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Prospectus is an important component of a company. Generally, people look for
the prospectus of a company in order to decide whether they should invest in
that company or not. The authenticity of the contents mentioned in the
prospectus is critical. The reason why companies issue prospectus is that they
want people to come and take debentures of the company or to credit money
through the company.
The contents mentioned in the prospectus must be true. In case there is any incorrect information in the prospectus, and if the public performs any action based on the information in the prospectus, it will invite civil or criminal liabilities upon the company. In this article, we shall examine the meaning and the civil and criminal liabilities for misstatements in prospectus.
According to the Section 2(70) of the Companies Act, 2013, “prospectus” means any document described or issued as a prospectus and includes notices, circulars, and documents, advertisements offering an invitation to purchase or subscribe securities. Simply speaking a prospectus is a document inviting deposits or offers from the public for the subscription of its shares or debentures. Likewise, a document that offers the sale of shares of a company by its members shall also be deemed to be a prospectus. The prospectus must contain information and reports on financial information mentioned by the Securities and Exchange Board of India (SEBI) in consultation with the Central Government.
prospectus is an essential document through which one can find out the
reliability of a company’s scheme. A company is responsible to check whether
the contents of the prospectus are true or not.
There are various kinds of the prospectus. These are discussed below.
Shelf prospectus is a prospectus for one or more issues of
securities or class of securities stated in that prospectus delivered by any
funding organisation or bank. A company that has already filed a shelf
prospectus with the registrar doesn’t need to file a fresh prospectus at every
stage of the offer of securities within a period of the legitimacy of such
Section 64 of the Companies Act specifies Deemed Prospectus. It is an exclusion to the issuance of a prospectus. The making and filing of a prospectus is a difficult task, and the requirements with respect to the prospectus are rigorous; therefore a company can avoid this by providing the entire money to an intermediate known as the issuing house. After that, the shares are presented to the public by the issuing house through an announcement.
A Red Herring Prospectus is a kind of prospectus that does not have complete details on the price of the securities offered and the quantum of securities offered whereas Information Memorandum means a process taken prior to the filing of a prospectus through which a demand for the securities intended to be issued by a company is elicited, and the terms for the issue and the price of such securities are analysed by notices, circulars, advertisements or document.
prospectus contains the information which is relied on by the public to either
subscribe or purchase the securities of a company. If it contains any
misstatement then it would invite serious consequences. Any statement that is
incorrect or misleading is included in the prospectus then it would be termed
as mis-statements in prospectus. Any inclusion or omission of a fact which is
likely to mislead the public shall also be termed as a misstatement. Where a
matter which is material enough has been omitted from the prospectus and such
omission is likely to mislead the public, the prospectus will be deemed to be a
prospectus with an incorrect statement.
are times when matters related to representation for the future events have
been questioned. A mere representation that something will be done or will
happen in future is not a representation of fact which could invoke the
liability for misstatement. To invoke it, there must be a misstatement to an
existing fact. Representation would invoke the responsibility if it was true
only at the time of issue of prospectus and not at the time of
allotment. A statement in a prospectus as to the persons who are to be
directors is a material statement and if it is untrue, a person subscribing on
the faith of it is prima facie entitled to rescind.
The liabilities for Mis-statements in prospectus can be covered under the following heads:
Where a person who has subscribed for securities of a company based on any statement included or any inclusion or omission of a matter, in the prospectus that is misleading and upon acting on the content of the prospectus, suffers any loss or damage as a consequence, then the company and every person who–
Shall be liable to pay compensation to every
person, without prejudice to any punishment to which any person may be liable,
to every person who has suffered such loss or damage.
No person shall be liable for misstatement if the person proves that-
Issuance of Prospectus with intent
to defraud or any other fraudulent purposes–
it has been proved that a prospectus has been issued with an intent to defraud
the applicants for the securities of the company or any other person for that
matter or for any other malicious purpose, each person referred in the
above-mentioned passage shall be personally liable, without any limitation of
liability, for all or any of the damages incurred by any person who had subscribed
to the securities on the basis of such prospectus.
Section 63 of the Companies
Act deals with criminal liability for mis-statements in prospectus
Where a prospectus issued, circulated, or distributed includes any statement that is untrue or misleading in any form in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises such issue of the prospectus shall be liable for fraud.
“Fraud” under Sec. 447 comprises of an act, omission, concealment of any fact with an intent to deceive, gain undue advantage, or to injure the interests of the company, its shareholders, its creditors or any other person. It is not necessary that such an act involve any wrongful profit or wrongful loss. If a person commits abuse of position, then that shall also be considered fraud under this section.
a person is found to be guilty of the offence of fraud, then that person shall
be punished with imprisonment for a term that shall not be less than six months
and may extend to ten years. He shall also be liable to fine, which shall not
be less than the amount involved in the fraud and may extend to three times the
amount involved in the fraud.
the fraud so committed involves public interest, the term of imprisonment shall
not be less than three years.
Exemption from the criminal
No person shall be liable for criminal liability if the person proves that-
care and prudence must be maintained while making a prospectus. The prospectus
must be checked for any mis-statements in prospectus or any irregularities
prior to its issuance to the general public. The Companies Act provides for
liabilities and punishments upon certain people for any misstatements found in
the prospectus of a company. The general public relies upon the prospectus for
making investment decisions; therefore, its authenticity must be maintained.
Read, More: A Brief Overview on Company Directors: Duties, Powers, Appointment & Liabilities
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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