This article has been written by Aditya Jain
Meaning of a prospectus
As per section 2(70) of the Companies Act 2013, a prospectus refers to a document which invites proposals from the people for the buying of the securities of the company. ‘Prospectuses comprise not only of a document designated or distributed as prospectus but also circulars, advertisements and notices which offer invitation to acquire the securities. Similarly, any document which is offering the shares of the company for sale by the members of the company will likewise be deemed as a prospectus as per section 28(2) of the Companies Act 2013 .
Prospectus comprises of reports and information on financial data stated by the Securities and Exchange Board of India after consultation with Central Government section 26(1) of the Companies Act 2013 . The date which is specified in the prospectus is considered to be the publication date of the prospectus. All the powers concerning to prospectus, redeeming of the preference shares, allotment return, and any matter explicitly provided in the Companies Act 2013, shall be wielded by the Central Government, the Registrar or the National Company Law Tribunal as per the explanation in section 24 of the Companies Act 2013.
The information which is to be specified in the prospectus in addition to the steps which are vital to its registration are sets out in Section 26 of the Companies Act 2013. The penalty for the issuance of a prospectus in breach of the said requirements is covered by Section 26(9) of the Companies Act 2013. A company which issues a prospectus in breach of the said requirements is punishable to a fine of fifty thousand rupees which may be extended to three lakh rupees. Everyone who has information about the issuance of a prospectus which is in breach of the relevant requirements is punishable by means of imprisonment which may range to three years or else with a fine of fifty thousand rupees may be extended to three lakh rupees or by means of both fine in addition to imprisonment.
Misstatements in the prospectus
Prospectus is depended on on by the public in purchasing the shares of the company therefore misstatements in the prospectus invite penalties. Misstatement in a prospectus happens when a declaration that is false or deceptive in context or form is contained within the prospectus. Similarly, omission or inclusion of anything that is expected to mislead is also considered as misstatement as per section 34 of the Companies Act 2013.
Liability for misstatement in the prospectus
An individual who has given his consent and signed the prospectus will be liable for the misstatement in the prospectus. Individuals who are responsible for managing the complete, or significantly all of the matters of the company might be held legally responsible for the misstatement contained in the prospectus in case they had given consent and signed the prospectus. Managers, Directors and Company Secretaries, will come under this category.
Nevertheless, simple signing of declarations in a prospectus shall not lead to the liability for misstatement in the prospectus in case the individual signing is neither drawing salary from that company nor he is the manager of that company.
Securities and Exchange Board of India considering the Company Secretary’s submissions that he had signed in the prospectus under the power of attorney of the directors, in behalf of directors and determined that he wasn’t responsible for the misstatement in the prospectus as director, in the matter of Sahara India Commercial Corporation Limited on October 31, 2018.
Similarly, in the case of Hafez Rustom Dalal vs Registrar of Companies on 30 December, 2004, the Gujarat High Court determined that the respondent authority has to indicate the declarations in the prospectus that they regard as incorrect or made to persuade the people for buying the shares of that company, while issuing notices.
In Royal Mail Case or R v Kylsant & Otrs which is a renowned criminal case of 1931, the entire prospectus had been held to be incorrect, not for the reason that of what is specified but because of the things that were not specified.
Criminal liability for mis-statements in prospectus
Misstatement in prospectus can invoke criminal liabilities as per section 34 of the Companies Act 2013 and civil liabilities as per section 35 of the Companies Act 2013. Misstatements can bring about punishment for fraud under Section 447 of the Companies Act 2013.
- Criminal liability
Any individual who has authorized the issuance of the prospectus which contains false or deceptive statements will be liable for punishment for fraud under section 447 of the Companies Act 2013, as per section 34 of the Companies Act 2013. Fraud as per section 447 of the Companies Act 2013 consists of an act, concealment, omission of any fact with an intending to to betray, get an undue advantage, or to harm the benefits of the company or its stakeholders or the creditors of the company or any other individual. It’s not essential for such an act to comprise of any wrongful loss or wrongful gain. Abuse of a position by an individual is considered as fraud as well, under section 447 of the Companies Act 2013. Section 447 of the Companies Act 2013 has set the punishment for fraud:
- In case the fraud involves 1% of the turnover of the company or a sum greater than or equal to ten lakh rupees, (whichever is lesser): the individual guilty of fraud shall be punished by means of not less than a tenure of six months of imprisonment that may be stretched to a maximum of ten years. A fine of a sum which is not less than the sum which is involved in such fraud and such fine might be extended to three times of such a sum.
- In case the fraud involves an amount, which is less than 1% of the turnover of the company or ten lakh rupees (whichever is lesser) and does not involve public interest, the fine might be extended to fifty lakh rupees or imprisonment which might be extended to five years or with both fine as well as imprisonment.
- In case public interest is involved in the fraud in question, the period of imprisonment shall not be lesser than three years.
Exceptions from liability for misstatements in Prospectus
An individual is not criminally liable under section 34 of the Companies Act 2013 in case the individual proves that:
- the statement in the prospectus or the omission is not material or
- he had reasonable grounds to be certain that the declaration is correct or the insertion or omission is essential and had believed in it till the time of the issuance of prospectus.
Conclusion
The prospectus must be made with greatest care as it is inviting the people to purchase the securities of the company. The public depends on the declarations and the reports which are attached with the prospectus for making a decision to invest. Hence, the Companies Act 2013 has made provisions for punishments and fines for the people who deliver dishonest and incorrect statements in a prospectus.
Henceforth, it can be understood that the prospectus of any company is an important document for the company so many aspects have been well-thought-out by the legislators to make certain that there remains no possibility for the company or any person to escape any legal responsibility which may occur.
Reference
- https://blog.ipleaders.in/liable-misstatements-prospectus/
- The Companies Act 2013
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