A prospectus is a vital part of any business. In general, consumers search for a firm’s prospectus to determine whether or not they should invest in that company. It’s crucial that the things described in the prospectus are genuine. Companies create prospectuses because they want customers to come in and buy the firm’s debentures or credit money through the company.

The Companies Act of 2013, Section 2(70), defines “prospectus” as “any document characterized or distributed as a prospectus, including notices, circulars, and documents, as well as ads presenting an invitation to purchase or subscribe stocks.

A prospectus is an important document that can be used to determine the validity of a company’s scheme. It is the responsibility of the corporation to verify if the contents of the prospectus are accurate.

There are various prospectus types, including:

Shelf Prospectus

Any funding organisation or bank may produce a prospectus for one or more releases of securities or categories of securities specified in the prospectus. This prospectus is known as a shelf prospectus. 

Deemed Prospectus

Section 64 of The Companies Act defines a deemed prospectus. It is a clause that forbids the release of a prospectus. A firm can get around this by spending the entire sum to an intermediary defined as an issuing house to avoid the complicated and demanding prospectus requirements. The issuing house subsequently notices to release the shares to the public.

Information Memorandum and Red Herring Prospectus

An Information Memorandum is a process carried out ahead of the filing of a prospectus during which a supply of securities destined to be provided by a company is evoked, as well as the conditions for the issue and even the price of these securities are analysed through circulars, notices, documents or advertisements. A Red Herring Prospectus is a kind of prospectus that lacks full details on the cost of the securities provided and the number of securities issued.

Misstatements in prospectus

A prospectus is a document that contains information that the public can use to subscribe to or purchase a company’s securities. If it contains any inaccuracies, it will have major ramifications. Any statement in the prospectus that is erroneous or misleading is referred to as misstatements in the prospectus. A misrepresentation is defined as the inclusion or omission of a fact that is likely to mislead the public. The prospectus shall be regarded a prospectus with an erroneous statement if a relevant matter has been omitted from the prospectus and such omission is likely to mislead the public.

There have been instances when representation for future events has been called into question. A mere remark that something will be done or happen in the future is not a statement of fact that could lead to liability for misrepresentation.  A misstatement of an existing fact is required to activate it. If a representation was true only at the time of prospectus issuance and not at the time of allotment, it would trigger liability. A statement in a prospectus about the persons who would be directors is a significant statement, and if it is false, a person who subscribed on the basis of it is prima facie entitled to cancel their subscription.

Liabilities for Misstatements in Prospectus

Liabilities for prospectus misstatements can be classified under the following headings:

·        Civil Liability

·        Criminal Liability

Criminal Liability in case of misstatements in prospectus

Criminal liability for misstatements in prospectuses is dealt with in Section 63 of the Companies Act.

Every person who authorizes the issue, circulation, or distribution of a prospectus that contains any statement that is incorrect or misleading in any form in which it is contained, or where any inclusion or omission of any matter is likely to mislead, is responsible for fraud.

Sec. 447 defines “fraud” as any act, omission, or concealment of any fact with the aim to deceive, obtain an unfair advantage, or harm the company, its shareholders, creditors, or any other person. It is not required that such a conduct result in any unjust profit or loss. If a person abuses his or her position,  that is also deemed fraud under this provision.

Punishment for misstatement in prospectus

If a person is found guilty of fraud, they will be sentenced to prison for a period of not less than six months but not more than ten years. He will also face a fine that will not be less than the amount involved in the fraud but could be up to three times the amount involved in the scam. If the fraud was perpetrated in the public interest, the sentence must be at least of three years .

Exemption from criminal responsibility

No one can be held criminally accountable if they can prove that-

  • Such a statement or omission was irrelevant,
  • or he had reasonable grounds to think, and did believe, until the prospectus was issued, that the statement was truthful and the omission or inclusion was required.

Prohibition of the Company and directors from dealing with securities following misstatement

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 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.





When creating a prospectus, extreme caution and discretion are required. Before it is released to the general public, the prospectus must be verified for any misstatements or anomalies. The Companies Act holds specific people liable and punishes them for any misstatements revealed in a company’s prospectus. Because the general public relies on the prospectus to make investment decisions, its integrity must be preserved.


Misstatement in Prospectus

Aishwarya Says:

Law students often face problems, which they cannot share with their friends and families. We have started a column on our website Student’s Corner. In this column we are talking to several law students about the challenges that they face. Students who are interested in participating in the same, can fill this Google Form.


We do conduct several Courses, Quizs and Webinars, Click here to registerDo 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 the year 2021, we wrote about 1000 Inspirational Women In India, in the year 2022, we would be featuring 5000 Start Up Stories

Join our Whatsapp group for Legal Job Openings

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Create a website or blog at

Up ↑

%d bloggers like this: