12.5.14 (Prospectus by Implication)

Section 64 has been designed to check the by passing 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: (a) 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 (b) 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.

In case a document is deemed as prospectus, then it must contain the following information in addition to the information required to be stated in prospectus under s.56(a) the net amount of consideration received or to be received by the company in respect of the shares or debentures to which the offer relates; and (b) the place and time at which the contract under which the said shares or debentures have been or are be allotted may be inspected.

For purposes of registration of a prospectus under s.60, the persons making the offer of sale to the public are to be deemed as directors of the company.

Where the person making the offer is a company or a firm, the documents (i.e., deemed prospectus) must be signed by at least two directors or one-half of the partners as the case may be.

Circumstances under which a document containing an for sale of shares or debentures be not deemed to be a prospectus. A document containing an offer for sale of shares or debentures is a prospectus or not depends upon whether it extends an invitation to the public to subscribe or not. The prima facie test of ‘public offer’ or ‘public invitation’ is whether the terms of the offer or invitation are such that, despite its limited circulation, it is open to any person who so chooses to bring his money and apply for shares in response to the invitation. If the offer or invitation is so open, then it constitutes a ‘public offer’ .If, on the other hand, an offer or invitation can be accepted only by the person to whom it is made and none other, then it will not be deemed to be an offer or invitation to the public.

The word ‘public’ includes any section of the public (s.67).It may, thus, include all

Registered 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.

ls the issue of prospectus compulsory? /When prospectus is not required to be issucd? 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 u 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].

12.5.15 Statement in Lieu of Prospectus (s.70). If a public company makes a private arrangement for raising its capital then it must file a statement in lieu of prospectus with the Registrar at least three days before any allotment of shares or debentures can be made. Schedule III contains a model form of a Statement in Lieu of Prospectus in pursuance of s.70; Schedule IV contains a model form of a Statement in Lieu of Prospectus when a private company is converted into a public company in pursuance of s.44. If allotment of shares or debenture is made without filing the Statement in lieu of prospectus, the allottee may avoid it within two months after the statutory meeting, or where no such meeting is to be held, within two months of the allotment. Contravention also renders the company and every director liable to a fine upto Rs 10,000.