A Study On The Legal Implications For Misstatements In The Prospectusin India


When any company reaches out to the public to fund its visions, it is the prospectus that they send out –that ‘letter of offer’ that can turn dreams to reality. The prospectus could thus be visualized as the envoy of the company, sent to elucidate detailed information to woo potential investors from the general public. Countless business legends have been created, entirely because companies invited the public to subscribe to their securities or trade in existing securities, and thereby enter into a ‘relationship’ with the company.

Section 2(36) of the Companies Act, 1956 defines a prospectus as,

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

Thus, the prospectus is really the basis of contract between the company and the ‘buyer’. It is the information stated in the prospectus that drives an individual’s decision to invest in a company or not. As such, information provided must be authentic, accurate and exhaustive.

But what happens if they’re not? Considering the magnitude of funds involved, the law comprehends the temptation of companies to leverage the prospectus deceptively, and the need to protect investors from the same. Schedule II, III, IV and sections 44, 56, 60-65 and 603-608 of the Companies Act, 1956 details certain mandatory disclosures and specific information which must be included in the prospectus. In addition, SEBI Guidelines, 2000 provides for Disclosure for Investor and Protection, also related to the contents of the prospectus.

Furthermore, to ensure that companies are discouraged from toei ...
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