Prospectus
Definition
Section 2(36)-“ any document described or issued as a prospectus and includes any notice, circular, advertisement, or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any share in, or debentures of, a corporate body.”
In simple words, any document inviting deposits from the public or inviting offers from the public for the subscription of shares or debentures of a company is a prospectus.
Contents
“The Companies Act contains a comprehensive set of regulations intended to protect the investing public from victimization”. The intention of the Legislature in making these regulations is “to secure the fullest disclosure of material and essential particulars and lay the same in full view of all the intending purchasers of shares”
The relevant rules and regulations are-
- Every prospect must be dated(section 55)
- A copy of the prospectus must be registered with the Registrar and this fact must be stated on the face of the prospectus. The Registrar can refuse to register a prospectus which does not comply with the disclosure requirements.(section 60). The prospectus must be issued within 90 days of its registration.
- If the prospectus includes a statement purporting to be made by an expert, consent in writing from that expert must be obtained and this fact must be stated in the prospectus. (Section 58). The expert should be unconnected with the formation or management of the company. (Section 57). Section 59 provides that the expression “expert” includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him. Thus the expert becomes a party to the prospectus and liable for untrue statements if any.
- Section 56 requires every prospectus to disclose the matters specified in Schedule II of the Act. The information required to be disclosed refers to the objects of the company, details as to shares, managerial personnel, minimum subscription, underwriting, preliminary expenses, material contracts, etc.
- Lastly, the “golden rule” –the public is at the mercy of the company promoters. Everything must, therefore, be stated with strict and scrupulous accuracy”
Prospectus- Remedies for Misrepresentation
- Rescission for misrepresentation-the shareholder can also sue the company for rescission of the contract. Under this remedy, the contract is cancelled and the money given by the shareholder refunded. Under Section 75 of the Contract Act, a person who lawfully rescinds a contract is entitled to compensation for any damage which he has sustained through non-fulfilment of the contract.
Loss of right of rescission
(a) By affirmation-if the allottee with full knowledge of the misrepresentation upholds the contract, he cannot afterwards rescind.
(b) By unreasonable delay– any man who claims to retire from a company on the ground that he was induced to become a member by misrepresentation, is bound to come at the earliest possible moment after he becomes aware of the misrepresentation.” An action after 5 months was held to be too late.
(c) By the commencement of winding up-the right of rescission is lost on the commencement of the winding-up of the company. “But where a shareholder has started active proceedings to be relieved of his shares, the passing of the winding-up the order during their pendency would not prevent his getting the relief.”
- Damages for deceit-any person induced by a fraudulent statement in a prospectus to take shares, is entitled to sue the company for damages. He must prove the same matters in claiming damages for deceit as in claiming rescission of the contract. He cannot both retain the shares and get damages against the company. He must show that he has repudiated the shares and has not acted as a shareholder after discovering the fraud or misrepresentation.
- Compensation-Section 62-every director, promoter and every person who authorizes the issue of the prospectus is liable to pay compensation to the aggrieved party for loss or damage he may have incurred by reason of any untrue statement in the prospectus.
The persons who are liable to pay compensation are
- (a) directors at the time of issue of prospectus
- (b) persons who have authorized themselves to be named as directors in the prospectus
- (c) promoters
- (d) persons who have authorized the issue of prospectus.
Defences
(a) Withdrawal of consent-a director, etc is not liable if he withdrew his consent before the issue of the prospectus and it was issued without his consent or authority.
(b) Absence of consent-where a prospectus was issued without the directors’, etc knowledge or consent, and on becoming aware of its issue, he forthwith gave reasonable public notice of that fact, he is not liable.
(c) Ignorance of untrue statement-a director, etc may sometimes be ignorant of the untrue statement contained in the prospectus. If after the issue of the prospectus and before allotment thereunder, he on becoming aware of any untrue statement therein withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reasons, therefore, he is not liable.
(d) Reasonable ground for belief-if a director, etc has reasonable ground to believe that the statement was true and he, in fact, believed it to be true up to the time of allotment, he is not liable.
(e) Statement of expert-if the statement is a correct and fair representation or extract or copy of the statement made by an expert who is competent to make it and had given his consent and not withdrawn it, the director, etc is not liable.
Keywords: Prospectus, Prospectus Under Companies Act, Prospectus of companies in India.
Click here to read the Bare Act of Companies Act 2013
