A Study on the Legal Implications for Misstatements in the Prospectusin India

Topics: Misrepresentation, Limited liability, Legal liability Pages: 13 (4027 words) Published: October 5, 2008

When any company reaches out to the public to fund its visions, it is the prospectus that they send out –that ‘letter of offer’ that can turn dreams to reality. The prospectus could thus be visualized as the envoy of the company, sent to elucidate detailed information to woo potential investors from the general public. Countless business legends have been created, entirely because companies invited the public to subscribe to their securities or trade in existing securities, and thereby enter into a ‘relationship’ with the company.

Section 2(36) of the Companies Act, 1956 defines a prospectus as,

“…any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting offers from the public for the subscription or the purchase of any shares in, or debentures of, a body corporate.”

Thus, the prospectus is really the basis of contract between the company and the ‘buyer’. It is the information stated in the prospectus that drives an individual’s decision to invest in a company or not. As such, information provided must be authentic, accurate and exhaustive.

But what happens if they’re not? Considering the magnitude of funds involved, the law comprehends the temptation of companies to leverage the prospectus deceptively, and the need to protect investors from the same. Schedule II, III, IV and sections 44, 56, 60-65 and 603-608 of the Companies Act, 1956 details certain mandatory disclosures and specific information which must be included in the prospectus. In addition, SEBI Guidelines, 2000 provides for Disclosure for Investor and Protection, also related to the contents of the prospectus.

Furthermore, to ensure that companies are discouraged from toeing the line, the Companies Act prescribes severe penalties, both civil and criminal, for misstatements in a prospectus. These provisions also apply to brochures, pamphlets and other publicity material advertising the issue of securities. Basically, this essay researches the area of misstatements of prospectus and the remedies thereof, as provided for in the Companies Act. Specific cases may be inserted to clarify concepts. In addition, we will also consider the 2005 litigation of Danier Leather to capture the curious nuances of this area, though the case ended with a twist and a change in judgement.


Our guiding principle when defining misstatements in the prospectus is provided by the ‘Golden Rule’ as to framing of prospectuses, laid down by V.C. Kindersley in New Brunswick & Canada Rly & Land Co. (V Muggeridge, (1860) I Dr. and Sm. 363) in the following words,

“Those who issue prospectus holding out to the public the great advantages which will accrue to persons who will take shares in a proposed undertaking, and inviting them to take shares on the faith of the representations therein contained, are bound to state everything with strict and scrupulous accuracy and not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge, the existence of which might in any degree affect the nature of extent and quality of the privileges and advantages which the prospectus holds as inducement to take shares.”

If there is any misstatement of a material fact in a prospectus, or if the prospectus is wanting in any material fact, there may arise:-

Civil Liability
Criminal liability.

Remedies against the Company

If there is a misstatement or withholding of material information in a prospectus, and if it has induced any shareholder to purchase shares, he can:- Rescind the contract; and
Claim damages from the company, whether the statement is fraudulent or an innocent one.

Rescission of the Contract

Any person, who takes shares on the faith of statement of fact contained in a prospectus, can apply to the court for the rescission of the contract, if those...
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