1. Introduction: Investors decide to invest in thTh sharecapital or debenture on the basis of information mentioned in prospectus. In case of any misrepresentation, fraudulent advertisement or exaggerated statement made in the prospectus, it will be cheating or fraud to the investors, to avoid such situation and to protect the interest of investors. Some provisions are kept in the Companies Act for the misrepresentation in the prospectus.
2. What is Misrepresentation in the prospectus ? : Misrepresentation in the prospectus means..
(1) The statements made with reference to the conteIjs of the prospectus is misleading.
(ii) In order to mislead the reader necessary information inot provided in the prospectus.
(iii) By using ambiguous words in the prospectus an attempt is made to mislead the public.
3. Liability for Misrepresentation in the Prospectus : Two types of liabilities arise due to the misrepresentation in the prospectus (1) Civil liability and (2) Criminal liability.
(1) Civil liability : If any person who has invested in a company relying upon the published prospectus of a company sustains loss, he may initiate civil proceedings against the company for getting compensation for his loss and the company is liable to pay amount of damages to him. This is called civil liability. A person responsible for this fraudulent activity is liable to punishment. In short, civil liability means, responsibility to compensate the financial loss, due to misrepresentation in the prospectus. Following persons are responsible to compensate the same:
(i) The persons who were directors of the company at the time when prospectus was published.
(ii) The directors who have consented to put their names in the prospectus.
(iii) The promoters of the company.
(iv) The officer authorized by the company to publish the prospectus.
(v) Person whose name is mentioned for giving opinion as an expert in the prospectus.
(2) Criminal liability : To give deliberate misrepresentation in the prospectus and cause financial loss is considered as criminal offence. In this type of liability the officers of the company can be punished with imprisonment or fine or both. The very purpose of making misleading statement is to fraudulently tempt to invest or attempt to tempt the person to invest in a company. For such incidents strict provisions for punishment are made under law.
(A) Liability of other offences regarding information of the prospectus:
(1) If the prospectus is not of the legal character or the necessary information are not provided there in, the Director or authorized person can be held responsible.
(2) Prospectus can be published only after getting it registered before the Registrar. There should be date and signature of authorized persons in the prospectus. If the above formalities are not complied with the person responsible for the publication of prospectus may be punished with fine.
(3) If the provisions regarding the statements of experts are not complied with the person who has published the prospectus is liable for fine.
(B) Liability for the Breach of Trust and Cheating : If any person knowingly makes careless statements or false promise, conceals material facts, dishonestly hides something and thereby attracts others to invest in the shares or debenture of a company he can be held liable for the offences of criminal Breach of Trust or cheating and be punished with imprisonment or fine or both.