Q.Bright Textiles Private Limited has grown rapidly and now wants to raise funds by inviting the general public to subscribe to its shares through an advertisement. Can it do so in its current form? Explain, with reference to the relevant company-law rules on private companies and prospectus.
Step 1 — Identify the restriction on a private company. Under Section 2(68), a private company's Articles must, among other things, prohibit any invitation to the public to subscribe for its securities. This is one of the defining legal restrictions that separates a private company from a public one.
Step 2 — Can a private company use a prospectus at all? No. Under Section 23, only a PUBLIC company may raise capital via a public offer (prospectus); a private company is confined to private placement (Section 42), rights issues, or bonus issues — none of which involve a general public invitation.
Step 3 — What must Bright Textiles do? To lawfully invite the public, Bright Textiles must first convert itself from a private company into a public company: alter its Articles to remove the private-company restrictions, pass a special resolution to that effect, and file the required forms with the Registrar of Companies, while also satisfying the public company's minimum member/director requirements.
Step 4 — Only after conversion. Once validly converted into a public company, Bright Textiles may issue a prospectus (containing all the Section 26 particulars) and lawfully invite the general public to subscribe.
Bright Textiles cannot invite the public while it remains a private company (Section 2(68)'s prohibition, and Section 23's restriction of public offers to public companies). It must first convert into a public company by special resolution and Registrar filing, and only then may it issue a prospectus.
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