CHAPTER:1

ISSUE OF SECURITIES

A company can issue capital by issuing securities1. The term securities here has same
meaning as given in clause (h) of section 2 of the Securities Contract Regulation Act, 1956
(SCRA).Capital may be raised by following means

 Public Issue Or Initial Public Offer (Ipo):

Under this method, the company issues a prospectus to the public inviting offers for
subscription. The investors who are interested in the securities apply for the securities they
are willing to buy. Advertisements are also issued in the leading newspapers. Under the
Company Act it is obligatory for a public limited company to issue a prospectus or file a
statement in lieu of prospectus with the Registrar of Companies. Public issue or direct selling
of securities is the most common method of selling new issues of securities. This method
enables a company to raise funds from a large number of investors widely scattered
throughout the country. This method ensures a wider distribution of securities thereby leading
to diffusion of ownership and avoids concentration of economic power in a few hands.

 Private Placement:
In this method, the issuing company sells its securities privately to one or more institutional
brokers who in turn sell them to their clients and associates. This method is quite convenient
and economical. Moreover, the company gets the money quickly and there is no risk of non-
receipt of minimum subscription. This deprives the public a chance to purchase securities of a
flourishing company and there may be concentration of the company’s ownership in a few
hands. Private placement is very suitable for small issues particularly during depression.

1
“securities” include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate.

1
1.1 PROSPECTUS:

When prospectus is issued by any company, it is mainly to invite public to take shares or
debentures of the company or to deposit money with the company. A prospectus should
mandatorily contained what is stated in the Companies Act 2013, Prospectus (Securities and
Allotment) Rules 2014 and also those regulation in SEBI(Issue of Capital and Disclosure
Requirements) 2009. It is the duty of the company to see that the statements made in the
prospectus are of true nature. The definition of ‘prospectus’ in the Indian Companies Act,
1956 (the “Act”) was based on the definition found in the English Companies Act [Section
455(1)]. It then underwent amendment in 1960 following the recommendation of the
Companies Act Amendment Committee of 1957 and also in 1974. The current definition as
per 2013 Act, Section 2(70) stands as follows:

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

Hence any advertisement that intends to offer to the public shares or debentures of the
company for sale is a prospectus. According to the general clauses Act 1956,

“Document shall include any matter written, expressed or described upon any substance by
means of letters, figures or marks, or by more than one of those means which is intended to
be used, or which may be used, for the purpose or recording that matter."

In Pramatha Nath Sanyal v Kali Kumar Dutt2 an advertisement in a newspaper read as “

Some shares are still available for sale according to the terms of the prospectus of the
company which can be obtained on application." It was held to be a prospectus as it invited
public to purchase shares.

The Golden Rule as regards the drafting of the prospectus was laid down in the leading
case New Brunswick and Canada Railway and Land Co. v. Muggeridge3, as:

 Only true nature of the company’s venture shall be disclosed;

2
Pramatha Nath Sanyal v Kali Kumar Dutt (1925) ILR 52 Cal 440
3
New Brunswick and Canada Railway and Land Co. v. Muggeridge [1924] SCR 450

2
  Strict and scrupulous accuracy shall be maintained in drafting prospectus as it invites
the public to take shares on the faith of the representations contained in the
prospectus;
 There must be voluntary disclosures of information as would reasonably constitute a
fair representation of facts for the public to act upon.

1.2 TYPES OF PROSPECTUS:

 Shelf Prospectus (SECTION 31):

Any class of company may file a shelf prospectus with the Registrar of Companies at the
stage of first offer of securities.
“Shelf prospectus” means a prospectus in respect of which the securities or class of securities
included therein are issued for subscription in one or more issues over a certain period
without the issue of a further prospectus.
The shelf prospectus shall indicate that validate period which is not exceeding one year from
the date of first offer of securities under that prospectus. Once, a shelf prospectus has been
issued, there will be no requirement of any further prospectus for any subsequent offer of
these securities issued during this validity period. A company filing a shelf prospectus is
required to file an information memorandum containing all material facts, changes in
financial position and such other prescribed changes which is to be informed to the registrar
within prescribed time.

 Red Herring Prospectus (SECTION 32):

A company may issue a red herring prospectus before the issue of a prospectus.
“Red herring prospectus” means a prospectus which does not include complete particulars of
the quantum or price of the securities included therein.
The Law mandates the filing red herring prospectus with Registrar of companies at least three
days before the opening of the subscription list and the offer.
A red herring prospectus shall carry the same obligation as are applicable to a prospectus. In
case there is any variation between red herring prospectus and a prospectus, It is necessary
that particular variation to be highlighted as variation in the prospectus.

3
Upon the closing of the offer of securities, the prospectus shall be filed with the Registrar and
the Securities and Exchange Board of India. This prospectus shall state
(a) total capital raised,
(b) whether debt capital or share capital,
(c) closing price of the securities and
(d) any other details not included in red herring prospectus.

 Abridged Prospectus: SECTION 2(1)

“Abridged Prospectus” means a memorandum containing such salient features of a
prospectus as may be specified by the securities and Exchange Board by making regulations
in this behalf. 'Abridged Prospectutos' is considered be a shorter version of the Prospectus
and contains all the salient features of a Prospectus. It accompanies the application form of
public issues. Every appl!cation form for the purchase of the securities of a company shall be
issued unless the form is accompanied by an “Abridge Prospectus”.
There is no need for abridge prospectus in case of:
a) Underwriting Agreement; and
b) Private placement.
Any person may make a request for a copy of the prospectus before closing of the
subscription list and the offer. The company shall furnish a copy to him.

CHAPTER: 2

MISLEADING PROSPECTUS

A prospectus containing false, misleading ambiguous or fraudulent statements of material

facts, or suppressing material facts, is termed as “misleading prospectus” and in that case a
misled investor (original allottee of shares who had relied on the prospectus and not a buyer
in the open market) is entitled to proceed against those who misled him. What is a false or
untrue statement? A general commendation, even if too highly coloured, is not a false
statement, but to say that something has been done, when it is not so, is a mis-statement of
fact. If there is omission of material facts from a prospectus or/and where the statement is
ambiguous in the form and context in which it is included, the prospectus shall be deemed to
be untrue.

4
Hence a prospectus should be honestly framed and should not by any half statement of the
truth or ambiguous phraseology give a false impression or mislead the investor, for the whole
prospectus is to be read, and if, as a whole, it be misleading, those who issue it cannot escape
on the ground that there is not a single statement which, standing alone, can be challenged as
false. Often matters related to representation for the future events have been questioned4. A
mere representation that something will be done or will happen in future is not a
representation of fact which could invoke the liability for misstatement. In order to invoke it,
there must be a misstatement as to an existing fact 5. an ambiguous statement which carries
double meaning and an Applicant who reasonably puts one meaning and is misled would be
entitled to relief and the maker of the statement would not be heard to say that some other
meaning should have been put upon his words.6

2.1 INSTANCES OF MISSTATEMENT IN PROSPECTUS:

 A mere representation that something will be done or will happen in future is not a
representation of fact. It may be only a promise or a forecast. Thus, there must be a
misstatatement as to an exixting fact. Representations as to future earnings do not
avoid the contract7.
 Sometimes representations which were true when the prospectus was issued become
false before the allotment is made. In such cases, the fact ought to be communicated
to the applicant, else the applicant will be able to rescind the contract8.
 A misstatement of the names of the directors in the prospectus is an important
misrepresentation9.
 The following statements which were untrue, have, in their respective contexts, been
held to be material statements of fact:
 That more than one half of the first issue of shares had already been subscribed for10.
 Statement that the person from whom the company bought the property would pay all
the preliminary expenses11

4
Varunisrani, Importance prospectus tool investor protection-India, Corporate Law Reporter(February 25,
2013), http://corporatelawreporter.com/2013/02/25/importance-prospectus-tool-investor-protection-india/.
5
Bentley v. Black, (1893) 9 TLR 580 (CA).
6
R. v. Kylsant, (1932) 1 KB 442.
7
Pioneer Tractors Co. Ltd v. Peebles (1914) DLR 477 (Canada)
8
Rajagopala Iyer v. The South Indian Rubber Works AIR 1942 Mad 656.
9
In Re Metropolitan Coal Consumer’s Association Ltd.
10
Shiromani Sugar Mills Ltd. v. Debi Prasad AIR 1950 All 508
11
Re, Liberian Government Concessions, etc. Co (1892) 9 TLR 136.

5
  An ambiguous statement which carries double meaning and an applicant who
reasonably puts one meaning and is misled would be entitled to relief and the maker
of the statement would not be heard to say that some other meaning should have been
put upon his words12.
 If a prospectus contains statements of fact, the recipient is entitled to rely upon them.
He need not verify them. If the prospectus states the effect or terms of a document,
and offers it for inspection, he is not bound to inspect it. He is entitled to assume that
the prospectus is true.
 Recession of the contract was ordered in case where the objects of the company as
stated in the prospectus were different from those stated in the memorandum13.
 When the statements in the prospectus are clear but an applicant happens to take a
wrong meaning by misreading them he cannot complain so as to get rid of the
allotment14.

2.2 PERSONS LIABLE FOR MISSTATEMENT:

• It includes every person who is considered to be director of the company at the time of the
issue of the prospectus;
• every person who has authorised himself to be named and is named in the prospectus either
as a director, or as having agreed to become a director, either immediately or after an interval
of time;
• every person who is a promoter of the company;
• every person who has authorised the issue of the prospectus;
• an expert15: the liability of an expert would not accrue just because of his position as an
expert but would be only for an untrue statement made by him in the capacity of an
expert. The expert’s consent should be endorsed on or annexed to the registration of the
prospectus. By consenting to the issue of the prospectus the expert does not undertake
liability in respect of anything in the prospectus except his own statement.

12
Supra note 8
13
Re, Russian iron Works Co., Stewart’s case, (1866) 1 Ch App 574.
14
Bansidhar Durga Dutt v. Tata Power Co. Ltd AIR 1925 Bom 272.
15
The expression “expert” includes an engineer, a value, an accountant and any other person whose profession
gives authority to a statement made by him.

6
2.3 REMEDIES FOR MISTATEMENT IN THE PROSPECTUS:
The remedies available to a person who has Subscribed for shares on the faith of a misleading
prospectus, may be grouped into two categories
1. Remedies against the company.
2. Remedies against the directors, promoters and experts.

The following two remedies are available to an injured party against the company for
misrepresentation in the prospectus under general law:

(a) Rescission of the contract to take or accept shares:

For this, the shareholder has to seek the remedy within a reasonable time and has to surrender
the shares to the company. Further, these conditions must be satisfied.
 The prospectus was issued by the company or on its behalf by the directors or it was
deemed to be a ‘prospectus issued by the company by implication’ under Section 25
or Section 28.
 The prospectus contained a misrepresentation of facts, and not of law or of opinion.
 The misrepresentation was material and related to such fads as it likely to influence
the judgment of the prospective investor
 It must be proved that the subscriber actually relied upon the mis-statement while
applying for shares. Loss of the right of rescission.

The right of rescinding the contract however, is lost, if the allottee does not start the
proceedings within a reasonable time after coming to know of the misrepresentation. Also
If he expressly or impliedly affirms his contract after becoming aware of the falsity of the
statement like accepting dividend, paying calls money or trying to sell the shares. This right
is also not available in case if he is a man of such prudence who will not be misled by means
of those misstatements.

(b) Damages for fraudulent mis-statement or concealment :

Any such person induced by such statement or omission is also entitled to sue the company
for damages. For this, he has to first rescind his contract and give
up or surrender his shares to the company, as an allottee of the shares cannot claim damages

7
and also, side by side, retain his shares. But to avail this remedy, the subscriber must prove :
(i) that the mis-statements were made fraudulently, and
(ii) that he has actually been deceived, in addition to proving other facts necessary to succeed
in a suit of rescission.

The usual claim against the company is for rescission of the contract of allotment. Damages
are generally claimed from the Directors, Promoters and other persons who had authorized
the issue of the prospectus personally, or from experts who had signed the report referred to
in the prospectus.
Remedies against the directors, promoters and experts: The liability of the directors,
promoters, etc. for a misleading prospectus can be studied under the following heads:

 Civil liability
 Criminal liability

Civil Liability: (Section 35)

Where a person has subscribed for securities of a company acting on any statement included,
or the inclusion or omission of any matter, in the prospectus which is misleading and has
sustained any loss or damage as a consequence thereof, the company and every person who
 Is a director of the company at the time of the issue of the prospectus.
 Has authorised himself to be named and is named in the prospectus as a director of
the company, or has agreed to become such director, either immediately or after an
interval of time.
 Is a promoter of the company;
 Has authorised the issue of the prospectus; and
 Is an expert referred to in Section 26(5) of the Companies Act, 2013 shall be liable to
pay compensation to every person who has sustained such loss or damage. [Section
35 (1)1].
The measure of damages for the loss suffered by reason of the untrue statement, omission,
etc. is the difference between the value which the shares would have had but for such
statement or omission and the true value of the shares at the time of allotment 16. In applying
the correct measure of damages to be awarded to compensate a person who has been

16
McConnel v Wright, (1903) 1 Ch 546.

8
fraudulently induced to purchase shares, the crucial criterion is the difference between the
purchase price and their actual value. It may be appropriate to use the subsequent market
price of the shares after the fraud has come to light and the market has settled17. The period
prescribed for a suit for damage by shareholder is three years as per Article 113 of the
Limitation Act, 1963.

Criminal Liability: (Section34)

Criminal liability involves a fine or a term of imprisonment or both on the guilty party.
Section 34 states that where a prospectus includes an untrue statement, every person who
authorizes the issue of such prospectus she be liable” under Section 447, unless he proves
either
 That the statement or omission was immaterial, or
 That he had reasonable grounds to believe it to be true.
As per Section 447, any person who is found to be guilty of fraud, shall be punishable with
imprisonment for a term ranging from six months 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. Where the fraud in question involves public interest,
the term of imprisonment shall not be less than three years once the prosecution establishes
the falsity of statement in a prospectus signed by a director, etc., the onus is shifted to the
defendant of proving either that the statement was immaterial or that he believed it to An
expert who has given the consent will not be deemed to be ipso facto a person who authorised
the issue of prospectus18.

CHAPTER: 3

POSITION IN UK

The publication in the UK (England and Wales) of offering documents exposes those
responsible for their preparation and publication to potential liability for misrepresentation or

17
Smith New Court Securities Ltd. v. Scrimgeour Vickers (Asset Management) Ltd., (1997)
1 BCLC 350 (HL).
18
Company Law Committee Report 1962, Para 62.

9
negligent misstatement. Potentially simpler statutory liabilities arise under the Financial
Services and Markets Act 2000 (the “FSMA”), previously contained in the Financial Services
Act 1986. FSMA provides the framework within which the Financial Services Authority (the
“FSA”) will operate as the regulator for the financial services industry in the UK. Section 90
of the FSMA provide that any person responsible for listing particulars19, is liable to pay
compensation to a person who has acquired securities to which the particulars apply and
suffered loss in respect of them as a result of:
(i) any untrue or misleading statement in the particulars; or
(ii) the omission from the particulars of any matter required to be included by section 80 or
81.

3.1 DIRECTOR’S LIABILITY UNDER SECTION 463 OF THE UK

COMPANIES ACT, 2006
Section 463 of applies to directors of all companies. Under section 463, subject to the
knowledge requirement, a director is liable to compensate the company for any loss that the
company suffers as a result of any untrue or misleading statement in, or omission from:

 the directors’ report (including the business review section);

 the directors’ remuneration report;
 a summary financial statement (SFS) so far as it is derived from either of the above
reports

3.2LIABILITY FOR NEGLIGENT MISSTATEMENT: TORT

LIABILITY
The liability under section 90 revolves around the duty to care since it is based on fraud and
negligence. Thus if any person who was under a duty of care does any omission or fails to
perform his duty his liability can be invoked if a loss is suffered due to such omission or
failure or negligence. It has been held that if the investor can show that there was a
misstatement by the maker of a statement in the offering document who owed him a duty of

19
As per Section 79 (2) of FSMA, “Listing particulars” means a document in such form and containing such
information as may be specified in listing rules.

10
care, the investor can claim in negligence20. But the burden of proof is on the plaintiff that the
defendant owed a duty of care towards him.

3.3 DEFENSE AVAILABLE IN CASES OF MISSTATEMENT:

A person does not incur any liability under section 90 if he satisfies the court that the person
suffering the loss acquired the securities in question with knowledge:

 that the statement was false or misleading; or

 of the omitted matter; or
 of the change or new matter, as the case may be.

3.4 LATEST DEVELOPMENT: LIABILITY OF ISSUERS IN

CONNECTION WITH PUBLISHED INFORMATION:
In order to clearly frame out the liabilities of issuers, United Kingdom legislation has come
up with Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010.
This regime is different than the earlier regime where liability was dependent on fraud and
negligence whereas this new regime provides for the liability of issuers to pay compensation
to third parties who have suffered loss as a result of misstatements, or dishonest omissions in
information published by the issuer, or dishonest delay by the issuer in publishing
information21.

CHAPTER: 4

PUBLIC IN SUING CORPORATE FOR MISSTATEMENT:

PREVENTIVE MEASURE FOR MISSTATEMENT

On the growth of common law, The Supreme Court of India gave all individuals in the
country and the newly formed consumer groups or social action groups, an easier access to
the law and introduced in their work a broad public interest perspective. A new era of the PIL

20
Hedley Byrne v Heller [1964] AC 465
21
Inserted by Section 1270 of the UK Companies Act, 2006 and to be effective from 1 October 2010

11
movement was heralded by Justice P.N. Bhagawati in the case of S.P. Gupta v. Union of
India. In this case it was held that “any member of the public or social action group acting
bonafide” can invoke the Writ Jurisdiction of the High Courts or the Supreme Court seeking
redressal against violation of a legal or constitutional rights of persons who due to social or
economic or any other disability cannot approach the Court. In case of prospectus and in
matters of misstatements public spirited individuals have to be given the right to have any
action against the company indulging or having found of issuing misleading prospectus. In
fraudulent misrepresentations, mainly with a view to hoodwink the public investors and if the
public is lured to accept the offer to subscribe it would be too late for them to realize that they
all have been plain victims of deceit.It can be done as a Quia timet Action which is an
injunction to restrain wrongful acts which are threatened or imminent but have not yet
commenced.
Quia timet is an extraordinary relief granted by Courts to prevent irreparable harm. It gives
relief to parties who face imminent threat or danger of a tortious harm for which there is no
adequate legal relief available later. They are actually writs of prevention which require three
conditions - (a) no actual present injury, (b) reasonable fear of future harm, and (c)
irreparable harm, if relief is not granted as held in the case of Kuldip Singh v. Subhash
Chander Jain. Though individual action is possible, it is rarely resorted to, with the result that
the defendents will be able to amass money from the public by these means. It is suggested
that this suit shall be filed on behalf of the general public on obtaining leave under Order I,
rule 8 of the Code of Civil Procedure22. In the case of Fertilizer Corporation Kamgar Union
v. Union of India23, and also in the case of S.P.Gupta v. President of India24 which stated that
it is not necessary that the plaintiff should have a particular interest so as to sustain any action
in a civil court. public interest litigation is a part of the process of "participate justice" and a
public citizen must be encouraged, wherever a public wrong is found. Apart from the fact that
there is an attempt to fraudulently misrepresent the statement of affairs of the company, there
is also a violation of the statute then it should be open to the plaintiffs to seek redress in such
cases by a suitable order of injunction, declaration, etc.

22
Order 1, rule 8 of the Code of Civil Procedure states that, (1) Where there are numerous persons having the
same interest in one suit,—
(a) one or more of such persons may, with the permission of the court, sue or be sued, or may defend such suit,
on behalf of, or for the benefit of, all persons so interested;
(b) the court may direct that one or more of such persons may sue or be sued, or may defend such suit, on behalf
of, or for the benefit of, all persons so interested.
23
Fertilizer Corporation Kamgar Union v. Union of India AIR 1981 SC 344
24
S.P.Gupta v. President of India AIR 1982 SC 149

12
 CONCLUSION:
Thus, in regard to considering a prospectus as fraudulent, it is not necessary that there should
be false representation in it, even if every word included in the prospectus is true, the
suppression of material facts may render it fraudulent and make liable the ones behind it. To
judge its effect, it should be read as a whole. It is not necessarily enough if the prospectus
refers to to the contracts and puts the intending shareholder upon enquiry as to their contents,
the reason being sometime half a truth is no better than a downright falsehood. It is high time
that a preventive action for misstatement in prospectus be undertaken and restore confidence
and develop business strata in the minds of prospective investors.

BIBILIOGRAPHY

Cases Referred:

 Bansidhar Durga Dutt v. Tata Power Co. Ltd AIR 1925 Bom 272.
 Bentley v. Black, (1893) 9 TLR 580 (CA).
 Fertilizer Corporation Kamgar Union v. Union of India AIR 1981 SC 344
 Hedley Byrne v Heller [1964] AC 465
 In Re Metropolitan Coal Consumer’s Association Ltd.
 McConnel v Wright, (1903) 1 Ch 546.
 New Brunswick and Canada Railway and Land Co. v. Muggeridge [1924] SCR 450
 Pioneer Tractors Co. Ltd v. Peebles (1914) DLR 477 (Canada)
 Pramatha Nath Sanyal v Kali Kumar Dutt (1925) ILR 52 Cal 440
 Rajagopala Iyer v. The South Indian Rubber Works AIR 1942 Mad 656.
 Re, Russian iron Works Co., Stewart’s case, (1866) 1 Ch App 574.
 R. v. Kylsant, (1932) 1 KB 442.
 Re, Liberian Government Concessions, etc. Co (1892) 9 TLR 136.
 Smith New Court Securities Ltd. v. Scrimgeour Vickers (Asset Management) Ltd.,
(1997)1 BCLC 350 (HL).

13
  S.P.Gupta v. President of India AIR 1982 SC 149
 Shiromani Sugar Mills Ltd. v. Debi Prasad AIR 1950 All 50

Statutes Referred:
 UK Companies Act, 2006
 Companies Act, 2013
 Prospectus (Securities and Allotment) Rules 2014
 SEBI(Issue of Capital and Disclosure Requirements), 2009
 Financial Services and Markets Act 2000.

Committee Reports Referred:

Law Committee Report, 1962.

Books Referred:

 PRACHI MANEKAR, INSIGHTS INTO THE NEW COMPANY LAW, (2013)

 PAUL L. DAVIES AND SARAH WORTHINGTON, PRINCIPLES OF MODERN COMPANY LAW

 G.K. KAPOOR AND SANJAY DHAMIJA, TAXMANN’S COMPANY LAW, (18th ed 2015)

 DEREK FRENCH, STEPHEN MAYSON AND CHRISTOPHER RYAN, COMPANY LAW, (32d ed

2016)

 G.K. KAPOOR AND SANJAY DHAMIJA, COMPANY LAW, (18th ed, 2015) Taxmann

Publications: New Delhi

Articles Referred:

 Consequences of Misleading Prospectus, The Lawyers and Jurists,

http://www.lawyersnjurists.com/article/24516/discuss-consequences-misleading-
statement-prospectus-company-illustrate-remedies-aggrieved-person.html.

14
 Sudipto Dey, Any Misrepresentation in Prospectus is treated as Fraud, Business
Standard, October 19, 2014, http://www.business-standard.com/article/opinion/any-
misrepresentation-in-prospectus-is-treated-as-fraud-114101900724_1.html.

 Varunisrani, Importance prospectus tool investor protection-India, Corporate Law

Reporter (February 25, 2013),
http://corporatelawreporter.com/2013/02/25/importance-prospectus-tool-investor-
protection-india/.

15