Mis Statement

Misstatements in Prospectus/
Consequences
In case of misstatement of a material
fact, there may arise :
(I)Civil Liability
(II)Criminal Liability

(I) Civil Liability

( induced to subscribe for shares on faith of
misleading prospectus)
A. Remedies against the company
1. Rescission of the contract
Conditions for rescission :
(i) statement must be a material misrepresentation of fact (differs from
opinion) e.g wrong profits, directors
(ii) statement must have induced the shareholder to take the shares)
(iii) statement must be untrue (dividend declared)
(iv) the deceived shareholder is an allottee and he must have relied on
the statement in the prospectus
(v) the omission of material fact must be misleading before rescission is
granted (approval for racing land)
(vi) proceedings must start as soon as the allottee comes to know.
2. Damages for deceit

B. Remedies against the Directors,

Promoters, Experts
The persons liable are :
- directors
- authorised as directors in prospectus
- promoters
- persons authorised to issue prospectus

1. Liability for damages for misstatement in

prospectus
Defences of Directors, promoters, etc.
a. Withdrawal of consent
b. Absence of consent (public notice reqd.)
c. Ignorance of untrue statement (public notice)
d. Reasonable ground for belief (resignation of
any director )
e. Statement of expert
Right of Contribution

2. Liability for damages for non-compliance with

sec.16 (matters to be reported)
3. Liability under general law
- deceived can drag all to the court for fraud
- fraud is : statement should be made knowingly,
without belief in its truth, recklessly

(II) Criminal Liability

( prospectus containing untrue statement)

A. Punishment for fraud (Sec 447)

The persons who is guilty of fraud is punishable
with:
- imprisonment for a term which shall not be less
than 6 months which may extend to 10 years
- liable to which shall not be less than the amount
involved in fraud and may extend to 3 times the
amount involved in the fraud.
- If fraud involves public interest, the term of
imprisonment shall not be less than 5 years.

(B) Punishment for false statement (Sec 448)

If any return, report, certificate, financial statement,
prospectus, statement or other document, any person
makes a statement :
- which is false in material particulars, knowing to be
false or
- which omits any material fact, knowing it to be
material,
he shall be liable under sec.447

(C) Punishment for fraudulently inducing persons to invest

money (Sec 36)
Any person either knowingly or recklessly makes any statement,
promise or forecast which is false, deceiving or misleading or
deliberately conceals any material facts to induce another person
to enter into or to offer to enter into:
- any agreement with a view to acquire, dispose or subscribe for or
underwriting securities; or
- any agreement , the purpose of which is to secure a profit to any
of the parties from the yield of securities or reference to fluctuation
in value of securities; or
- any agreement for obtaining credit facilities from any bank or
financial institution
he shall be liable under sec.447