The term "prospectus" is defined as "any document classified or disseminated
as a prospectus, including notices, circulars, and documents, as well as adverts
presenting an offer to purchase or subscribe stocks" in Section 2(70) of the
Companies Act of 2013. A prospectus is, to put it simply, a document that
solicits public contributions or bids for the subscription of shares or
A prospectus is a document that advertises the sale of stock in a corporation by
its shareholders. The prospectus must contain data and reports on financial
facts, which must be provided by the Securities and Exchange Board of India (SEBI),
in collaboration with the Central Government. A prospectus is a crucial document
that can be used to assess the legitimacy of a business plan. The corporation is
in charge of ensuring the accuracy of the prospectus's information.
Types Of Prospectuse
Mis Statement in prospectus
- Shelf Prospectus:
Any funding organisation or bank may produce a prospectus for one or more
issues of securities or classes of securities mentioned in the prospectus.
This prospectus is known as a shelf prospectus. A corporation does not have
to submit a fresh prospectus at each stage of the offering of securities
within a reasonable amount of time after the shelf prospectus's validity has
expired if it has already submitted a shelf prospectus to the registrar.
- Deemed Prospectus:
Section 64 of the Companies Act provides a definition of a deemed
prospectus. It is a clause that forbids the release of a prospectus. A firm
can get around this by paying the entire sum to a middleman known as an
issuing house in order to avoid the complicated and onerous prospectus
requirements. The issuing house subsequently makes a notice to release the
shares to the general public.
- Red herring prospectus and Information memorandum:
A Red Herring Prospectus is a type of prospectus that lacks full information
regarding the price of the securities offered and the quantity of securities
offered, whereas an Information Memorandum refers to the process used prior
to the filing of a prospectus to elicit demand for the securities that a
company intends to issue and analyse the terms for the issue and the price
of such securities through notices, circulars, advertisements, or other
A prospectus is a document with information that the general public can use to
subscribe for or buy securities from a corporation. It will have significant
effects if any of the information is inaccurate. Misstatements in the prospectus
are any inaccurate or deceptive statements in the prospectus.
The inclusion or removal of an information that is likely to mislead the public
is referred to as a misrepresentation. If a material fact has been left out of
the prospectus and that omission is likely to mislead the public, the prospectus
will be deemed to contain an error.
In several cases, the accuracy of representation of future events has been
questioned. A statement of truth that could subject one to responsibility for
misrepresentation is not implied by a simple prediction of what will be done or
happen in the future. It must be activated by making a false remark about an
Liability would result from a representation that was accurate only at the time
of prospectus issuance and not at the time of allotment. If a prospectus makes a
major assertion about the people who will serve as directors, and that statement
turns out to be untrue, the subscriber who did so is presumed to have the right
to terminate their subscription.
Liabilities for mis statement in prospectus
Liabilities for prospectus misstatements can be classified under the
- Civil Liability
- Criminal Liability
- Civil Liability for Prospectus Misstatements
If a person who has purchased securities from a corporation experiences any
loss or harm as a result of a prospectus statement, the inclusion or absence
of a misleading item, or acting on the information in the prospectus, then
the company and everyone associated who:
Exemption from Liability from misstatements in prospectus
- Is currently serving as a director of the company, is listed in the
prospectus as such, or has committed to serve in that capacity,
- Or works to promote the business,
- Or is a professional who has been involved or interested in the company's
founding, management, or has authorised or permitted the prospectus's release.
- Or advancement. will be responsible for compensating any person who has
experienced such loss or harm, without affecting any penalties that may be
imposed on anyone.
No person shall be liable for misstatement if the person proves that:
- The person had revoked his consent before the prospectus was made public.
If someone who had consented to serve as a director of the company later
withdraws that consent and alleges that the prospectus was distributed
without his approval.
- When a prospectus is distributed to a person without their knowledge or
consent. When a prospectus is released without the knowledge or consent of a
person, and that person learns of it, that person is required to publish a
notice that the prospectus was not released with his or her consent.
Issuing a prospectus with the intent to defraud or for any other illegal
If it is established that the prospectus was issued with the intent to defraud
applicants for the company's securities, or anyone else for that matter, or for
any other nefarious purpose, then each of the people listed in the preceding
sentence shall be personally liable for all damages suffered by any person who
subscribed to the securities on the basis of such prospectus.
- Criminal Liability in case of misstatements in prospectus
Criminal liability for misstatements in prospectuses is dealt with in Section 63
of the Companies Act.
Anyone who authorises the publication, distribution, or issuance of a prospectus
that contains information that is false, deceptive, or both, or that includes or
omits information that is likely to mislead, is guilty of fraud.
Any action, omission, or concealment of information with the intent to deceive,
get an unfair advantage, or injure the corporation, its shareholders, creditors,
or any other person is considered "fraud" under Section 447. It is not necessary
for such behaviour to cause any unfair gain or loss. Under this rule, it also
constitutes fraud for someone to misuse their position.
Punishment for misstatement in prospectus
If someone is found guilty of fraud, they will receive a term that ranges from
six months to ten years in prison. Additionally, he will be subject to a fine
that will not be less than the sum involved in the fraud but may be up to three
times that sum. The punishment must be at least three years if the fraud was
committed for the benefit of the public.
Exemption from criminal responsibility
If someone can demonstrate that a statement or omission was immaterial, that it
was necessary, or that the person had a good faith belief that the statement was
true at the time the prospectus was released, they cannot be charged with a
Prohibition of the Company and directors from dealing with securities
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
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.
The prospectus must be created with the utmost care since it serves as an
invitation to the public to subscribe to a company's shares. The claims and
reports included in the prospectus are relied upon by the general public when
making investment decisions. As a result, those who make false or misleading
claims in the prospectus are subject to liability and penalty under the