Prospectus And Misstatement In A Prospectus Under Company Law


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 corporate 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.

Company prospectus is released by the corporate 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.


  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 the behalf of the company.
  4. The invitation must be associated with debentures, shares or such other instruments.


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 corporate like name, its registered office address, its CIN number, and the objects of the company.
  2. The details of the persons who sign 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 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 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 promoter’s contribution.
  14. Any litigation of legal action pending or taken by a Government Department or a statutory body.


If a prospectus issued violates the provisions of section 26 of the Companies Act, 2013 then,

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


  1. In the Initial Public Offerings, the prospectus notifies the shareholders about the company’s future plans and their business model.
  2. The objective of the product, fees, inclusions and exclusions are defined in the prospectus for the insurance and investment funds potential customers.
  3. The prospectus for the Electronic Fund Transfer customers informs about the history, portfolio, fund’s goal and various financial details.


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

1. Deemed Prospectus

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

2. 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.

3. Shelf Prospectus

Section 31 of the Companies Act, 2013 defines the shelf prospectus. When a company offers one 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 made its validity period starts. No prospectus is issued on the further offers.

4. 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.


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


The prospectus is trusted 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.


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., SEBI 31st 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.


Misleading representation includes –

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


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


The people who can be sued are –

  1. The company that 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.)


Section 62 of the Companies Act deals with civil liability and makes the actual person responsible to pay every single individual 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-

  1. Is a director when the prospectus was issued
  2. Named as the director or authorized himself or has agreed to become a director
  3. The promoter of the corporation
  4. Has authorized the issue of the prospectus


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:

1. Damages for misstatement– Compensation will be given to the shareholders for the loss by the directors, promoters and the authorized persons.

2. 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

1. Imprisonment up to 2 years or Rs. 50000 fine must beard by the people that mislead.

2. Person who knowingly issued a misstatement is punishable for imprisonment up to 5 years or with a fine Rs. 100000 or both.


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.



This article has been written by Manisha Singh, 4th year BA.LLB student at Heritage Law College, Kolkata(Calcutta University).

Also Read – What Are The Qualification And Disqualification Of Directors?

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