What do you mean by Mis-statement in Prospectus? Discuss the liability for misstatements in the prospectus.

Question: What do you mean by Mis-statement in Prospectus? Discuss the liability for misstatements in the prospectus. [BJS 2011]

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Answer

Section 2(70) of the Companies Act 2013 defines a Prospectus as

Prospectus means any document described or issued as a prospectus and includes a red herring prospectus referred to in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of body corporate.

A misstatement in a prospectus refers to any incorrect or misleading information that is included in the document. A prospectus is a document that is issued by a company prior to an initial public offering (IPO) or other securities offering. It provides potential investors with information about the company, its financials, and the risks associated with investing in the company.

The liability accrues where any person subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of an untrue statement included therein.

In the Indian scenario, the liability for misstatements in a prospectus is governed by the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) Act, 1992 and the Securities Contracts (Regulation) Act, 1956. The Companies Act and SEBI Act provide for civil and criminal liability for making false statements in a prospectus.

Criminal Liability

Every person who permits the release of a prospectus shall be liable under section 447 of the Companies Act of 2013 if the prospectus contains any statement that is false or misleading, or if the inclusion or omission of any matter is likely to cause misrepresentation.

Section 447 of the Companies Act, 2013:

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Civil Liability

Civil liability for misstatements in the prospectus will arise when a person has sustained any loss or damage by subscribing securities of a company based on a misleading prospectus (section 35). In such instances the following persons shall be liable under section 447 and will have to pay compensation to persons who have sustained such loss or damage:

• director of the company at the time of the issue of the prospectus;
  
• person who has agreed to be named as a director in the prospectus and is named as a director of the company, or has agreed to become such director;
• is a promoter of the company;
• has authorised the issue of the prospectus; and
• is an expert who has been engaged or interested in the formation or promotion or management of the company

Companies, their directors and officers, auditors, and those involved in the preparation and distribution of a prospectus can be held liable for any misstatements or omissions in the document. SEBI has the power to take action against any company or individual for violation of securities laws, including those related to misstatements in a prospectus. SEBI can impose penalties, and fines, revoke licenses and also take legal action against them.

Additionally, investors can file a complaint to SEBI or the National Company Law Tribunal (NCLT) for any losses suffered as a result of a misstatement in the prospectus. 

In the Matter of the IT Solution Company, Taksheel Solutions Limited (2013), SEBI found that the Red Herring Prospectus/Prospectus had several missing vital pieces of information which resulted in a misstatement. SEBI had earlier prohibited the company, its promoters/directors and independent directors from buying, selling, or dealing in securities in any manner. SEBI put restrictions on the promoters and directors from trading in the markets. 

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