.

(v) If the shares are offered exclusively to the existing members with whom necessary information about the company and its issue is already available.

(vi) If the offer is made in connection with a bonafide invitation to a person to enter into an underwriting agreement with respect to the shares.

(vii) If the shares offered are uniform in all respects with shares already issued and quoted on a stock exchange.