Ms. TEENA KAPOOR a 3rd year law student from Gitarattan International Business School college
INTRODUCTION
A prospectus is a document that contains information that the public can use to subscribe to or purchase securities of a company. Inclusion of inaccuracies could have serious consequences. Any false or misleading statements in the Prospectus are referred to as misrepresentations in the Prospectus. Misrepresentation is defined as containing or omitting facts that could mislead the public. A prospectus is considered to be misleading if there is a risk of misleading the public by omitting the relevant matters in the prospectus. There are instances where the notion of future events has been questioned. Merely stating that something has been or will happen in the future is not a statement of fact that could lead to liability for misrepresentation. In order to activate this, distortion of the existing facts is necessary. If the description was correct only at the time of publication of the prospectus and not at the time of distribution, then liability is involved. The description of the prospectus for the prospective director is an important description, and if false, the person who made the subscription has the right to cancel the subscription.
MEANING
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 authorises 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.
Section 34.Criminal liability for mis-statements in prospectus.
Where a prospectus , issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be liable under section 447:
Provided that nothing in this section shall apply to a person if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.
Exemption from the criminal liability
No person shall be liable for criminal liability if the person proves that-
Such statement or omission was immaterial,
Or he had reasonable ground to believe, and did up till the time of issue of prospectus believe that the statement was true and the omission or the inclusion was necessary.
Conclusion
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;
CASE LAW
In the matter of Taksheel Solutions Limited, the SEBI (25 October 2013) discovered that the Red Herring Prospectus/Prospectus had a number of crucial details lacking, leading to misrepresentation. The company, its promoters/directors, and independent directors were previously forbidden by SEBI from purchasing, selling, or otherwise transacting in securities.
The Board stated that in order to assist the applicants in making an educated investment decision, the firm had a responsibility to include honest and accurate disclosures and representations in the Prospectus. The Board also noted that a related party transaction was not disclosed in the Prospectus. The Board affirmed the temporary injunction prohibiting the Company and its Promoters/Directors from dealing in securities as a result. The Board, however, lifted the ban on the independent directors who had left the Company and had been subject to the restraint for more than 21 months.
Suspension of the auditor for false certificate attached to the Prospectus
The High Court of Andhra Pradesh noted that the prospectus is a special document and that the auditor would be in breach of his statutory obligations if he issued a false certificate, which is what happened in The Institute of Chartered Accountants of India v. Mukesh Gang, Chartered Accountant, Referred Case No.2 of 2011. The court further stated that because the public purchased the shares in response to the invitation, he must be assumed to be aware of the repercussions of such gross negligence of a false certification (Prospectus).
The court additionally noted that, in accordance with Section 65 of the Companies Act of 1956, false representations in a prospectus will subject the maker to liability for any loss or injury a person suffers as a result of subscribing for shares or debentures based on such assertions.
In this case, the court determined that the statutory auditor’s certification led to the general public being misled into buying firm shares by putting their trust in such a document. In accordance with Section 21(5) of the Chartered Accountants Act, 1949, the court therefore put the respondent’s ability to practise as a chartered accountant on three-year probation.
REFERENCES
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