MISSTATEMENT IN INITIAL PUBLIC OFFER

UNDER COMPANIES ACT 2013

Project submitted to

Mr. Shreyas Vyas

(Faculty: Corporate law I)

Project submitted by

Anushree Jugade

Semester: V, Roll no: 24

Section: A

HIDAYATULLAH NATIONAL LAW UNIVERSITY

Raipur (C.G)
 ACKNOWLEDGEMENTS

I feel highly elated to work on the topic Misstatement in IPO under Companies
Act 2013. The practical realization of this project has obligated the assistance and
help of many people. I express my deepest regard and gratitude to my teacher, Mr.
Shreyas Vyas for his inspiration and invaluable guidance has been of immense help
in understanding and carrying out the nuances of the project report.

My gratitude also goes out to the staff and administration of Hidayatullah National
Law University for the infrastructure in the form of our library and it lab that was a
source of great help for completion of this project.

Name : Anushree Jugade

Signature:

Semester: V

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 TABLE OF CONTENTS

ACKNOWLEDGEMENTS ................................................................................................................................. 2
Chapter 1....................................................................................................................................................... 4
Introduction................................................................................................................................................... 4
RESEARCH OBJECTIVES.................................................................................................................................. 6
RESEARCH METHODOLGY ............................................................................................................................. 6
SOURCES OF DATA ........................................................................................................................................ 6
SCOPE AND LIMITATION OF THE STUDY ....................................................................................................... 7
Chapter 2 ................................................................................................................................................... 8
Meaning and concept of Initial Public Offer ............................................................................................ 8
Chapter 3 ................................................................................................................................................. 10
Significance of Initial Public Offer for Companies. ............................................................................... 10
Chapter 4 ................................................................................................................................................. 11
Meaning and Duties of Promoter ............................................................................................................ 11
Chapter 5 ................................................................................................................................................. 12
Liability for Misstatements under Companies Act 2013 ........................................................................ 12
CONCLUSION ............................................................................................................................................... 17
REFERENCES ................................................................................................................................................ 18

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 Chapter 1

Introduction

Financial markets have an important relationship with economic development. A

company decides to issue securities for different reasons; the main reason being
raising capital to meet its financial requirements may be for starting a venture,
repaying debts, expansion and diversification. Initial Public Offer is the act of the
company to offer the securities of the company for the first time in the market, in this
case the unlisted company issues the shares through prospectus and the interested
parties subscribe to the shares of the company. This helps the Public company to
raise its capital which could be also raised through Debt capital or private placement
in certain cases. This actually reflects indulgence of enormous investor wealth for the
sublime reason of economic development. This economic dependence of the
corporate sector is a compelling rationale for an orderly regulated environment that
boosts investor confidence and assures conformity with prescribed norms. It helps in
creating conducive ownership base and wide capacities to create an impact on the
national economy. When an investor buys securities he is enabling the company to
carry on its business using those funds. In India a company planning to issue
securities shall abide by relevant provisions of (a) Securities Contracts (Regulation)
Act, 1956, (b) Securities Contracts (Regulation) Rules, 1957, (c) Companies Act,
2013 (hereinafter referred to as the Act) and The Companies ( Prospectus and
Allotment of Securities) Rules, 2014, (d) Securities and Exchange Board of India
Act, 1992 and the rules and regulations made there under. Primarily, issues can be
classified as a Public, Rights or preferential issues (also known as private
placements). While public and rights issues involve a detailed procedure, private
placements or preferential issues are relatively simpler. The promoters of the
company are endowed with the responsibility of not only getting the company started
but also have to raise the capital of the company by issuing prospectus and in case of
any discrepancy in the prospectus the Promoters and first directors and the experts

4
confirming the prospectus to be fine would be liable for fine and penalty. Thus any
misstatement in the prospectus for the Initial public offer would attract the
punishment in the form of compensation which is to be paid to the aggrieved and
may be even imprisoned or penalized.

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 RESEARCH OBJECTIVES

To understand the meaning of Initial Public Offer (IPO).

To analyze its purpose and significance for companies.
To study the modes and means of misstatement in IPO.
To study the related penalties.

RESEARCH METHODOLGY

This project report is based on descriptive research methodology. The research

problem has been provided by our faculty keeping in view the needs of the topic.
Secondary and electronic resources have been largely used to gather information and
data about the topic. Books and other references have been primarily helpful in
giving this project a firm structure. Websites, dictionaries and articles have also been
referred.

SOURCES OF DATA

The information has been received from various secondary sources.

Books
Articles
Journals
Websites

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 SCOPE AND LIMITATION OF THE STUDY

The project report includes the concept and meaning of Initial Public Offer. It studies
the modes and means through which misstatement could be done in prospectus for
IPO and the related penalties.

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 Chapter 2
Meaning and concept of Initial Public Offer

An IPO is when a company which is presently not listed at any stock exchange
makes either a fresh issue of shares or makes an offer for sale of its existing shares or
both for the first time to the public. Through a public offering, the issuer makes an
offer for new investors to enter its shareholding family. The shares are made
available to the investors at the price determined by the promoters of the company in
consultation with its investment bankers. The successful completion of an IPO leads
to the listing and trading of the companys shares at the designated stock exchanges. 1

Chapter III of the Act deals with Prospectus and allotment of securities, the chapter
is divided into two parts, Part I deals with Public Offer and Part II deals with Private
Placement. Section 23 of the Act provides that a company whether public or private
may issue securities. A public company may issue securities:

(a) to public through prospectus ("public offer") by complying with the provisions of
Part I of Chapter III of the Act; or

(b) through private placement by complying with the provisions of Part II of Chapter
III of the Act; or

(c) through a rights issue or a bonus issue in accordance with the provisions of this
Act and in case of a listed company or a company which intends to get its securities
listed also with the provisions of the SEBI Act, 1992 and the rules and regulations
made thereunder.2

The section deals with issue of securities, which is a wider term not restricted to
equity, preference or debentures. Securities has been defined under section 2(81) to

1
http://taxguru.in/company-law/all-about-initial-public-offerings-ipos-in-brief.html#sthash.UNGGPzg0.dpuf
2
http://corporatelawreporter.com/companies_act/section-23-of-companies-act-2013-public-offer-and-private-
placement/

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 mean the securities as defined in clause (h) of section 2 of the Securities Contracts
(Regulation) Act, 1956. The relevant section says that securities include, 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; derivative;
units or any other investments issued by any collective investment scheme to the
investors in such schemes; Government securities; such other instruments as may be
declared by the Central Government to be securities; and rights or interest in
securities.3

A public company may issue any of the aforesaid securities by way of a public offer
or rights/ bonus issue or private placement. Public Offer here includes initial public
offer (IPO) or further public offer (FPO) of securities to the public by a company, or
an offer for sale (OFS) of securities to the public by an existing shareholder, through
issue of a prospectus. PROSPECTUS In general parlance prospectus refers to an
information booklet or offer document on the basis of which an investor invests in
the securities of an issuer company. It has been defined under section 2(70) so as to
mean 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 a body corporate.4

Further section 29 of the Act mandates that every company making public offer and
such other class or classes of companies as may be prescribed, shall issue the
securities only through dematerialised form. Other companies may issue securities in
physical or in dematerialised form. The rules provide that the promoters of every
public company making a public offer of any convertible securities may hold such
securities only in dematerialised form. The entire holding of convertible securities of
the company by the promoters held in physical form up to the date of the initial

3
http://www.lawteacher.net/free-law-essays/business-law/misstatement-in-prospectus-law-essays.php
4
https://www.icsi.edu/portals/0/PROSPECTUS%20&%20ALLOTMENT.pdf

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 public offer shall be converted into dematerialised form before such offer is made
and thereafter such promoter shareholding shall be held in dematerialized form only.5

Chapter 3
Significance of Initial Public Offer for Companies.

Going public provides an opportunity to the companies to raise cash for setting up a
project or for diversification/expansion or sometimes for working capital or even to
retire debt or for potential acquisitions. This is called fresh issue of capital where the
proceeds of the issue go to the company.

Companies also go public to provide a route for some of the existing shareholders
including venture capitalists to exit fully or partially from the companys
shareholding or for promoters to partially dilute their holding. This is called an offer
for sale where the proceeds of the issue go to the selling shareholders and not to the
company.6 Listing has various benefits like it, increases the companys ability to
raise debt at finer rates. The company also gets a continuing window for raising more
capital, both from the domestic and overseas equity markets. Acquisitions also
become simpler as instead of cash payouts, companies can use shares as a currency.
Listing also lends liquidity to the stock, which is very critical for the success of
employee stock ownership plans, which help to attract top talent. Of course, listing
carries a considerable degree of prestige for the company.7

Regulations for IPOs

SEBI oversees that the companies act in a reasonable and fair manner, especially
with reference to the minority shareholders because of the large public participation.
For example, such companies should have a board of directors, where at least half the
members are independent of the promoters/company. Moreover, companies have to

5
Section 29 Companies Act 2013.
6 http://taxguru.in/company-law/all-about-initial-public-offerings-ipos-in brief.html# sthash.UNGGPzg0 .dpuf
7
http://www.lawteacher.net/free-law-essays/business-law/misstatement-in-prospectus-law-essays.php

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 comply with the listing agreement, which among other things, stipulate continuing
disclosures in specified formats and frequency8.

Chapter 4
Meaning and Duties of Promoter

The promoter has been defined as a person or persons who are in over-all control of
the company, who are instrumental in the formulation of a plan or programme
pursuant to which

the securities are offered to the public and those named in the prospectus as
promoters(s). It may be noted that a director / officer of the issuer company or
person, if they are acting as such merely in their professional capacity are not be
included in the definition of a promoter. Promoter Group includes the promoter, an
immediate relative of the promoter (i.e. any spouse of that person, or any parent,
brother, sister or child of the person or of the spouse). In case promoter is a company,
a subsidiary or holding company of that company; any company in which the
promoter holds 10% or more of the equity capital or which holds 10% or more of the
equity capital of the Promoter; any company in which a group of individuals or
companies or combinations thereof who holds 20% or more of the equity capital in
that company also holds 20% or more of the equity capital of the issuer company. In
case the promoter is an individual, any company in which 10% or more of the share
capital is held by the promoter or an immediate relative of the promoter or a firm or
HUF in which the Promoter or any one or more of his immediate relative is a
member; any company in which a company specified in (i) above, holds 10% or
more, of the share capital; any HUF or firm in which the aggregate share of the
promoter and his immediate relatives is equal to or more than 10% of the total, and

8
http://taxguru.in/company-law/all-about-initial-public-offerings-ipos-in-brief.html#st hash.UNGGP zg0.dpuf

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 all persons whose shareholding is aggregated for the purpose of disclosing in the
prospectus shareholding of the promoter group

In case of an IPO, the promoters have to necessarily offer at least 20 per cent of the
post issue capital. In case of public issues by listed companies, the promoters shall
participate either to the extent of 20 per cent of the proposed issue or ensure post-
issue share holding to the extent of 20 per cent of the post-issue capital.9

In case of any issue of capital to the public the minimum contribution of promoters
shall be locked in for a period of three years, both for an IPO and public issue by
listed companies. In case of an IPO, if the promoters contribution in the proposed
issue exceeds the required minimum contribution, such excess contribution shall also
be locked in for a period of one year. In addition, the entire pre-issue share capital, or
paid up share capital prior to IPO, and shares issued on a firm allotment basis along
with issue shall be locked-in for a period of one year from the date of allotment in
public issue.10

Chapter 5
Liability for Misstatements under Companies Act 2013

The promoter of a company is liable for the initial issue of shares as he is responsible
for getting the company into action. His role does not end with the mere getting of
the certificate of incorporation rather, a full-fledged procedure is to be followed to
get the capital for the company, if the memorandum of a company provides for the
share capital clause and the same could be either raised through public or through
private placement as provided under part II of Chapter III.

Thus in case of any misstatement or misrepresentation by the promoter in the

prospectus of the company for raising capital for the issue of shares through Initial

9
http://www.lawteacher.net/free-law-essays/business-law/misstatement-in-prospectus-law-essays.php
10
http://taxguru.in/company-law/all-about-initial-public-offerings-ipos-in-brief.html#sthash.UNGG Pzg0.dpuf

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 Public Offer will be attracting penalties and liabilities because any act of the
promoter would be affecting the person who on the basis of the representation would
be subscribing to those shares and thus he would be liable to pay damages and be
penalized for fraud under section 447 of Companies Act 2013 for fraud.11

a. Criminal Liability: Section 34

Section 34 of the Act states that where a prospectus, issued, circulated or distributed
includes any statement which is untrue or Prospectus and Allotment of Securities 29
misleading in form or context in which it is included or where any inclusion or
omission of any matter is likely to mislead, every person who authorizes the issue of
such prospectus shall be liable under section 447 of the Act.

As per Section 447 of the -Act 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. For the
purpose of this section,

(i) fraud in relation to affairs of a company or any body corporate, includes

any act, omission, concealment of any fact or abuse of position committed by
any person or any other
(ii) person with the connivance in any manner, with intent to deceive, to gain
undue advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not there is any
wrongful gain or wrongful loss;

(ii) wrongful gain means the gain by unlawful means of property to which the
person gaining is not legally entitled;

11
http://www.lawteacher.net/free-law-essays/business-law/misstatement-in-prospectus-law-essays.php

13
 (iii) wrongful loss means the loss by unlawful means of property to which the
person losing is legally entitled. This penalty shall however not apply to a person if
he proves that such statement or omission was immaterial or that he had reasonable
grounds to believe, and did up to the time of issue of the prospectus believe, that the
statement was true or the inclusion or omission was necessary.12

b. 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

(a) is a director of the company at the time of the issue of the prospectus;

(b) has authorised himself to be named and is named in the 30 Prospectus and
Allotment of Securities prospectus as a director of the company, or has agreed to
become such director, either immediately or after an interval of time;

(c) is a promoter of the company;

(d) has authorised the issue of the prospectus; and

(e) is an expert as defined in the Act shall, without prejudice to any punishment to
which any person may be liable under section 36 of the -Act be liable to pay
compensation to every person who has sustained such loss or damage. However, no
person shall be liable for any civil liability if he proves that, having consented to
become a director of the company, he withdrew his consent before the issue of the
prospectus, and that it was issued without his authority or consent; or that the
prospectus was issued without his knowledge or consent, and that on becoming
aware of its issue, he forthwith gave a reasonable public notice that it was issued
without his knowledge or consent.13

12
http://www.legalindia.com/liability-for-misstatement-in-prospectus-where-to-stop/
13
http://www.legalindia.com/liability-for-misstatement-in-prospectus-where-to-stop/

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 Where it is proved that a prospectus has been issued with an intent to defraud the
applicants for the securities of a company or any other person or for any fraudulent
purpose , every director of the company at the time of the issue of the prospectus,
every person who has authorized 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, every , promoter of the company, every
person who has authorized the issue of the prospectus and every person who is an
expert as defined in the Act shall be personally responsible, without any limitation of
liability for all or any of the losses or damages that may have been incurred by any
person who subscribed to the securities on the basis of such a prospectus.14

c. Punishment for Fradulently inducing persons to invest money: Section 36

Any person who, either knowingly or recklessly makes any statement, promise or
forecast which is false, deceptive or misleading, or deliberately conceals any material
facts, to induce another person to enter into, or to offer to enter into,

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or
underwriting securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit
to any of the parties from the yield of Prospectus and Allotment of Securities 31
securities or by reference to fluctuations in the value of securities; or

(c) any agreement for, or with a view to obtaining credit facilities from any bank or
financial institution; shall be liable for action under section 447 of the Act. 15

d. Class Action Suits: Section 37

Section 37 of the Act provides that a suit may be filed or any other action may be
taken under section 34 or section 35 or section 36 by any person, group of persons or
any association of persons affected by any misleading statement or the inclusion or
omission of any matter in the prospectus16. This section enables any person, group of

14
https://www.icsi.edu/portals/0/PROSPECTUS%20&%20ALLOTMENT.pdf
15
https://www.icsi.edu/portals/0/PROSPECTUS%20&%20ALLOTMENT.pdf
16
http://www.bseindia.com/Static/about/Ipo_Fpo.aspx?expandable=0

15
 persons or any association of persons who have been affected by any misleading
statement or the inclusion or omission of any matter in the prospectus to file a suit or
initiate any other action under section 34,35 or 36 of he Act.17

17
https://www.icsi.edu/portals/0/PROSPECTUS%20&%20ALLOTMENT.pdf

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 CONCLUSION

This project report deals with the liability for the misstatement in the Initial Public
Offer while issuing the securities through the prospectus which means that if there is
any misrepresentation in the prospectus by the promoter or any other person
responsible for the IPO that person would be liable to pay compensation to the
aggrieved for the damage done by subscribing to the securities and would be liable
for fraud under section 447 of the Act 2013. Section 34, 35 and 36 of the Act 2013
provide for the liability of the promoter or any person for innocently or deliberately
misrepresenting in the prospectus and thus any act which falls under any of the
conditions provided in the above three sections would be liable to pay the
compensation and damages and the person aggrieved ahs the remedy under section
37 of the Act to file a suit against the promoter or the company for providing false
statement in the prospectus.

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 REFERENCES

Books

A. Ramaiya, Guide to Companies Act, (Vol.1) 46th Edition., 2008, Lexis Nexis
Butterworths, Wadhwa
Dr. G.K. Kapoor, Company Law and Practice, 20th Edition, 2015, Taxmann

Websites

www.legalindia.com
www.aishmghrana.me
www.icsi.edu/portals
www.taxguru.in
www.corporatelawreporter.com
www.indiamicrofinance.com
www.bseindia.com
www.lawteacher.net

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