Importance of Prospectus as a Tool for Investor Protection in India

INTRODUCTION

The definition of ˜prospectus™ in the Indian Companies Act, 1956 (the Act) was based on the definition found in the English Companies Act [Section 455(1)].[1] It then underwent amendment in 1960 following the recommendation of the Companies Act Amendment Committee of 1957 and also in 1974.[2] The current definition as per Section 2(36) stands as follows:

prospectus means 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 shares in, or debentures of, a body corporate.[3]

A Prospectus according to Section 2(36) of the Companies Act, 1956 means any document inviting deposits from the public for the subscription or purchase of any securities of a body corporate. Following types of documents are prospectus: –

 Any document described or issued as prospectus; including

 any notice,

 circular,

 advertisement or

 other document[4]

Ingredients to constitute a prospectus[5]

(i) There must be an invitation to the public;

ii) The invitation must be made by or on behalf of the company or in relation to an intended company;

iii) The invitation must be to subscribe or purchase

iv) The invitation must relate to securities or such other instrument.

Invitation to public means

An offer or invitation shall be treated as made to the public keeping in view all circumstances as calculated to result directly or indirectly, it may properly be regarded, the securities of the company become available for subscription or purchase by persons other than those receiving the offer or invitation.[6]

A Prospectus issued by or on behalf of a public company must contain the matters specified in Part I of Schedule II set out the reports specified in Part II of that Schedule and Parts I and II of Schedule II have to be read in conjunction with the clarifications etc. given in Part III of the said Schedule of the Companies Act, 1956.[7] SEBI (Issue of Capital & Disclosure Regulations) 2009 also mandate certain disclosures. Regulation 14(3), 37(a), 44, 45(1)(f), 57(2)(a), 57(2)(b), 58(1) and 58(2) deal with disclosures in Prospectus.

THE GOLDEN RULE FOR PROSPECTUS INTERPRETATION[8]

The Golden Rule as regards the drafting of the prospectus was laid down in the leading case New Brunswick and Canada Railway and Land Co. v. Muggeridge,[9] as:

• Only true nature of the company™s venture shall be disclosed;
• Strict and scrupulous accuracy shall be maintained in drafting prospectus as it invites the public to take shares on the faith of the representations contained in the prospectus;
• In addition to the mandatory information required to be given as per Part I and Part II of Schedule II of the Act, there must be voluntary disclosures of information as would reasonably constitute a fair representation of facts for the public to act upon.

DEEMED PROSPECTUS [10]

The Act also deals with the concept of deemed prospectus under Section 64 of the  Companies Act, 1956. This section is an exception to issue of prospectus. A company may allot or agree to allot any shares or debentures to an `issue house™ without there being any intention on the part of the company to make shares or debentures available directly to the public through issue of prospectus. But then it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, shares or debentures was made with a view to the shares or debentures being offered for sale to the public if it is shown:

(a) that an offer of the shares or debentures or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or

(b) that at the date when the offer was made, the whole consideration to be received by the company in respect of shares or debentures which had not been received by it.

The prospectus is the basic document on the basis of which the intending investors decide whether or not they should subscribe to the shares or debentures. Therefore, the law requires unstinted disclosure of various matters through prospectus and forbids variations of any terms and conditions of a contract contained therein except with the approval and authority of the company in general meeting.[11]

Those who issue prospectus holding out to the public great advantage which will accrue to persons who take up shares on the representations contained therein, are bound to state everything with scrupulous accuracy and not only to abstain from stating as fact that which is not so but to omit no fact within their knowledge, the existence of which might in any degree affect the nature or extent or quality of the privilege and advantages which the prospectus holds out as an inducement to take shares.[12]

It is therefore essential that the information statutorily needing disclosure is stated fully and precisely so that the investing public which is ignorant of the present and future prospects of the company may get all the information which is likely to affect the public mind.[13] It is only to protect the members of the public against their being misguided by half truths or falsehoods that the law casts a liability on various persons connected with the issue of the prospectus to compensate every person (who subscribes on the faith of the prospectus) for any loss or damage he may have sustained because of the inclusion of any untrue statements in the prospectus as per Section 62 of the Companies Act, 1956.[14]

RESEARCH QUESTIONS

• What is the importance of Prospectus as a tool for the investor?
• Whether SEBI regulations and the Companies Act are effective as a tool of information and disclosure in a prospectus?
• Whether a change is required in the law to make it more stringent keeping in mind the present scenario?

HYPOTHESIS

The researcher has formulated the following hypothesis:

• Prospectus is a statement in which the investor has faith before buying the shares hence the mis-statements have to be severely dealt with.
• SEBI Information & Disclosure Regulations, 2009 and the provisions of Companies Act ,1956 have to be made more stringent in order to have an effective check on the appropriate and true disclosures in the Prospectus.

SCOPE

The researcher intends to analyse the importance of prospectus as a tool for investor protection in India by referring the following :

a) The Companies Act, 1956

b) SEBI( Issue of Capital & Disclosure Regulations) 2009

c) Recent Caselaws.

RESEARCH METHODOLOGY

The researcher has used the doctrinal research methodology and resources like books and web resources have been used to carry out the research.

LITERATURE REVIEW

• Pennington(2006). Company Law, New York: Oxford Publications

This book enumerates the concept of prospectus in great detail. It traces the history of prospectus and also deals with the various circumstances in which the prospectus is useful as a tool for the investor. It also deals with disclosure and consequences of non disclosure. The book also has many English cases for better understanding.

• Mayson, French and Ryan (2009). Company Law, New York: Oxford Publications

This book traces the concept and importance of prospectus and also deals with the role which prospectus plays in the building of a company. It also helps to understand the procedure relating to the making of prospectus.

• Majumdar & Kapoor( 2008). Company Law and Practice, Delhi: Taxmann Publications

The book deals in detail with what a prospectus is and why it is issued. It also deals with various sections of the Companies Act, 1956 relating to the prospectus and disclosures which are to be made in the prospectus

• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

These regulations have replaced the guidelines for information and disclosure protection of 2000 and also deal with how and what kind of disclosures have to be made in the prospectus.

• Primary Markets Vol. 2. Institute of Chartered Financial Analysts 1995

The book deals with prospectus and also deals with the relevant sections of the Companies Act. It also has relevant sections of the Securities Contract and Regulation Act, 1956. The book also deals with the procedure to issue a prospectus.

• Eilis Ferran (2009). Principles of Corporate Finance Law, New York: Oxford Publications

The book is based on various principles of Corporate Finance and discusses the origin and concept of prospectus. The book has very important material on prospectus based on UK laws. Various landmark caselaws of the UK legislation i.e FSMA, 2006 are discussed and also the concept of civil and criminal liability in case of mis representation is also discussed.

 2.       SCOPE OF LIABILITY FOR MIS STATEMENT

2.1   CONCEPT OF MIS STATEMENT 

As per Section 65 of the Companies Act, 1956 , a statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included inter alia in the prospectus itself or contained in any report or memorandum appearing on the face thereof or by reference incorporated therein or issued therewith and where the omission from a prospectus of any manner is calculated to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included. The liability accrues where any person subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of untrue statement included therein.[15]

i)                    A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context to which it is included; and

ii)                  Where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed in respect of such omission, to be a prospectus in which untrue statements are included.[16]

A mere representation that something will be done or will happen in future is not a representation of fact which could invoke the liability for misstatement. In order to invoke it, there must be a misstatement as to an existing fact.[17] Representation would invoke the responsibility if it was true only at the time of issue of prospectus and not at the time of allotment.[18] A statement in a prospectus as to the persons who are to be directors is a material statement and if it is untrue, a person subscribing on the faith of it isprima facie entitled to rescind.[19] Similarly an ambiguous statement which carries double meaning and an applicant who reasonably puts one meaning and is misled would be entitled to relief and the maker of the statement would not be heard to say that some other meaning should have been put upon his words.[20] It has also been held that those who accepted false statements as true were not deprived of their remedy merely because they neglected to go and look at the correctness of the statements.[21] Where the statements in the prospectus are clear but an applicant happens to take a wrong meaning by misreading them he cannot complain so as to get rid of the allotment.[22] Any variation or modification of the terms and conditions of the issued prospectus and the prospectus approved by CCI would have the effect of misrepresentation.[23]

Any misstatement made in an advertisement inviting deposits made via Section 58-A of the Act would also attract the applicability of liability provisions vis-à-vis prospectus. [24]

2.2    PERSONS WHO COULD BE HELD LIABLE

• every person who is a director of the company at the time of the issue of the prospectus; [25]
• every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time;[26]
• every person who is a promoter of the company;[27]
• every person who has authorised the issue of the prospectus;[28]
• an expert[29]: the liability of an expert surrounds around Section 57 & 58 of the Act. These provisions make it clear that the liability would not accrue just because of his position as an expert but would be only for an untrue statement made by him in the capacity of an expert. The expert™s consent should be endorsed on or annexed to the registration of the prospectus.[30] By consenting to the issue of the prospectus the expert does not undertake liability in respect of anything in the prospectus except his own statement.[31] 

2.3   PENALTY AND FINE

2.3.1          Any person who could be held liable for prospectus, if he does not mention the salient features in the prospectus which are prescribed, then he shall be punishable with fine which may extend to Rs. 50,000.[32]

2.3.2          Where any person who acts as an expert and who is or has been engaged or interested in the formation or promotion, or in the management, of the company or where a prospectus is issued which contains a statement made by an expert and the consent to such an effect has not been obtained or has been withdrawn, then the Company and every person, who is knowingly a party to the issue thereof, shall be punishable with find which may extend to Rs. 50,000.[33]

2.3.3          Any person who either by knowingly or recklessly making any statement , promise or forecast which is false, deceptive or misleading or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into or to offer to enter into (a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting shares or debentures; (b) any agreement, the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of shares or debentures, or by reference to fluctuations in the value of shares or debentures, shall be punishable with imprisonment for a term which may extend to 5 years or with fine which may extend to Rs. 1 Lakh or with both.[34] This liability is intended to apply not merely to company prospectuses but also to any proposal or offer for sale of shares by anybody whatsoever. This provision is expected to serve as a sufficient deterrent to unscrupulous company promoters against making untrue and deceptive statements in prospectuses with a view to obtaining capital from the public.[35]

3.       CIVIL LIABILITY FOR MIS STATEMENT IN PROSPECTUS

Section 62 of the Act incorporates the provision relating to the civil liability for misstatement in prospectus. It provides very clearly that where a prospectus invites persons to subscribe for shares in or debentures of a company liability accrues to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement included therein. Every person who, becomes liable to make any payment by virtue of such misrepresentation may recover contribution as in cases of contract from any other person who, if sued separately would have been liable to make the same payment unless the former person was and the latter person was not guilty of fraudulent misrepresentation.[36] The measure of damages for the loss suffered by reason of the untrue statement, omission etc. is the difference between the value which the shares would have had but for such statement or omission and the true value of the shares at the time of allotment.[37] In applying the correct measure of damages to be awarded to compensate a person who has been fraudulently induced to purchase shares, the crucial criterion is the difference between the purchase price and their actual value. It may be appropriate to use the subsequent market price of the shares after the fraud has come to light and the market has settled.[38]

4.       CRIMINAL LIABILITY FOR MIS STATEMENT IN PROSPECTUS

Section 63 of the Act incorporates the provision relating to the criminal liability for misstatement in prospectus. It provides that where a prospectus includes any untrue statement, every person who authorized the issue of prospectus shall be punishable with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs 50,000 or with both. The offence is compoundable under Section 621A. It has to be noted that under such cases, once the prosecution establishes the falsity of statement in a prospectus signed by a director, etc., the onus is shifted to the defendant of proving either that the statement was immaterial or that he believed it to be true.[39]

5.       DEFENSES

5.1   DEFENSE VIS-À-VIS GENERAL LIABILITY 

A director or other person responsible for the prospectus shall not incur any liability by reason of any non-compliance with, or contravention of, any of the requirements with respect to the matters to be stated and reports to be set out in prospectus:

(a) as regards any matter not disclosed, he proves that he had no knowledge thereof; or[40]

(b) he proves that the non-compliance or contravention arose from an honest mistake of fact on his part; or[41]

(c) the non-compliance or contravention was in respect of matters which, in the opinion of the Court dealing with the case were immaterial or was otherwise such as ought, in the opinion of that court, having regard to all the circumstances of the case, reasonably to be excused, provided that no director or other person shall incur any liability in respect of the failure to include in a prospectus a statement with respect to the matters specified in clause 18 of Schedule II unless it is proved that he had knowledge of the matters not disclosed. [42]

5.2   DEFENSE AVAILABLE TO ANY PERSON EXCEPT AN EXPERT VIS-À-VIS CIVIL LIABILITY 

No person shall be liable if he proves:

(a) that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent;[43]

(b) that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent;[44]

(c) that, 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 reason therefor; or[45]

(d) that-

(i) as regards every untrue statement not purporting to be made on the authority of an expert or of a public official document or statement, he had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures, as the case may be, believe, that the statement was true; and[46]

(ii) as regards every untrue statement purporting to be a statement by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that person had given the consent required by section 58 to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of the prospectus for registration or, to the defendant™s knowledge, before allotment thereunder; and

(iii) as regards every untrue statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the document. [47]

5.3   DEFENSE AVAILABLE TO AN EXPERT VIS-À-VIS CIVIL LIABILITY 

An expert who has given his consent under Section 58 of the Act shall not be liable if he proves:

(a) that, having given his consent under section 58 to the issue of the prospectus, he withdrew it in writing before delivery of a copy of the prospectus for registration;[48]

(b) that, after delivery of a copy of the prospectus for registration and before allotment thereunder, he, on becoming aware of the untrue statement, withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reason therefor; or[49]

(c) that he was competent to make the statement and that he had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures, believe, that the statement was true. [50]

5.4   DEFENSE AVAILABLE VIS-À-VIS CRIMINAL LIABILITY 

Any person who could he held criminally liable shall not be deemed to be so if he proves either that the statement was immaterial or that he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the statement was true. [51]

6 LIABILITY FOR MIS STATEMENT IN UNITED KINGDOM

6.1. UNITED KINGDOM 

The publication in the UK (England and Wales) of offering documents exposes those responsible for their preparation and publication to potential liability for misrepresentation or negligent misstatement.[52] Potentially simpler statutory liabilities arise under the Financial Services and Markets Act 2000 (the FSMA), previously contained in the Financial Services Act 1986. FSMA provides the framework within which the Financial Services Authority (the FSA) will operate as the regulator for the financial services industry in the UK. Criminal liability may also arise, as well as liabilities under the Listing Rules or other self-regulatory schemes.[53] In practice, without clear evidence of fraud, such claims are not clear cut, and may face complex issues, particularly in relation to causation and reliance, in showing that the misleading information in fact caused the damage, or that the investor in fact relied on the misleading information in entering into the investment. This is presumably why few cases have reached trial in recent years. Faced with technical difficulties on one side, and publicity issues on the other, claims usually settle long before trial.[54]

6.2  WHO MAY BE LIABLE? 

Section 90 of the FSMA provide that any person responsible for listing particulars, is liable to pay compensation to a person who has acquired securities to which the particulars apply and suffered loss in respect of them as a result of:

(i) any untrue or misleading statement in the particulars; or

(ii) the omission from the particulars of any matter required to be included by section 80 or 81. [55]

Section 80 and 81 states that the listing particulars must contain all such information as investors and their professional advisers would reasonably require and if at any time there occurs any significant change affecting any matter contained in those particulars the inclusion of which is mandated by the situation has to be included in unless its not a significant change of if the issuer of the securities is not aware of the change or new matter in question. If in case a person fails to include significant changes then his liability can be invoked to pay compensation to any person who acquires securities of the kind in question and suffers loss in respect of them as a result of the failure. However, liability under section 90 does not stop the general liability that may be incurred upon.[56]

6.3   LIABILITY OF PROMOTERS

Section 90 (8) deals with the liability of promoters as follows:

No person shall, by reason of being a promoter of a company or otherwise, incur any liability for failing to disclose information which he would not be required to disclose in listing particulars in respect of a company™s securities”

(a) if he were responsible for those particulars; or

(b) if he is responsible for them, which he is entitled to omit by virtue of section 82. [57]

6.4   DIRECTOR™S LIABILITY UNDER SECTION 463 OF THE FSMA ACT, 2006 

Section 463 applies to directors of all companies. Under section 463, subject to the knowledge requirement, a director is liable to compensate the company for any loss that the company suffers as a result of any untrue or misleading statement in, or omission from:

• the directors™ report (including the business review section);
• the directors™ remuneration report;
• a summary financial statement (SFS) so far as it is derived from either of the above reports.[58]

Section 463 provides a safe harbour in that a director is only liable to compensate the company for the loss suffered by the company in reimbursing an investor if the director knew or was reckless as to whether the statement was untrue or misleading or knew the omission to be dishonest concealment of a material fact.[59] The director™s liability under section 463 is limited to the company only and not to shareholders or third parties.[60] A director may still incur liability for a criminal offence, for example, under section 397 of FSMA for misleading statements and practices and civil liability for market manipulation.[61]

6.5  LIABILITY FOR NEGLIGENT MISSTATEMENT: TORT LIABILITY: CONTROVERSY OVER ˜DUTY OF CARE™ 

The liability under section 90 revolves around the duty to care since it is based on fraud and negligence. Thus if any person who was under a duty of care does any omission or fails to perform his duty his liability can be invoked if a loss is suffered due to such omission or failure or negligence. It has been held that if the investor can show that there was a misstatement by the maker of a statement in the offering document who owed him a duty of care, the investor can claim in negligence.[62] But the burden of proof is on the plaintiff that the defendant owed a duty of care towards him. However a controversy has arose with respect to the position of after market purchasers, since an after market purchaser needs to show that the misleading statement in the particulars still influenced the market he bought, thus, wherein in an obiter[63] by Lightman J, he stated that FSMA compensation claim is available to purchasers in the after market, a contrary decision was given in Al Nakib v Longcroft,[64] where the Court held that given the difficulty in establishing a duty of care in relation to an unascertained class of people, it is thought that no duty of care is owed to after market purchasers. Thus it is interesting to note that whether investors make a claim under FSMA or negligence, since FSMA does not require proof of negligence, however for a wider group, a negligence claim might serve more beneficial.

6.6  DEFENSE TO SECTION 90 LIABILITY 

Schedule 10 of the FSMA frames out the possible situations where a person can save himself from being held liable under Section 90 of the FSMA. The defenses provided under FSMA are quite similar to the one provided under Indian Companies Act, 1956. It also classifies the different defense available to an expert and non-expert.

6.7   FOR A STATEMENT MADE BY A NON-EXPERT [65]

A person does not incur any liability under section 90 for loss caused by a statement if he satisfies the court that, at the time when the listing particulars were submitted to the competent authority, he reasonably believed (having made such enquiries, if any, as were reasonable) that:

• the statement was true and not misleading;
• the matter whose omission caused the loss was properly omitted, and that one or more of the following conditions are satisfied:
  • he continued in his belief until the time when the securities in question were acquired;
  • they were acquired before it was reasonably practicable to bring a correction to the attention of persons likely to acquire them;
  • before the securities were acquired, he had taken all such steps as it was reasonable for him to have taken to secure that a correction was brought to the attention of those persons;
  • he continued in his belief until after the commencement of dealings in the securities following their admission to the official list and they were acquired after such a lapse of time that he ought in the circumstances to be reasonably excused. [66]

 

 

 

6.8   FOR A STATEMENT MADE BY AN EXPERT [67]

For FSMA an expert includes any engineer, valuer, accountant or other person whose profession, qualifications or experience give authority to a statement made by him. This definition is similar to the definition of expert in the Indian Companies Act, 1956.

An expert does not incur any liability under section 90 for loss in respect of any securities caused by a statement if he satisfies the court that, at the time when the listing particulars were submitted to the competent authority, he reasonably believed that the other person: [68]

• was competent to make or authorise the statement, and
• had consented to its inclusion in the form and context in which it was included, and that one or more of the following conditions are satisfied:
  • he continued in his belief until the time when the securities were acquired;
  • they were acquired before it was reasonably practicable to bring the fact that the expert was not competent, or had not consented, to the attention of persons likely to acquire the securities in question;
  • before the securities were acquired he had taken all such steps as it was reasonable for him to have taken to secure that that fact was brought to the attention of those persons;
  • he continued in his belief until after the commencement of dealings in the securities following their admission to the official list and they were acquired after such a lapse of time that he ought in the circumstances to be reasonably excused. [69]

DEFENSE BY CORRECTION OF STATEMENT 

Another defense that is available to an expert from incurring the liability is when he satisfies the court that:

• before the securities in question were acquired, the fact that the he was not competent or had not consented had been published in a manner calculated to bring it to the attention of persons likely to acquire the securities; or
• he took all such steps as it was reasonable for him to take to secure such publication and reasonably believed that it had taken place before the securities were acquired. [70]

 DEFENSE AVAILABLE TO BOTH, EXPERT AND NON-EXPERT 

A person does not incur any liability under section 90 if he satisfies the court that the person suffering the loss acquired the securities in question with knowledge:

• that the statement was false or misleading; or
• of the omitted matter; or
• of the change or new matter, as the case may be.

6.9 LATEST DEVELOPMENT: LIABILITY OF ISSUERS IN CONNECTION WITH PUBLISHED INFORMATION[71]

In order to clearly frame out the liabilities of issuers, United Kingdom legislation has come up with Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010. This regime is different than the earlier regime where liability was dependent on fraud and negligence whereas this new regime provides for the liability of issuers to pay compensation to third parties who have suffered loss as a result of misstatements, or dishonest omissions in information published by the issuer, or dishonest delay by the issuer in publishing information.[72] The purpose of the second set of regulations is to extend the current statutory regime for the liability of issuers for misstatements set out in section 90A of FSMA. Under the existing statutory regime, issuers of securities traded on regulated markets in the United Kingdom are liable for fraudulent misstatements made to the market in a limited class of publications.[73] The regulations extend the regime to cover issuers of any securities admitted to trading on a securities market in the UK, and issuers for which the UK is the issuer™s home state. Claims for misstatement may be brought not only by buyers of securities but also by sellers and holders of securities, if they have acted in reliance on a fraudulent misstatement and suffered loss as a result.  [74]

RECENT JUDICIAL TREND

CASE 1

Appellants: Mrs. Bhupinder Kaur Singh and Ors.

Vs.

Respondent: Registrar of Companies

 

[2010]159CompCas92(Delhi)

 

Hon’ble Judges:

A.K. Sikri, J.

Counsels:

For Appellant/Petitioner/plaintiff: Vikas Guglani and Gurmeet Bindra, Advs

For Respondents/Defendant: Manisha Dhir and Shanta Narang, Advs.

IN THE HIGH COURT OF DELHI

FACTS

The Registrar of Companies (ROC) has filed two complaints against the petitioners herein impleading them as accused persons. Complaint No. 698/2002 is filed under Sections 63 and 628 of the Companies Act, 1956 (for short, ‘the Act’) alleging that the accused persons in the year 1996 promoted a company, namely ‘Tactful Investments Ltd.’ and raised public issue. In the prospectus, which was signed by the petitioners, it was mentioned that the money collected by way of public issue shall be utilized and invested in leasing business, which was going to be the main activity of the company. However, the funds collected by way of public issue were not utilized in the leasing business as stated or promised in the prospectus and, thus, the petitioners had made false statement in the prospectus, which act was punishable under Sections 63 and 628 of the Act. The public issue was of 24,00,000 equity shares of Rs. 10/- each aggregating to Rs. 240 lacs and the following objects were mentioned in the prospectus for this public issue:

a) To augment the long terms resources for the working capital requirement for leasing and investments.

b) To get shares of the company listed on Stock Exchange; and

c) To meet the expenses of the public issue.

Thus, primarily the purpose was to utilize the funds collected for leasing and investment.

Instead of utilizing the money in leasing business, the company made huge investments in unproductive shares and securities amounting to Rs. 3.13 crores and Rs. 7.18 crores during 1995-96 and 1996-97 respectively, which was much beyond the limit of Rs. 90 lacs and Rs. 100 lacs set out for this purpose in the prospectus. This investment remained blocked till 31.3.2001 and yielded very meagre income and hardly any return by way of dividends. The company did not undertake any leasing and consultancy activities as promised in the prospectus.

ARGUMENTS BY THE PETITIONERS

The grounds for challenge, which are common in both these petitions, may first be noted:

(a) it is stated that the petitioner No. 1 is 65 years of age and the petitioner No. 3 is 83 years old, who have been named as accused persons in the complaint knowing fully well that they were not the directors of the company at the relevant time when the funds were to be utilized by the company. It is stated that on 1.7.1996 the petitioners resigned as directors and Form-32 was submitted with the ROC on 9.9.1996. Therefore, the petitioners were not the directors when the funds in question were allegedly utilized for a purpose other than that mentioned in the prospectus and, Therefore, cannot be held liable;

(b) as per the requirement the petitioners signed the prospectus wherein all the details pertaining to the promoters and risk factors were indicated. It was specifically stated in the prospectus that the petitioners, who were promoters, did not have any experience in leasing business, which would be the main activity of the company with many other facts as to the risks involved. It was also stated that the petitioners as promoters did not make substantial investments in the share capital, which fact was specifically stated in the prospectus of the company and as the petitioners are not having major share holding, they were forced to resign and, Therefore, have no control over the business of the company;

(c) it is also contended that leasing was one of the object mentioned in the prospectus and the other business object was investment. The company had admittedly utilized the funds in the investment business and, Therefore, there was no misutilization of funds as the funds were invested in one of the activities mentioned in the prospectus;

(d) it is also submitted that the non-commencement of the leasing business cannot amount to making of any false statement in the prospectus, amounting to inducement or misleading any person especially when in the prospectus it was specifically mentioned that ‘the proposed deployment of funds is merely indicative and the company will review the same keeping in view the market opportunities and the interest of the shareholders’;

It is contended that Section 63 of the Act envisages that where a prospectus issued includes any untrue statement, every person who authorised the issue of the prospectus shall be punished as provided under the said section. However, in the entire complaint there is no averment as to which statement of the petitioners in the prospectus is untrue. Further, the statement which is alleged to be false has to be a statement, which on the date of signing the prospectus was a false statement to the knowledge of the petitioners. However, no such averment has been made in the complaint. On the basis of the alleged misutilization of funds that took place on subsequent dates, it cannot be alleged that there was a false statement in the prospectus and complaint under Sections 63 and 628 of the Act was prima facie not maintainable.

It could not be denied that the Extraordinary General Meeting of the company was held on 25.3.1998 and the company changed its business from leasing to Infotech. For this purpose not only the name of the company was changed to M/s. Cyber Space Infosys Ltd. but alteration in the object clause was also made by including Infotech business. This change was specifically approved by the Department of Company Affairs. The change was notified with the ROC as well. Obviously, after such a change in the object clause if the company started Infotech business as well and earned the income from software business, it cannot be said that statement made in the prospectus in the year 1994, while making the public issue, was false. There may be various reasons for changing the object clause and the line of business. It is a matter of common knowledge that the leasing, finance which was lucrative in the early 1990s was not so in the late 1990s. It is also a matter of common knowledge that the software business started picking up during those years, which is the position till date. If in these circumstances a policy decision was taken to change the line of business and to start a business which was more promising and beneficial to the company and the shareholders voted for the

same in its Extraordinary General Meeting which include those shareholders who subscribed to the shares in the public issue in the year 1994, it cannot be said that these shareholders were, in any way, duped or misled.

JUDGMENT

The very heading of the section makes misstatement in the prospectus as civil liability. Liability is of the persons mentioned therein which is to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue statement included in the prospectus. Two things which follow are – (i) it is the person who has subscribed for shares or debentures on the basis of representation made in the prospectus who can ask for compensation; and (ii) compensation has to be for any loss or damage which he has sustained by reason of such untrue statement. Thus, not only the liability is civil liability, the right is given to the person, who has suffered, to prove the loss or damage which he has suffered and filed recovery proceedings for such compensation. By no stretch of imagination it can be treated as criminal liability and, Therefore, criminal complaint under Section 62 of the Act, that too by the ROC, would not be maintainable.

It is not at all stated that there was any complaint received by the ROC or the Department of Company Affairs from any persons who alleged that they were induced to buy the shares on the basis of misstatement/representation in the prospectus. It is also not stated that any complaint is received from any persons alleging that they had suffered any loss. Therefore, ex facie, provisions of Section 62 and 68 of the Act are not attracted on the basis of the allegations made in the complaint.

CASE 2

Appellants: Hemendra Prasad Nag Chowdary and Ors.

Vs.

Respondent: Registrar of Companies and Anr.

 [2010]158CompCas21(AP)

Hon’ble Judges:

Samudrala Govindarajulu, J.

Counsels:

For Appellant/Petitioner/Plaintiff: Shireen Sethna Baria, Adv.

For Respondents/Defendant: M. Ganga Rao, Adv. for Respondent

FACTS

The Pfimex group consisted of partnerships and the erstwhile partners promoted A10 company. On June 14, 1990, A10 came out with public issue for 24,87,223 equity shares of Rs. 10 each for cash aggregating to Rs. 2,48,72,230. The public issue was over

subscribed by 6.5 times. Subsequently, on May 16, 1992, through letter of offer, A10 came out with 14 per cent. secured fully convertible debentures (“A” series) of 3,50,000 of Rs. 150 each for cash or par aggregating to Rs. 5,25,00,000 of which 3,33,334 debentures aggregating to Rs. 5,00,00,100 were offered on rights basis to the existing equity shareholders of the company and 16,666 debentures aggregating to Rs. 24,99,900 to its employees. The company was running its unit at Jeedimetla. On the ground that the company incurred loss of Rs. 1,628.59 lakhs and that the company’s net worth has been eroded and that there was non-availability of working capital, the company’s unit at Jeedimetla was closed by March 31, 1998 and the company became a sick industrial company under the Sick Industrial Companies (Special Provisions) Act, 1985.

All the three complaints were filed by the Registrar of Companies, Andhra Pradesh.

ARGUMENTS BY THE ACCUSED

It is contended by senior counsel appearing for the petitioners that none of the above penal sections of law is applicable to the facts of these cases, because the complaints do not disclose which part of the prospectus or letter of offer contained which misstatements and which false promise as contemplated by the above penal sections of law.

The prospectus contained only figures and achievements which were secured by Pfimex group prior to being converted into a company. The letter of offer given in the year

1992 also contained performance results of the company after it is incorporated. It is not the complainant’s case that any of those past history and performance results set out by the company either in the prospectus or in the letter of offer were false or misleading. The only allegation against the company is that the company had given a rosy picture in the prospectus and in the letter of offer attracting the public and shareholders to subscribe for shares and debentures in the company, by mentioning expected future results. One has to be optimistic in life and cannot be expected to be pessimistic. No one can expect future gloomy picture in the prospectus or letter of offer. At the same time, the subscribers will decide on subscribing for shares and debentures having regard to market instabilities and other risks involving in the subscription. Simply because the company expected to give more dividend and expected to earn more profit which the company could not achieve in future years, it cannot be said that the contents of the prospectus and letter of offer were full of false promises and false inducements. The company or its directors did not promise any definite achievement in future.

The court accepted this argument and held that there was no misstatement in the prospectus and the proceedings in lower court were quashed and all the appeals were allowed.

CASE 3

Appellants: Shri Ratanlal Tamakhuwala

Vs.

Respondent: M/s. Gujarat NRE Coke Limited

Hon’ble Judges:

Partha Sakha Datta, J.

Counsels:

For Appellant/Petitioner/Plaintiff: Mr. S.K. Kapoor, Mr. Sekhar Bose and Mr. S. Ganguly

For Respondents/Defendant: Mr. S. Moitra, Mr. Milon Mukherjee and Mr. Jaymalya Bagchi for the O.P.

IN THE HIGH COURT OF CALCUTTA C.R.R. NO. 54 OF 2009

DECIDED ON: 07.12.2009

FACTS

This application under section 482 of the Code of Criminal Procedure has been filed by one of the accused persons in Case No. C-26437 of 2008, under section 63 of the Companies Act, 1956, and section 199 of the Indian Penal Code, now pending before the learned Chief Metropolitan Magistrate, Calcutta praying for quashing of the proceeding.

The present petitioner was one of the directors of the complainant company appointed in the year 1993 as Managing Director and was in full-time employment of the complainant company until 1997 when he was dismissed from service in the year 1997. Similarly, accused No.2 who was the Vice president(Operations) of the complainant company was also dismissed from service as both defalcated and siphoned off crores of rupees from the complainant-company.

Then they floated another company called ACPL, in 1995 and made a public offer to raise money. They issued Red Herring Prospectus, (RHP) on 18th July, 2000 and made themselves directors of ACPL. This ACPL entered into capital market through initial public offer, (IPO) of 72,60,000 equity shares in a price band of Rs.164/- to Rs.196/- per equity share which was open for subscription from 7^th August, 2008 and closed on 13th August, 2008. Now in their prospectus they made serious misstatements some of which are in the language of the complainant as follows:

• The M/s. Austral Coke & Projects Limited has claimed inter alia the existence of

various fixed assets at its plant including 4 chimneys and 138 ovens. The company has only two chimneys which can give a produce of 60,000 – 70,000 tones of coke which cannot justify the claimed figures by any stretch of engineering excellence.

• As per the statement of profit and loss account appearing on page 147 of the RHP which is part of their audit report, for the 11 months ended 29th February, 2008 sales of products manufactured by the company at Rs.12481.72 lacs is complemented by Raw materials & Goods consumed at Rs.12843.24 lacs while against sale of products traded by the company for Rs.10184.43 lacs, the corresponding cost of purchase of such traded goods is not shown thereby grossly inflating the profits reported by the auditors.
• In the prospectus, the accused person 1 and 2, the promoters of M/s Austral Coke & Projects Limited have claimed that they were the one of the promoters of complainant and were instrumental in growth of the complainant, conveniently forgetting to mention that they were forcefully “expelled” in 1997 from the complainant by its shareholders because of their fraudulent practices including defalcation of shareholders’ monies. Several cases against accused persons Nos. 1 and 2 are still pending in the Calcutta High Court for investigation and recovery ofpublic investor funds defalcated by them.
• CARE one of the leading credit rating agencies in the country have graded the public issue of M/s Austral Coke & Projects Limited and has assigned the “CARE IPO GRADE 2” indicating below average fundamentals

The accused persons thus committed offence under section 63 of the Companies Act, 1956. The complainant having come to know of the misstatements issued a Press Release bringing the misstatements to the knowledge of the investors and public in general. Accused Nos. 1 and 2 issued a counter Press Release alleging that the complaint of the complainant was in the nature of a ‘family dispute’.

DEFENCE TAKEN BY AUSTRAL COKE & PROJECTS LIMITED

Mr. S. K. Kapoor, learned advocate for the petitioner in support of the application praying for quashing of the proceeding made two-fold submissions.

The first submission is the prosecution under section 63 of the Companies Act is not maintainable at the instance of the accused in view of the bar under section 621 of the Companies Act in terms of which no Court shall take cognizance of offence except on a complaint made by the Registrar of Companies or a share-holder or the Central Government.

His second submission is that on the facts alleged in the petition of complaint offences under section 199/200 IPC cannot lie because the prospectus is not a declaration within the meaning of explanation to section 200 of the IPC.

DECISION OF THE COURT

Section 621 clearly excludes any person as complainant other than the Registrar, share-holder or a person authorised by the Central Government to lodge complaint against the offender company to prosecute on the charge of misstatements in prospectus. It seems to the court that when a statute lays down a procedure for prosecution for misstatements in prospectus the procedure laid down therein has to be followed and no other procedure is maintainable. Again, when a statute, special of its kind, has defined a specific offence and provided punishment thereof prosecution has to be launched under that special law to the exclusion of the general law. The law is well-settled that when a statute provides that a thing should be done in a certain way it has to be done in that way or not at all. The other methods of performance are exclusively forbidden.

The Companies Act is a complete self contained Code. It provides in clear terms the remedy available in case a company issues a prospectus with misstatements and section 63 clearly provides that a company or a officer of a company can be prosecuted on account of misstatement in prospectus under section 63 and where thus there is a special provision in a statute which is a self-contained one providing punishment on account of he offences alleged prosecution has be to launched in the manner as laid down in that Act itself. Therefore, in terms of section 621 of the Act a parallel or a rival company cannot initiate a complaint alleging offences under section 63 of the Act. In that view of the matter, it does not appear to me that prosecution under section 199/200 IPC which is said to correspond to section 63 of the Companies Act is maintainable.

Accordingly, the revisional application succeeds and is allowed. The criminal proceedings

being Case No. C-26437 of 2008 under section 199/200 of IPC and under section 63 of the Companies Act, now pending before the learned Chief Metropolitan Magistrate, Kolkata is hereby quashed.

CASE 4

Appellants: Manju Yadav

Vs.

Respondent: Registrar of Companies

2007(98)DRJ312

Hon’ble Judges:

S. Ravindra Bhat, J.

Counsels:

For Appellant/Petitioner/plaintiff: Sanjeev K. Tiwari, Adv

For Respondents/Defendant: Baldev Malik, Adv.

FACTS

The present petition seeks a quashing order, under Section 482, Code of Criminal Procedure, (hereafter “the Code”) in respect of criminal proceedings, filed by the Registrar of Companies.

The petitioner avers and it is so contended by his counsel, that the prosecution for

commission of offences is not maintainable on two counts. One, the allegation about violation of Section 62 does not result in commission of an offence, since that provision relates to a civil wrong; Two, that the prosecution as far as the offence under Section 68, Companies Act, is concerned, is not maintainable, because no sanction was obtained for the purpose.

JUDGMENT

Reliance was placed upon the decision reported as Rajeev Shukla v. Registrar of Companies 135 (2006)DLT 599. In that decision, the court held as follows:

Registrar of Companies has filed a criminal complaint under Section 62 read with Section 68 of the Indian Companies Act, 1956 against the petitioner, which is pending in the Court of ACMM. Tis Hazari, Delhi. This Petition is filed seeking quashing/dismissal of the said complaint. The submission of learned Counsel for the petitioner is that no criminal complaint can be filed under Section 62 of the Act inasmuch as this provision deals with ‘Civil liability for mis-statement in the prospectus’. Insofar as the complaint under Section 68 of the Act is concerned, his submission is that for filing complaint under this Section, prior sanction of the competent authority is required and no such sanction is obtained or available to the officer/complainant who has filed the complaint.

The petitioner has filed, along with this petition, copy of DCA letter dated 13.03.2002 as per which the Department of Company Affairs in the Ministry of Law, Justice and Company affairs had granted general permission to the Regional Directors for launching prosecution for violation of Sections 62, 63 and 628 of the Act in respect of 229 vanishing companies identified originally. This sanction, however, does not include launching of prosecution under Section 68 of the Act as well.

Thus the Registrar could not proceed with the criminal complaint under Section 62 and it was quashed.

CASE 5

In Re: Brooks Laboratories Ltd.

Hon’ble Judges:

Prashant Saran, Whole-Time Member

ORDER DECIDED ON: 28.12.2011

FACTS

Brooks Laboratories Ltd. (hereinafter referred to as ‘Brooks’) incorporated on January 23, 2002 by Atul Ranchal and Rajesh Mahajan is a pharmaceutical contract research and

manufacturing services company having its manufacturing facility at Baddi, Himachal Pradesh.

Brooks entered the capital market by way of an issuance of equity shares to the public in the price band of ` 90 to ` 100 per equity share of face value of 10 each aggregating ` 63 crores. The primary objective of the issue was to set up a manufacturing unit at JB SEZ P. Ltd, Panoli, Gujarat for manufacturing of various pharmaceuticals formulations and to meet long term working capital requirement.

The issue was graded by ICRA and assigned the Initial Public Offering (hereinafter referred to as ‘IPO’) Grade 2 indicating below average fundamentals. The bids opened on August 16, 2011 and closed on August 18, 2011. The issue was managed by D&A Financial Services P. Ltd. as Book Running Lead Manager. The issue received 4,878 Applications for 11,121,360 equity shares resulting in 1.76 times subscription. The price of the public issue was fixed at 100.

Brooks received a total sum of 61,03,07,312 (after deduction of issue related expenses) as issue proceeds on September 2, 2011 and transferred the funds to certain entities on September 2 and 3, 2011. Brooks informed that the money paid was towards repayment of short term loans (inter corporate deposits (hereinafter referred to as ‘ICDs’)) availed by the company from these entities earlier.

Brooks has not made any disclosures with regard to raising of ICDs and its repayment

in the RHP dated August 3, 2011/ prospectus dated August 22, 2011. It is also noted that the agreements entered into by Brooks were only a cover up for a more sinister conspiracy designed to siphon the funds of the public issue.

Brooks also transferred  4 crores out of the public issue proceeds to MK Distributors without any proper agreement or for any consideration. The RHP/ prospectus specifically mentions that “pending utilization for the identified projects, the Net Proceeds of the Issue are proposed to be invested in high quality interest/dividend bearing liquid instruments including money market mutual funds and deposits with the banks or for reducing overdraft, for the interim and applicable period.” It was found that the transfer of funds to MK Distributors is not in accordance with what is disclosed in the RHP/prospectus.

Although the contract was dated June 1, 2011 Brooks nor its BRLM disclosed this material information in the RHP/ prospectus. These non-disclosures (i.e. pertaining to raising of ICDs and its repayment, placing purchase orders, appointment of project contractor, payment towards plant and machinery and to the project contractor), transfer of funds between related entities indicates that the directors of the company, its BRLM and the financiers had a tacit understanding to defraud the public issue process and also had a pre-determined plan to siphon off funds from the issue proceeds disguised as ICDs and its repayment.

Further, in the RHP/ prospectus the company has revealed the names of suppliers and also the quotation given by them in 2010 for supply of plant and machinery, utilities, etc. The quotations were perused and found that the quotations were received through e-mails without any proper signature. Further, the quotations indicated by the suppliers did not match with those disclosed in the prospectus of the company. It is imperative for a BRLM to make disclosures only after verifying the relevant documents. However, I find that the BRLM has not made any proper due diligence before making disclosures in the RHP/ prospectus.

Discrepancy in the quotations given by the suppliers for supply of plant and machinery, construction of building and utilities and what is revealed in the prospectus of the company. It was found that the prospectus indicated that Brooks shall place orders of plant and machinery, utilities with indigenous company. However, I find that Brooks went ahead and placed orders for plant and machinery to a firm based in UAE and did not disclose the same in the prospectus of the company. The company has not disclosed the recommendations of its own technical committee strongly recommending purchase of imported plant and machinery rather than indigenous plant and machinery as informed in the prospectus. I am of the view that the due diligence on the part of the merchant banker does not mean passively reporting whatever is reported to it but to find out everything that is worth finding out.

The above acts of Brooks, its directors and BRLM are prima facie of such nature that it has shattered the confidence of the investors in the public issue process which is not in the interest of the securities market. Thus, prima facie, it is observed that Brooks has failed to make prompt, true and fair disclosure of all material developments relating to its business and securities in violation of Regulation 57, Clause 2 (VII) (G) of Part A as specified in Schedule VIII, 60(7) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR Regulations’). It is also observed that D&A Financial Services P. Ltd. has failed to exercise due diligence regarding all the aspects of the issue including the veracity and adequate disclosure in the offer documents in violation of Regulation 57, Clause 2 (VII) (G) of Part A as specified in Schedule VIII, 60(7), 64(1) of ICDR Regulations and clauses 4, 6 and 7 as specified in Schedule III of Regulation 13 of SEBI (Merchant Bankers) Regulations, 1992.

One basic premise that underlies trading on the stock exchanges is that investors conform to standards of transparency and ethical behavior prescribed in the various regulations and statutes, relevant in this regard. In the light of the preliminary findings against the entities mentioned above, it would be difficult to conclude that these entities conformed to the prescriptions even remotely. No indulgence on the part of SEBI would be justified, given the sacrosanct mandate of investor protection entrusted to it. Therefore, this is a fit case where SEBI as the regulator needs to intervene sternly and immediately in preventing these entities from operating in the securities market to prevent further misuse and harm, until further directions.

ORDER

The company Brooks Laboratories Ltd. is prohibited from raising any further capital from the securities market, in any manner whatsoever, till further directions. The company Brooks Laboratories Ltd. shall call back the ICDs advanced by it to Suryamukhi Projects P. Ltd. and Neo Power Universal FZ LLC, UAE. These amounts together with all the IPO proceeds that are still lying unutilized with the company across all its banks / deposit accounts or any investments including in mutual funds, shall be deposited in an interest bearing escrow account with a scheduled commercial bank, till further orders. A confirmation on compliance of this direction shall be sent by the promoters of Brooks to the stock exchanges where it is listed, within 7 days of the date of order.

D & A Financial Services P. Ltd. (BRLM) and Dinesh R Kaushik, Director of BRLM are also prohibited from taking up any new assignment or involvement in any new issue of capital including IPO, follow-on issue etc. from the securities market in any manner whatsoever, from the date of this order till further directions.

CONCLUSION

The prospectus is the basic document on the basis of which the intending investors decide whether or not they should subscribe to the shares or debentures. Therefore, the law requires unstinted disclosure of various matters through prospectus and forbids variations of any terms and conditions of a contract contained therein except with the approval and authority of the company in general meeting.[75]

Those who issue prospectus holding out to the public great advantage which will accrue to persons who take up shares on the representations contained therein, are bound to state everything with scrupulous accuracy and not only to abstain from stating as fact that which is not so but to omit no fact within their knowledge, the existence of which might in any degree affect the nature or extent or quality of the privilege and advantages which the prospectus holds out as an inducement to take shares.[76]

It is therefore essential that the information statutorily needing disclosure is stated fully and precisely so that the investing public which is ignorant of the present and future prospects of the company may get all the information which is likely to affect the public mind.[77] It is only to protect the members of the public against their being misguided by half truths or falsehoods that the law casts a liability on various persons connected with the issue of the prospectus to compensate every person (who subscribes on the faith of the prospectus) for any loss or damage he may have sustained because of the inclusion of any untrue statements in the prospectus as per Section 62 of the Companies Act, 1956.

The Companies Act, 1956 and the SEBI ( Disclosure of Investor Protection Guidelines) ,2000 did not prove to be adequate to prevent IPO scams and defrauding of Investors. SEBI in 2009 understood the lacunae that prevailed in law and issued the Issue for Capital and Disclosure Regulations, 2009. These regulations give a detailed list of the matters to be disclosed in the prospectus. The depth and hardwork put into the making of these guidelines can be seen by the intricate details like the size and details even of the cover page are mentioned.

These guidelines have proved to be a boon as they help to restrict if not stop the misstatements in prospectus and create a safe arena for the investor to invest his money.

SUGGESTIONS

The Companies Bill, 2011 should be passed as the provisions of Companies Act, 1956 though amended from time to time are proving to be lagging behind in the modern age.

The Companies Bill, 2011 is also more stringent and elaborate as compared to the Companies Act, 1956.The definition of prospectus as defined in Clause 2 (70) of the Companies Bill, 2011 includes expressly mentioned red herring prospectus and shelf prospectus within its ambit thus widening the scope.

The Companies Bill also enhances the the scope of criminal as well as civil liability. Criminal Liability is dealt under Clause 34 of the bill while Civil Liability is dealt under Clause 35 of the Bill.

In the Companies Act, 1956, Section 68 states a maximum imprisonment of 5 years and maximum fine of Rs. 1 lakh. This has been radically enhanced owing to the frauds and experiences in the last decade. According to the Companies Bill, 2011, Section 447 states that 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.

Thus both the hypothesis drawn by the researcher stand true that the laws have to be made more stringent and the Companies Bill, 2011 should be brought in force as soon as possible as the present laws are not proving to be adequate and the ICDR guidelines have been amended on a regular basis by SEBI to curb the misuse of prospectus yet a stringent Act will help to substantiate the Laws and curb the Misuse of prospectus and protect the interest of investors.

*************

BIBLIOGRAPHY

BOOKS REFERRED

• Majumdar & Kapoor(2008). Company Law and Practice, Delhi: Taxmann Publications
• Mayson, French and Ryan (2009). Company Law, New York: Oxford Publications
• Pennington(2006). Company Law, New York: Oxford Publications
• Primary Markets Vol. 2. Institute of Chartered Financial Analysts 1995
• Eilis Ferran (2009). Principles of Corporate Finance Law, New York: Oxford Publications

WEBSITES REFERRED

• http://www.investopedia.com/terms/p/prospectus.asp#axzz1qv7CtGZ3 referred on January 20, 2012
• http://www.investopedia.com/terms/p/prospectus.asp referred on January 20, 2012
• http://www.helium.com/items/951522-the-importance-of-a-prospectus-for-an-initial-public-offer-ipo referred on February 3, 2012
• http://jurisonline.in/2008/05/company-law-liability-for-a-mis-statement-in-a-prospectus/ referred on March 1, 2012
• http://isid.org.in/pdf/raoalok.pdf referred on March 1, 2012
• http://www.legalserviceindia.com/article/l334-Protection-Of-The-Investors-By-Sebi.html referred on March 2, 2012
• http://uk.practicallaw.com/5-102-4205 referred on March 2, 2012.

LEGISLATIONS/ GUIDELINES/STATUTES REFERRED

• The Companies Act, 1956
• Financial Services and Markets Act, 2000 (U.K)
• The Companies Bill, 2011
• SEBI( Issue of Capital & Disclosure Regulations), 2009

COMMITTEE REPORTS REFERRED

• Company Law Committee Report, 1962

CASES REFERRED

• Bansidhar Durga Dutt v Tata Power Co. Ltd., AIR 1925 Bom 272
• Bentley v Black, (1893) 9 TLR 580 (CA)
• Bhupinder Kaur Singh v. Registrar of Companies [2010]159CompCas92(Delhi)
• Hedley Byrne v Heller [1964] AC 465
• Hemendra Prasad Nag Chlowdhury v. Registrar of Companies [2010]158CompCas21(AP)
• Kindersely V.C. in Burnswick and Canada Railway Co. vs. Mullridge (1860) 1 Dr &Sm 363
• Manju Yadav v. Registrar of Companies 2007(98)DRJ312
• McConnel v Wright, (1903) 1 Ch 546
• N. Parthasarathy v CCI, AIR 1991 SC 1420
• Possfund Custodian Trustee Limited v Diamond [1966] 2 All ER 774
• R. v. Kylsant, (1932) 1 KB 442
• Rajagopala Iyer v The South Indian Rubber Works, AIR 1942 Mad 656
• Re: Brooks Laboratories Ltd Decided on 28/12/2011
• Shri Ratanlal Tamakhuwala v. Registrar of Companies Decided on 7/12/2009
• Smith v Chadwick, (1882) 20 Ch D 27, 57
• Smith New Court Securities Ltd. v Scrimgeour Vickers (Asset Management) Ltd., (1997) 1 BCLC 350 (HL)

INLINE REFERENCES

[1] Available at http://www.investopedia.com/terms/p/prospectus.asp#axzz1qv7CtGZ3

[2] Ibid

[3] Section 2(36), The Companies Act, 1956

[4] Majumdar & Kapoor( 2008). Company Law and Practice, Delhi: Taxmann Publications pg. 177

[5] Available at http://www.investopedia.com/terms/p/prospectus.asp

[6] Majumdar & Kapoor( 2008). Company Law and Practice, Delhi: Taxmann Publications pg. 178

[7] Section 56 of the Companies Act, 1956

[8] Majumdar & Kapoor( 2008). Company Law and Practice, Delhi: Taxmann Publications pg. 198

[9] (1860) 1 Dr. & Sm. 363, 381

[10] Majumdar & Kapoor( 2008). Company Law and Practice, Delhi: Taxmann Publications pg. 188

[11] Section 61 of The Companies Act, 1956

[12] Kindersely V.C. in Burnswick and Canada Railway Co. vs. Mullridge (1860) 1 Dr &Sm 363

[13] Available at http://www.helium.com/items/951522-the-importance-of-a-prospectus-for-an-initial-public-offer-ipo

[14] Ibid

[15] Section 62 of The Companies Act, 1956

[16] Majumdar & Kapoor( 2008). Company Law and Practice, Delhi: Taxmann Publications pg. 192

[17] Bentley v Black, (1893) 9 TLR 580 (CA)

[18] Rajagopala Iyer v The South Indian Rubber Works, AIR 1942 Mad 656

[19] Ibid

[20] R. v. Kylsant, (1932) 1 KB 442

[21] Smith v Chadwick, (1882) 20 Ch D 27, 57

[22] Bansidhar Durga Dutt v Tata Power Co. Ltd., AIR 1925 Bom 272

[23] N. Parthasarathy v CCI, AIR 1991 SC 1420

[24] Section 58-B of the Companies Act, 1956

[25] Section 62 of the Companies Act, 1956

[26] Ibid

[27] Ibid

[28] Ibid

[29] The expression expert includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him according to Section 62 of The Companies Act, 1956.

[30] Section 60 (1) of the Companies Act, 1956

[31] Section 62 (1) and 63 (2) of The Companies Act, 1956

[32] Section 56 of the Companies Act, 1956

[33] Section 59(1) of the Companies Act, 1956

[34] Majumdar & Kapoor( 2008). Company Law and Practice, Delhi: Taxmann Publications pg. 195

[35] Company Law Committee Report, para 59

[36] Section 62 of the Companies Act, 1956

[37] McConnel v Wright, (1903) 1 Ch 546

[38] Smith New Court Securities Ltd. v Scrimgeour Vickers (Asset Management) Ltd., (1997) 1 BCLC 350 (HL)

[39] Section 63 of the Companies act, 1956

[40] Section 62(4) of the Companies Act, 1956

[41] Ibid

[42] Ibid

[43] Section 62(2) of the Companies Act, 1956

[44] Ibid

[45]Ibid

[46] Ibid

[47] Ibid

[48] Section 62 of the Companies Act, 1956

[49] Ibid

[50] Ibid

[51] Section 63 of The Companies Act, 1956

[52] Ferran Eilis (2009). Principles of Corporate Finance Law,New York: Oxford Publications pg. 430

[53] Ferran Eilis (2009). Principles of Corporate Finance Law,New York: Oxford Publications pg. 434

[54] Ibid

[55] Section 90 of the FSMA Act, 2000

[56] Section 90(6) of the FSMA Act, 2006

[57] Section 90(8) of the FSMA Act, 2006

[58] Section 463(3) of the FSMA Act, 2006

[59] Section 463(3) of FSMA Act, 2006

[60] Section 463(4) of the FSMA Act, 2006

[61] Ibid

[62] Hedley Byrne v Heller [1964] AC 465

[63] Possfund Custodian Trustee Limited v Diamond [1966] 2 All ER 774

[64] [1990] 3 All ER 321

[65] Mayson, French and Ryan (2009). Company Law, New York: Oxford Publications pg. 721

[66] Ibid

[67] Mayson, French and Ryan (2009). Company Law, New York: Oxford Publications pg. 723

[68] Section 90 of the FSMA Act, 2006

[69] Ibid

[70] Section 90 of the FSMA Act, 2006

[71] Inserted by Section 1270 of the UK Companies Act, 2006 and to be effective from 1 October 2010

[72]Available at http://jurisonline.in/2008/05/company-law-liability-for-a-mis-statement-in-a-prospectus/

[73] Ibid

[74] Ibid

[75] Section 61 of The Companies Act, 1956

[76] Kindersely V.C. in Burnswick and Canada Railway Co. vs. Mullridge (1860) 1 Dr &Sm 363

[77] Available at http://www.helium.com/items/951522-the-importance-of-a-prospectus-for-an-initial-public-offer-ipo