Advisory Services
Audit
Consulting
ESG Advisory
RBI Registration
SEBI Registration
IRDA Registration
FEMA Advisory
Compliances
IBC Services
VCFO Services
Growing
Developing
ME-1
ME-2
EU-1
EU-2
SE
Others
Select Your Location
A 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.
A 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 prospectus.
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.
A 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.
There 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–
Where 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.
If 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.
If the fraud so committed involves public interest, the term of imprisonment shall not be less than three years.
Exemption from the criminal liability
No person shall be liable for criminal liability if the person proves that-
Enough 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.
On 18th May 2023, the Securities Exchange Board of India (SEBI) released a Consultation Paper o...
Infrastructure and real estate have been regarded as India's "sunshine sector" since the turn o...
On 22nd May 2023, the Central Board of Direct Taxes (CBDT)[1] issued a new circular under secti...
Anyone can have different sources of income. With globalization and the opening up of economies...
The Reserve Bank of India (RBI) is crucial in regulating NBFC, including branch openings and cl...
In India, Non-Banking Financial Companies are subject to certain restrictions from taking publi...
It's usually a good idea to diversify the assets in your financial portfolio, especially during...
A nation is being built by the non-banking finance company through the development of wealth, t...
A corporate entity known as a portfolio manager complies with a contract or agreement with the...
Identifying and analysing risks associated with individual portfolio investments, such as equit...
Are you human?: 9 + 5 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
To augment its operations and sales revenue, each start-up needs to fuel in ample amount of funds into the business...
15 Jun, 2020
The companies act 2013 has clearly defined the roles and responsibilities of statutory Auditor, the responsibilitie...
21 Sep, 2017
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!