Misstatement In A Prospectus

According to Section 2(70) of the Companies Act, 2013 a prospectus is any law-related document outlining the financial securities for the sale to the investors of the corporate which also includes any circular, notice, ads or document which acts as an invite to offers from the general public.

The prospectus is trusted by the members of the general public for subscribing or purchasing the securities and other instruments from the corporation and any misstatement by the prospectus can lead to punishment. Misstatement in a prospectus occurs when an untrue or misleading statement is included and issued in the prospectus. Any deletion and inclusion of any matter which misleads the public is also a misstatement under Section 34 of this Act.

Misleading representation includes –

  1. Any untrue statement
  2. Statements implicating wrong impression
  3. Mis-leading statements
  4. Not disclosing true facts
  5. Omission of data

Liability for Misstatement:

A misstatement in the prospectus can invoke criminal (sec. 34) and civil liabilities (sec. 35). Misstatements can lead to punishment for fraud under Sec. 447. 

  • Criminal Liability: When any statement within the prospectus includes misleading or untrue information is distributed then everyone who authorized the issue of the prospectus is liable under section 447 of the Companies Act which states:

Any person guilty of fraud shall be punishable with an imprisonment for a term not less than six months but may extend to ten years and shall also be liable to a fine which shall not be less than the amount of the fraud and can be extended to three times of it.

If the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company (whichever is lower) and does not involve public interest, the imprisonment may extend to five years or with fine which may extend to fifty lakh rupees or with both.

If 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 prospectus will arise when a person has sustained any loss or damage by subscribing securities of a company based on a misleading prospectus (sec. 35)

 Every person and the company is liable who-

  1. Is a director when the prospectus was issued
  2. Named as the director or authorized himself or has agreed to become a director
  3. The promoter of the corporation
  4. Has authorized the issue of the prospectus

Other remedies include recission of contract, claim damages for deceit and liability for omission under section 26.

If the prospectus is issued in contravention of Section 26 the company shall be punishable with fine which shall not be less than rupees fifty thousand but can be extended to three lacks rupees and a person who knowingly is a party to such prospectus shall be punished with an imprisonment for three years or with fine which shall not be less than fifty thousand rupees and can be extended up to three lacks rupees or can be punished with both imprisonment and fine.

 A person shall not be liable under this section if he proves that:

  • he withdrew his consent to become a director of the company before the issue of the prospectus, and that it was issued without his authority or consent; or
  • the prospectus was issued without his knowledge or consent, and 
  • on becoming aware of its issue, he gave a reasonable public notice that it was issued without his knowledge or consent.

  • References:



Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems at adv.aishwaryasandeep@gmail.com

We also have a Facebook Group Restarter Moms for Mothers or Women who would like to rejoin their careers post a career break or women who are enterpreneurs.

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