Angela Kathuria Ballb 3rd year Gitarattan International Business School
What’s a prospectus?
Pursuant to section 2( 70) of the Companies Act, 2013, prospectus is a document that invites offers from the public for the subscription or purchase of the securities of a company. The term ‘ prospectus ’ includes not only a document described or issued as prospectus but also notices, leaflets and announcements offering assignation to buy or subscribe the securities. Likewise, any document that offers trade of shares of a company by its members will also be supposed to be a prospectus(sec. 28( 2)). The prospectus must contain similar information and reports on fiscal information specified by the Securities and Exchange Board of India( SEBI) in discussion with the Central Government(sec. 26( 1)). The date of publication of the prospectus is supposed to be the date indicated in the prospectus. The Central Government, the Tribunal or the Registrar can bring all powers in matters related to prospectus(sec. 24 Explanation).
26 of the Companies Act sets out the matters to be stated in the prospectus as well as the way needed to misbehave with its enrollment .Sec. 26( 9) deals with the discipline for issuing prospectus in violation of the said vittles. A company issuing such a prospectus shall be punishable with a forfeiture of minimum fifty thousand rupees and a outside of three lakh rupees. Also, every person who has a knowledge of the issue of similar prospectus shall be punishable with imprisonment that may extend to three times or with a minimum of fifty thousand rupees as fine. The forfeiture may extend to three lakh rupees, and the person may be awarded both fine and imprisonment.( How do we determine the internal guilt of a person? As in, how do we determine that he’d the knowledge that it’s a prospectus in violation? What’s the standard and on whom does the burden of evidence taradiddle ?)
Misstatements in the prospectus
Since prospectus is reckoned on by the members of the public to subscribe or buy the securities of a company, any misstatements on it invite correctional consequences. Misstatement may do when a statement which is untrue or deceiving in form or environment is included in the prospectus. Also, any addition or elision of any matter which is likely to mislead will also be considered as a misstatement(sec. 34). Fore.g., a statement on the purpose of offering shares which is untrue, or statement on the locales of services for a company which is misleading will amount to misstatement in the prospectus.
Liability for misstatement in the prospectus
A person who has inked and given concurrence to the prospectus is liable for misstatement. Persons who had the operation of the whole, or mainly whole of the affairs of the company can be held liable for misstatement in prospectus if they’ve inked the prospectus and had given concurrence for the same. Directors, Company registers, and Directors will come under this order. Still, the bare signing of the affirmations in the prospectus won’t affect in liability for misstatement if the person signing is neither a director of the company nor draw payment from the company. In the Matter of Sahara India Commercial CorporationLtd., SEBI 31Oct. 2018. Then, SEBI considered the submission of the Company Secretary that he inked the prospectus on behalf of the directors under their power of attorney and concluded that he wasn’t liable for misstatement as the director of the company.
A false claim in a prospectus can lead to criminal (Section 3
) and civil (Section 35) action. Under section 2, false statements can attract a penalty for fraud.
7.
Criminal liability
The person authorizing the issuance of a prospectus containing false or misleading statements is punished according to §
. 3
. Such punishment is for fraud as defined in clause 3
.
7. “Fraud”
7 includes any act, omission, concealment of any fact intended to defraud, obtain an undue advantage or prejudice the interests of the company or its shareholders or creditors or any other person. It is not necessary that such action involves wrongful gain or wrongful loss. Abuse of a person’s position is also considered fraud in this section. Sec.
7 further provides for punishment for fraud:
Where the value of the fraud is not less than ten lakhs of rupees or one per cent. Whoever commits fraud on the turnover of the company (whichever is less) is punished by imprisonment of at least six months, which may extend to ten years. Such a person must also be fined the amount of at least the amount related to the fraud, and the fine can be up to three times that amount.
If the value of the fraud is less than ten lakhs of rupees or one per cent. Of the turnover of the company (whichever is less) and does not involve public interest, imprisonment for a term which may extend to five years or fine which may extend to 50 lakh rupees or with both.
If the fraud in question concerns the public interest, the penalty is at least three years in prison.
Civil liability
Civil liability for the inaccuracy of the prospectus arises when a person has caused damage when subscribing to the securities of the company based on a misleading prospectus (§ 35). In such cases, according to §
7, the following persons are responsible and must pay compensation to the persons who suffered damage:
The company manager at the time of publication of the prospectus;
,
Persons who gave their consent to nominate themselves as administrators of the prospectus and were named or agreed to become administrators of the company;
Is a corporate promoter;
Authorized the issuance of the prospectus; and
Is an expert who has been involved or interested in establishing, promoting or managing a business.
Exceptions from liability for misstatements in Prospectus
A person shall not be criminally liable undersec. 34 if he proves that the statement or elision was immaterial or
He had reasonable grounds to believe that the statement was true or the addition or elision was necessary and believed in it up to the time of issue of the prospectus.
Likewise, a person shall not be liable undersub-section( 1) ofsec. 35( civil liability), if he proves that
He withdrew his concurrence to come a director of the company before the issue of the prospectus, and that it was issued without his authority or concurrence; or
The prospectus was issued without his knowledge or concurrence, and
On getting apprehensive of its issue, he gave a reasonable public notice that it was issued without his knowledge or concurrence.
A person may not be liable for a deceiving statement made by an expert if
The report is a correct and fair representation of the statement, or
A correct dupe or a correct and fair excerpt of the report or valuation; and
He had reasonable ground to believe that similar expert was competent to make the statement and had given the concurrence needed bysub-section( 5) of section 26 to the issue of the prospectus and hadn’t withdrawn that concurrence before delivery of a dupe of the prospectus for enrollment .(sec. 35( 2)( c)).
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