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Question: What do you mean by Mis-statement in Prospectus? Discuss the liability for misstatements in the prospectus. [BJS 2011]Find the question and answer of Company Law only on Legal Bites. [What do you mean by Mis-statement in Prospectus? Discuss the liability for misstatements in the prospectus.]AnswerThe definition of “prospectus” in the Indian Companies Act, 1956, (the “Act”) was based on the definition found in the English Companies Act [Section 455(1)]. It then...

Question: What do you mean by Mis-statement in Prospectus? Discuss the liability for misstatements in the prospectus. [BJS 2011]

Find the question and answer of Company Law only on Legal Bites. [What do you mean by Mis-statement in Prospectus? Discuss the liability for misstatements in the prospectus.]

Answer

The definition of “prospectus” in the Indian Companies Act, 1956, (the “Act”) was based on the definition found in the English Companies Act [Section 455(1)]. It then underwent amendment in 1960 following the recommendation of the Companies Act Amendment Committee of 1957 and also in 1974. Section 2(70) of the Companies Act 2013 defines a Prospectus as

means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of body corporate.

A misstatement in a prospectus refers to any incorrect or misleading information that is included in the document. A prospectus is a document that is issued by a company prior to an initial public offering (IPO) or other securities offering. It provides potential investors with information about the company, its financials, and the risks associated with investing in the company.

A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included inter alia in the prospectus itself or contained in any report or memorandum appearing on the face thereof or by reference incorporated therein or issued therewith and where the omission from a prospectus of any manner is calculated to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included. The liability accrues where any person subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of untrue statement included therein.

In the Indian scenario, the liability for misstatements in a prospectus is governed by the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) Act, 1992 and the Securities Contracts (Regulation) Act, 1956. The Companies Act and SEBI Act provide for civil and criminal liability for making false statements in a prospectus.

Criminal Liability

Every person who permits the release of a prospectus shall be liable under section 447 of the Companies Act of 2013 if the prospectus contains any statement that is false or misleading, or if the inclusion or omission of any matter is likely to cause misrepresentation.

Section 447 of the Companies Act, 2013:

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:
Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Civil Liability

Civil liability for misstatements in the prospectus will arise when a person has sustained any loss or damage by subscribing securities of a company based on a misleading prospectus (section 35). In such instances the following persons shall be liable under section 447 and will have to pay compensation to persons who have sustained such loss or damage:

  • director of the company at the time of the issue of the prospectus;
  • person who has agreed to be named as a director in the prospectus and is named as a director of the company, or has agreed to become such director;
  • is a promoter of the company;
  • has authorised the issue of the prospectus; and
  • is an expert who has been engaged or interested in the formation or promotion or management of the company

Companies, their directors and officers, auditors, and those involved in the preparation and distribution of a prospectus can be held liable for any misstatements or omissions in the document. SEBI has the power to take action against any company or individual for violation of securities laws, including those related to misstatements in a prospectus. SEBI can impose penalties, and fines, revoke licenses and also take legal action against them.

Additionally, investors can file a complaint to SEBI or the Company Law Board (CLB) for any losses suffered as a result of a misstatement in the prospectus. The CLB can order the company to compensate the investors for any losses suffered. It is important for the companies to ensure that the information provided in the prospectus is accurate, complete and not misleading in any way, to avoid any legal liabilities.

In the Matter of Taksheel Solutions Limited, the SEBI (25 Oct. 2013) found that the Red Herring Prospectus/Prospectus had several missing vital pieces of information which resulted in a misstatement. SEBI had earlier prohibited the company, its promoters/directors and independent directors from buying, selling, or dealing in securities in any manner. The Board noted that the company had the duty to make true and correct disclosures and statements in the Prospectus to help the applicants take an informed investment decision.

The Board further observed that the Prospectus failed to disclose a related party transaction too. Therefore, the Board confirmed the interim order of prohibition on the Company and its Promoters/Directors in dealing with securities. However, the Board vacated the prohibition on the independent directors who had resigned from the Company and had undergone the restraint for more than twenty-one months.

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