The Public Offer

In one line

A public company raising money from strangers must give them a prospectus, and the modern law's answer to what it must contain is no longer a statutory list but whatever the securities regulator specifies, with the Act keeping the machinery of signature, delivery, expert consent, validity and penalty.

In exam wording: under section 23(1) a public company may issue securities to the public through a prospectus, through private placement, or through a rights or bonus issue; under section 2(70) a prospectus means any document described or issued as a prospectus and includes a red herring prospectus, a shelf prospectus, or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities; and under section 26(1) every prospectus shall be dated and signed and shall state such information and set out such reports on financial information as may be specified by SEBI in consultation with the Central Government.

Why the law has this at all

An investor asked to buy shares in a company he cannot inspect is at an information disadvantage no ordinary contract law can cure. Caveat emptor assumes the buyer can examine the goods; a share is a claim on a future the seller knows far more about.

Company law's response has never been to judge the merits. It is mandatory disclosure: the company must tell the market what it knows, in a prescribed form, on pain of civil and criminal liability if what it says is untrue. The investor then decides. That is the philosophy stated in [Corporate Finance: the Map] and it is the reason the prospectus chapters are the longest in Chapter III.

The 2018 change moved who writes the list without changing the philosophy. A statutory catalogue in a 2013 Act cannot keep pace with disclosure practice; a regulator's regulations can. So s.26(1) now points at SEBI, and the Act retains what a regulator's regulations cannot easily supply: the signature and delivery discipline, the expert's consent rule, the ninety-day validity, and the penalties.

Section 23: the three routes

23(1): a public company may issue securities (a) to the public through a prospectus, a public offer, complying with Part I of Chapter III; (b) through private placement, complying with Part II; or (c) through a rights issue or bonus issue in accordance with the Act and, for a listed company or one intending to list, with the SEBI Act 1992 and its rules and regulations.

23(2): a private company may issue securities only by way of rights or bonus issue, or through private placement. It cannot make a public offer at all, which follows from s.2(68)(iii).