Question

Justify the following statement.

Company and officers responsible for issuing Prospectus are liable for misstatements in Prospectus.

Answer 1

(1) A prospectus constitutes the basis of the company’s contract between the' company and the shareholders. Hence it must disclose all the material facts which may influence the judgment of a prospective investor to buy shares or debentures. A Prospectus which contains false misleading, ambiguous or fraudulent statements of material facts, or which suppresses material facts, is considered to be a misleading prospectus. Any misstatement in the prospectus gives rise to civil as well as criminal liability. If a prospective investor is misled by some statement in the prospectus and thereby suffers any loss, he is entitled “to proceed against those who misled him.

(2) A person who purchases the shares on the basis of some misstatements made in the prospectus can avoid the contract and claim compensation for the loss or damage in a civil action against the company concerned. A company may, then, recover the same damages from the Directors or promoters concerned. The victimized person can also rescind the allotment of shares: and claim refunds of the money paid by him and sue: the company in the court of law for damages. Every person making the misstatement in the prospectus is punishable with imprisonment for a period of up to 2 years or with a fine up to Rs 5,000 or both. The Companies Act provides that only promoters and Directors are liable for criminal punishment.