Liability for Mis-Statements in the Prospectus :
An untrue statement or misstatement is one, which is misleading, in the form and context in which it has been included in the prospectus. Where a certain matter which is material enough has been omitted from the prospectus, and the omission is calculated to mislead those who act on the faith of the prospectus, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included. The prospectus in these circumstances may also be described as a ‘misleading prospectus’.
The legal consequence of inclusion of mis-statement in a prospectus is that it attaches criminal and civil liability to certain persons.
Liability for the mis-statement in the prospectus can be covered under two headings;
A. Criminal liability for misstatements in prospectus (Section 34):
1. Mis-statement in prospectus: Where a prospectus is issued, circulated or distributed, and it includes in relation to it (i) any statement which is untrue or misleading in form or context in which it is included, or (ii) where any inclusion or omission of any matter is likely to mislead,
then every person who authorizes the issue of such prospectus shall be liable under section 447:
2. Punishment for the mis-statement: Where any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.
Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
3. Exemption from the criminal liability: This section shall not apply to a person if he proves that-
(i) such statement or omission was immaterial, or
(ii) he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.
B. Civil liability for misstatements in prospectus (Section 35):
1. Persons liable for the mis-statement – Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred in section 26,
shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.
(2) Exemptions from the liabity: No person shall be liable for the mis-statement, where such person proves that—
(a) Withdrawn his consent before the issue of prospectus- Where a person having consented to become a director of the company, withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or
(b) Prospectus issued without his knowledge/ consent- Where the prospectus was issued without the knowledge or consent of a person, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
(3) Prospectus issued with intent to defraud or for any fraudulent purpose- Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred in this section shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.