Prospectus and Misstatement in a Prospectus

According to section 2(70) of the Companies Act, 2013 a prospectus is any law-related document outlining the financial securities for the sale to the investors of the corporation which also includes any circular, notice, ads or document which acts as an invite to offers from the general public. And these invitations to offers must be for the purchase of any securities of a company. It is a legal document for the public and investors to buy and have the details of the features, prospects and the declaration of a financial product.

The company’s prospectus is released by the corporation to inform the investors or the public that various securities and instruments are available for them. Mutual funds, stocks, bonds and other types of investments are informed in these documents which have been offered by the company to the public.

ISSUE OF PROSPECTUS

Under Section 26 of the Companies Act, 2013:

If a prospectus isn’t issued before ninety days from the date which a copy was delivered before the registrar, then it’s thought to be invalid. “Issued” here means issued to the public. In Nash v Lynd^[1]  it was held that “the term ‘issue’ is not satisfied by a single private communication”.

Contravention of section

• If a section is issued in contravention of the provision under Section 26, then the company can be penalized under Section 26 (9), with a fine of not less than rupees 50,000 extending up to rupees 3 lakh. 
• If a person becomes alert to such Prospectors when knowing the very fact that such prospectus is being issued in contravention of section 26, then he is punishable with imprisonment up to a term of three years or with a fine of more than Rupees 50,000 not surpassing rupees 3 lakh.

FIXED PRICE ISSUE AND BOOK BUILT ISSUE

In the issue of shares where the company decides the price at first and then discloses the same in the prospectus id called as fixed price issue.

On the other hand the price of the issue of shares is decided according to the securities demanded by the investors at various price levels is the book-built issue type.

ESSENTIALS OF A DOCUMENT TO BE CALLED PROSPECTUS

1. Invitation of subscription must be made to the public of share or debentures or inviting deposits by the document.
2. The invitation must be made to the public or the purchasers.
3. Such invitation must be invited by the company or on behalf of the company.
4. The invitation must be associated with debentures, shares or such other instruments.

THE CONTENTS OF A PROSPECTUS

The detailed contents of a prospectus are given in Section 26 of the Companies Act, 2013. The prospectus must have the following contents:

1. The details of the corporation like name, its registered office address, its CIN number, and the objects of the company.
2. The details of the one who signs the Memorandum and the particulars of the shareholding.
3. The details of the Directors of the company.
4. The minimum subscription amount that has been invited to the public share or debentures.
5. The details of the shares offered.
6. The amounts payable on the stages such as on application, then on the allotment and on the further calls.
7. The details of the underwriters of the issue.
8. Details of the Auditors of the company and their reports of the profit and the losses beard by the company.
9. The detailed procedure and time schedule for allotment and issue of securities.
10. The capital structure of the company.
11. The management perception of risk factors specific to the project.
12. The deadlines for the completion of the project.
13. The disclosures in such manner as may be prescribed about the sources of the promoter’s contribution.
14. Any litigation of legal action pending or taken by a Government Department or a statutory body.

DISCLOSURES TO BE MADE IN A PROSPECTUS

1. General Information: The general information contained in a prospectus will be related to the name and address of the company’s head office, officers, company secretaries, directors, bankers, and legal advisors. It accounts for the primary objective and business operated by the company. It describes the company’s capital structure in a specified manner. Further, it contains information about the issue opening and closing date, procedure and terms for allotment. It lists out the objective of the public offer and the terms and conditions of the issue. It also contains the consent of all the officers.
2. Financial Information: The financial information includes reports provided by the company’s auditors in connection to the profitability, liquidity, assets and liabilities, etc. as well as the report relating to the business in which the capital raised from the public will be utilized.
3. Statutory Information: The prospectus should include an official declaration concerning compliance with the Companies Act and also that the prospectus should not contain anything which violates the provisions of the law.

VIOLATION OF SECTION 26 OF THIS ACT

If a prospectus issued violates the provisions of this section then,

• The company shall pay a fine not less than Rs.50000 which can be extended to Rs. 300000.
• Imprisonment for a maximum term of three years or with a fine not less than Rs.50000 and a maximum of Rs. 300000 or with both can be imposed on every person of the company who is a party to the issue of the prospectus.

PROSPECTUS EXAMPLE

In the Initial Public Offerings, the prospectus notifies the shareholders about the company’s future plans and business model.

The objective of the product, fees, and inclusions and exclusions are defined in the prospectus for the insurance and investment funds’ potential customers.

The prospectus for Electronic Fund Transfer customers informs about the history, portfolio, fund’s goal and various financial details.

LEGAL REQUIREMENTS IN THE ISSUE OF PROSPECTUS (SECTION 26 OF THE COMPANIES ACT, 2013)

The Companies Act has defined some legal requirements for the issue and registration of a prospectus. The issue of the prospectus would be deemed to be legal only if the requirements are met.

1. Issue after the incorporation: As a rule, the prospectus of a company can only be issued after its incorporation. A prospectus issued by, or on behalf of a company, or in relation to an intended company, shall be dated, and that date shall be taken as the date of publication of the prospectus.

2. Registration of prospectus: it is mandatory to get the prospectus registered with the Registrar of Companies before it is issued to the public. The procedure for getting the prospectus registered is as under:

A. A copy of the prospectus, duly signed by every person who is named therein as a director or a proposed director of the company must be filed with the Registrar of Companies before the prospectus is issued to the public.

B. The following document must be attached thereto:

i) Consent to the issue of the prospectus required under any person as an expert confirming his written consent to the issue thereof, and that he has not withdrawn his consent as aforesaid appears in the prospectus.

ii) Copies of all contracts entered into with respect to the appointment of the managing director, directors and other officers of the company must also be filed with the Registrar.

iii) If the auditor or accountant of the company has made any adjustments in the company’s account, the said adjustments and the reasons thereof must be filed with the documents.

iv) There must be a copy of the application which is to be filled for the issue of the company’s shares and debentures attached with the prospectus.

v) The prospectus must have the written consent of all the persons who have been named as auditors, solicitors, bankers, brokers, etc.

C. Every prospectus must have, on the face of it, a statement that:

i) A copy of the prospectus has been delivered to the Registrar for registration.

ii) Specifies that any documents required to be endorsed by this section have been delivered to the Registrar.

D. A copy of the prospectus must be filed with the Registrar of Companies.

E. According to Section 26, no prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration.

If a prospectus is issued in contravention of the above–stated provisions, then the company and every person who knows a party to the issue of the prospectus shall be punishable with a fine.

TYPES OF PROSPECTUS

There are four types of prospectus according to the Companies Act, 2013. These are:

Deemed Prospectus

Section 25(1) of the Companies Act, 2013 defines the Deemed Prospectus. A deemed prospectus is a document from which the investors are made an offer when the company allows or agrees to allot securities of the company. Any document offering the sale of securities to the customers is a prospectus by the implication of law.

Red Herring Prospectus

All the information regarding the price of the securities offered and the number of securities to be issued isn’t defined within the red herring prospectus. According to the Companies Act, the prospectus must be issued to the registrar a minimum of 3 days before the offer and also the subscription list opens by the company.

Shelf Prospectus

Section 31 of the Companies Act, 2013 defines the shelf prospectus. When a company offers 1 or more securities to the public or the customers then the shelf prospectus is issued. The validity period of the prospectus should not be more than a year and from the commencement of the first offer, its validity period starts. No prospectus is issued on the further offers.

Abridged Prospectus

It is a memorandum providing all the data given by the SEBI. It gives all the data to the investors for making further decisions. An organization must issue an abridged prospectus with the application form for the purchase of the securities.

COMPANIES REQUIRED TO ISSUE PROSPECTUS

• Every publicly listed company that wants to offer shares ordebentures or other such instruments of the company to the public must issue a prospectus before offering the shares.
• Every private company who was at first a private company but converted itself to a public company and wants to offer their shares or debentures to the public must first issue a prospectus.

MISSTATEMENT IN A PROSPECTUS

The prospectus is trusted on by the members of the general public for subscribing or purchasing the securities and other instruments from the corporation and any misstatement by the prospectus can lead to punishment. Misstatement in a prospectus occurs when a untrue or misleading statement is included and issued in the prospectus. Any deletion and inclusion of any matter which misleads the public is also a misstatement under Section 34 of this Act. For instance, and statement which gives the incorrect location of the company’s office is misstatement in the prospectus or any statement offering shares misleads the public is a misstatement in a prospectus.

Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:

1. A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included.

2. Omission from the prospectus of any matter to mislead the investors.

LIABILITY FOR MISSTATEMENT WITHIN THE PROSPECTUS

The one who gives the consent and signs the prospectus is to blame for any misstatement in a prospectus. The Managers, CS and also the Directors of the corporation are answerable for the same. However, mere signing won’t result in liability for misstatement if the person who signed the prospectus is neither a Manager nor draws salary from that company.

In the case, Sahara India Commercial Corporation Ltd. v SEBI 31^st October 2018, on behalf of the Director of the company, the Company Secretary signed the prospectus using their power of attorney and SEBI concluded that the CS wasn’t chargeable for the misstatement within the prospectus as the Director of the corporate.

MISSLEADING REPRESENTATION INCLUDES

1. Any untrue statement
2. Statements implicating wrong impression
3. Mis-leading statements
4. Not disclosing true facts
5. Omission of data

CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS

When any statement within the prospectus includes misleading or untrue information is distributed then everyone who authorized the issue of the prospectus is liable umder section 447of this Act.

WHO MAY BE SUED IN CRIMINAL LIABILITY FOR ANY MISSTATEMENT IN THE PROSPECTUS?

The people who can be sued are:

1. The company who issues the prospectus.
2. Every Director of the company.
3. Every person whose name appeared in the prospectus as a proposed Director of the company.
4. Every Promoter of the prospectus.
5. Every person who authorized the issue of the prospectus.
6. Any expert such as an engineer, a chartered accountant, a company secretary, a cost accountant, etc.

DEFENCES AVAILABLE UNDER CRIMINAL LIABILITY

1. Person proves that statement or omission was immaterial;

2. Person has reasonable ground to believe and did believe that statement was true; or

3. Person has reasonable ground to believe and did believe that the inclusion or omission was necessary.

CIVIL LIABILITY FOR MISSTATEMENT

Section 62 of the Companies Act deals with the civil liability and makes the actual person responsible to pay every single individuals who has contributed for any share or debentures and could have grieved any damages by believing the prospectus where false and misleading information has been published. Every person and the company is liable who-

• Is a director when prospectus was issued
• Named as the director or authorized himself or has agreed to become a director
• The promoter of the corporation
• Has authorized the issue of the prospectus

DEFENCES AVAILABLE UNDER CIVIL LIABILITY

1. He has withdrawn his consent or never gives his consent;

2. The prospectus was issued without his knowledge or consent and when he become aware, gave a reasonable public notice that prospectus was issued without his knowledge or consent.

REMEDIES FOR MISSTATEMENTS IN PROSPECTUS

1. Remedies for civil liability

There are two remedies available against company:

1. Revocation of the Contract- The person who purchased the securities can cancel the contract. The money will be refunded to him, which he paid to the company.
2. Damages for Fraud- After revocation, the shareholders can claim damages from the company by filing a case in the court.

Remedies against the Directors, promoters and the authorized persons who issued the prospectus:

• Damages for misstatement- Compensation will be given to the shareholders for the loss by the directors, promoters and the authorized persons.
• Damages for non-disclosure- Fine of Rs. 50000 ad recovering the damages must be given by the people who mislead the purchasers from the one that is chargeable for the damages.

Remedies for criminal liability

• Imprisonment up to 2 years or Rs. 50000 fine must beard by the people that mislead.
• Person who knowingly issued a misstatement is punishable for imprisonment up to 5 years or with a fine Rs. 100000 or both.

CASE LAWS

New Brunswick Canada Railway V. Muggeridge

In this case, Justice Kindersley laid down the ‘golden rule’ for framing of a prospectus of a company.  In this case it was laid that, those who issue a prospectus withstand to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. On the faith of the details given in the prospectus, the people are invited to take shares. Everything should be accurate and at its best knowledge in the prospectus. Nothing should be stated in the prospectus which is not true in nature or is non- existing. In simpler words, the true nature of the company’s venture must be disclosed in the prospectus.

Rex v. Kylsant (1932)

The prospectus stated that dividends of 5 to 8 per cent had been regularly paid over a long period. The truth was that the company had been incurring substantial losses during the seven years preceding the date of the Prospectus and dividends had been paid out of the realized capital profit. Held, the prospectus was false and misleading. The statement though true in itself was rendered false in the context in which it was stated.

Thus, the persons issuing the prospectus must not include in the prospectus all the relevant particulars specified in Parts I & II of Schedule II of the Act, which are required to be stated compulsorily but should also voluntarily disclose any other information within their knowledge with might in any way affect the decision of the prospective investor to invest in the company.

CONCLUSION

A prospectus plays a crucial role for any customer who aims to buy shares, debentures or other instruments from the company. The issuance of prospectus must be under the provisions of the Companies Act 2013. The public relies on the statements issued by the company and takes the major investment decisions so it should be true and correct in nature, any misleading prospectus shouldn’t be published and therefore the person answerable for its issuance must be punished under the given provisions.

[1] 1929 AC 158: 140 LT 146. See also Sherwell v Combined Incandescent Mantles SyndicateLtd. (1907) 23 TLR 482.

Author: Manisha Singh [Sudent, Heritage Law College, Kolkata (Calcutta University)]