An offer to the public

An offer of shares to the company‘s shareholders cannot be termed “an offers to the public”. Sub-section(1) which states that an offer to the public shall include a reference to offering them to “any section of the public whether selected as members or debenture holders of the company“  is, as the sub-section itself states , to be read subject to the provisions of sub-section (3) and (4) of the section 67 of the 1956 Act. Sub-section 3 states that no offer shall be treated as made to the public if the offer or invitation can be regarded as “not being calculated 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 for the offer is made to less than 50 persons. An offer of rights, shares, therefore, does not require to be accompanied by  a prospectus or to be in the form of a prospectus.

This provisions which are by and large copied from the English section are somewhat difficult to construe in the abstract and each case will have to be decided on its own facts and circumstances. The expression “offers to the public” is not a technical expression but has to be understood in its ordinary popular sense of indicating an approach to the general public by advertisement, circular or otherwise, as distinguished from an offer made privately such as to friends or relatives  or a selected set of customers. In the latter case, it is always good to append a note that the shares are not offered  to the public.When shares or debentures do not provide any right of renunciation and such shares or debentures remain unsubscribed, or not taken up by share-holders or debenture holders to whom they are offered and the same or offered by the brokers of the company to certain persons only without making the general offers to the public, the offers by the brokers will not be deemed to be an offer or invitation to the public. Such an offer or invitation made by the brokers cannot , in view of the terms of section 67(3) of the 1956 Act, be regarded as an offer to the public because the under subscribed shares or debentures will only be allotted to those persons to whom the brokers have made an invitation or offer. If  a prospectus addressed to the general public, or to a section of the public, is published, that no doubt constitutes an offer to the public, even though none of the public come in; but possibly if this offer is made without any intention to let the public take up any of the shares, it might be found as  fact that there was no real offer to the public.

What is public issue and what is not

Where an invitation is made by the management of a company to selected persons for subscription or purchase by less than fifty persons receiving the offers 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 offers shall not be treated as an offer or invitation to the public. Where in a private company, a resolution was passed enabling the directors to dispose of the new issue of shares not taken by the existing shareholders, to any person or persons, it cannot be said to be an offer or invitation to the public. The words calculated in clause (a) suggests design, forethought or intention to accomplish a purpose. “Calculated” primarily means to compute mathematically, but when applied to a human action, it is used in the sense of ‘to intend, to design, to plan or to adopt, to achieve a purpose’. The public in the definition  (section 285 of the English Act of 1908)is, of course a general word. No particular members are prescribed. The point is that the offer is such as to be open to anyone who brings his money and applies in due from whether the prospectus was addressed to him on behalf of the company or not. The offer of shares to the kith and kin of a director is not an offer to the public. “Where a private company offers shares to selective persons it cannot be said to be extending an invitation to the public. In all cases the determination of the question of an offer is being made to the public depends upon the facts and language of the notice and the particular circumstances of each case”. But generally, an offer to a select and small circle of friends, promoters, relations or customers cannot be said to be an ‘offer to the public”. An offer upon the reconstruction of a company of shares in the new company to members of the old company in respect of their shares in that company is not an offer to the public.

The offer, to come within the section, need not be an offer by the company; for the section applies to any share capital offered to the public for subscription. The test seems to be this is there a sufficiently intimate subsisting connection between the company or the person making the offers and the persons to whom the offers is made as friends, customers, or otherwise to make the offer a domestic concern. And it is apprehended that the mere fact that an offer is made by the circular addressed by name to a number of persons does not of itself take it out of the category of offer to the public. An offer through issuing houses amount to offers to the public.

Listing if offer is to more than 50 persons

When an unlisted company issued optionally fully convertible bonds to more than 50 persons, in view of the provisions of section 67 of the 1956 Act, it was regarded as a public issue requiring compulsory listing in stock exchanges and therefore  SEBI had jurisdiction to regulate the said issue in exercise of powers conferred on it by section 55 A of the 1956 Act.

Public issue,  enquiry when necessary

In its decision , Securities Appellate Tribunal explained tests for examining whether a particular issue is to be regarded as public issue or not. SAT said that no in-depth enquiry from persons who had subscribed to debentures was necessary. The investor had placed no grievance before the SEBI. There was no material to show that the company had gone in for a public issue. SEBI guidelines could not be enforced in respect of anything done before they were  laid before the parliament.

Private and Confidential offers

Where a syndicate had printed a prospectus marked “strictly private and confidential – not for publication ” and some of the directors sent copies of it to their friends, it was not an offer to the public. On the other hand, where a prospectus marked private and confidential was filed with the Registrar of Companies, and a number of copies not exceeding 3,000 were issued by the promoter to shareholders in certain gas companies in which he was interested, it was held to be an offer to the public.

Option to acquire shares from company

Where an option given to a purchaser to acquire shares of  the company carried no conditions, it was held that the option-holder was entitled to exercise his option unaffected by any subsequent reorganization of the company’s  share capital. The court went by the decision in a company had increased its capital and so diluted the potential rights of the option-holders, the latter would not be affected if the company reorganizes capital in a manner which as against the option-holder disadvantages its shareholders.

Issue as domestic concern

In terms of sub-section 3(b) of section 67 of the 1956 Act, an issue which can be regarded as being a domestic concern of the persons making and receiving the offer or invitation shall not be regarded as a public issue. If the following conditions  are satisfied an issue can be regarded as a domestic concern.

• Offers made is made to less than 50 persons.
• Each offer is made to a specified addressee.
• Each addressee who takes up warrants that he is acquiring the securities for his own account for long-term investment purposes and not with a view to resale, and it would be reasonable for the issuer in all circumstances to believe such a warranty from each addressee;
• Non-renunciable documents of title are issued to successful applicants; and
• The offer is not associated with an application for listing on the Stock Exchange or for some other facility for trading the securities offered.

An invitation to subscribe for securities which is entirely a domestic concern of the persons making and receiving the offers, the invitation will not be a prospectus . A private placement where the company‘s directors approach a few likely investors with respect that they or other individuals whom they may introduce should subscribe for the company’s securities is again not a prospectus. Approach by a company through its brokers or a merchant banker or financier or recognized dealer acting on its behalf to a limited number of institutional or other investors inviting them to subscribe for the securities will not amount to a prospectus. But even an offer to a single person may be offers to public. Thus, a document addressed to the public even if it is in fact shown to one person only in the expectation  that he will be willing to subscribe all the capital will be a prospectus and it is deemed to be issued when it is shown to that person.

Letter of offer with the right to renunciation

The issue of further issues shares by a company to its members with the right to renounce them in favor of third parties does not require the issue or registration of prospectus. The offers of further shares with right of renunciation is a domestic concern of the persons receiving the offer and renouncing the offers and is not made by the company with intent to make a public offer and, therefore, the letter of offers to shareholder with right or renunciation does not require the company Registration with the Registrar of Companies.

For Company Registration in Madurai -> Click here