Q.When is a public company required to issue a prospectus, and why is a private company exempt?

A company's obligation to issue a prospectus depends entirely on whether it proposes to raise capital from the general public or through some other route.

Since a private company's Articles restrict share transfer and prohibit any invitation to the public (Section 2(68)), it raises funds only from promoters or through private placement, and the question of a public invitation simply does not arise for it.

Whether a company needs to issue a prospectus turns on how it proposes to raise capital, not on its size or turnover. A public company is legally free to invite members of the general public to subscribe for its shares or debentures. The moment it chooses to raise funds this way - as opposed to allotting the entire issue privately to a defined group, or restricting an offer only to its existing shareholders through a rights issue addressed to them personally - it is making an 'invitation to the public' within the meaning of Section 2(70), and it must first issue a prospectus that complies with Section 26: dated, signed by the directors, and registered with the Registrar of Companies before it reaches a single member of the public.

A private company, by contrast, is defined under Section 2(68) precisely by the restriction that its Articles must prohibit any invitation to the public to subscribe for its securities, and must restrict the right to transfer its shares. Because a private company cannot lawfully invite the public at all, the occasion for a prospectus never arises for it; it raises whatever capital it needs from its promoters, existing members, or through the private placement route of Section 42.

Even a public company is not always required to issue a prospectus - if it chooses private placement, or allots shares only to existing members by way of a rights or bonus issue circulated to them alone, no prospectus is needed for that particular transaction, because there is no invitation to the public in either case.

A common mistake is saying private companies 'are not allowed' to issue a prospectus as if it were a separate rule, instead of explaining that they are barred from inviting the public at all under Section 2(68), which is what actually removes the need for a prospectus.