IGry*

3
$
t
24 INTRODUCTION TO COMPANY LAW [s. 18
i

Change of registered office situation.-Every change of registered

office situation verified in ihe prescribed manner, has to be notified with
the Registrar within 15 days. 1^s. rz1+; Following changes can be effected
in the situation of the r"girtur.d office only with the authority of a special
resolution: (a) in the casi of an existing comPany, shifting the registered
office outside the local limits of any city, town or village where the
office
was situate at the commencement of the Act or where it may have been
shifted by the company's special resolution; and (b) in the case of any other
company, shifting of tire office outside the local limits of any city,
town or
village *h"r" ,rJh offi.u was first situated or later by the company's spe-
cial resolution.
No company is to change the place of its registered office from the
juris-
diction of one Registrar to that of another Registrar within the same State
unless such chan[e is confirmed by the Regional Director on application
in t:

the prescribed minner. The Regional Director has to confirm the shifting
withl.,30 days of the application and the company has to file the same with
i:
a

has
the Registrai within OO hays of the date of confirmation. The Registrar
to ceriify the registration within 30 days. The certificate of the Registrar i:
is conclusive evidence that all the ."qrrit"*"nts of the Act were complied I
with. t5.12(3--7)l i
eny aufu"lt Lnder the section is punisltl: The compalf 1d
"y:ty
officer in default is liable to a penalty of nt 1000 for every day during which
!a

the default continues but not exceeding Rs 1,00,000. [S. 12(8)] ts

6:
,:

I
Conversion of Companies already Registered tS' 18I ir

A company of any class registered under the Act may convert itself as a
5i
*
g

company of anotheiclass by ilteration of the memorandum and articles

in a

accordance with applicable provisions. Where the conversion is

required
to be done under ihls sectiory the Registrar has to satisfy himself on an
application by the company that the provisions for registration o{ co19a-
,ri"s hurr" been complied with. He may, then close the former registration
of the comPany, register the new documents and issue a certificate of reg-
istration like that olu rlu* comPany. The company remains the same entity
as it was before in respect of its debts, liabilities, obligations or
contracts'

Cnarrnn III
PNOSPUCTUS AND ATTOTPTENT OF SECURITIES

Defi nition of ProsPectus

A public company, but not a private company, entitled, by issuing a
i.q

prospectus, to invite applicatiot t fot its shares or debentures. "Prospectus"

is aefinea by Section^i1lO! in the following words: "'Prospectus' means
any document described or issued as a Prospegtls and includes a red
heiring prospectus referred to in Section-32 or shelf prospectus referred
to in Section 31 or any notice, circular, advertisement or other document
 5s.23)4,331 PROSPECTUS AND ALLOTMENT OF SECURITIES 25

rred inviting offers from the public for subscription or purchase of any securi-
/ith ties of a body corporate."
:ted An abridged prospectus means a memorandum containing such salient
cial features of a prospectus as may be specified by SEBI by making regula-
rred tions. IS.2(1)l
fice
Application Forms tS. 331
een
"her
Application forms for securities cannot be issued unless they are accom-
tor panied by a memorandum containing such salient features of a prospectus
;Pe- as may be prescribed. This is known as abridged prospectus. The purpose
is to reduce the expense-burden of a public issue. The full "prospectus"
Lris- has to be maintained in the office of the company and a copy of it has to be
tate supplied, when demanded by a person before closing of the subscription
nin test.
:ing This requirement is not to apply if it is shown that the form of applica-
vith tion was issued (a) in connection with a bona fide invitation to a person to
has enter into an underwriting agreement with respect to securities; or (b) in
trar relation to securities which are not offered to the public. [S. 33(1)]
lied A copy of the prospectus has to be given to a person who requests for
it before closing of the offer and the subscription list. [S. 33(2)] A default in
rery complying with the provisions of the section makes the company liable to
rich a penalty of Rs 50,000 for each default.

Public Offer IS.23I

A public company may issue securities to public through prospectus
asa (to be referred to as "public offe{' by complying with the provisions of
:s in Part I of Chapter III on Prospectus and Allotment of Securities). It may
ired also be done through private placement by complying with the provisions
tan of Part II of Chapter III. It may also be done through rights issue or bonus
lpa- issue by complying with the provisions of the Act and in case of listed
tion companies by complying with the provisions of the SEBI Act, 1992, and
reg- rules and regulations made under it.
ttity A prioate company may issue securities by way of rights issue or bonus
ts. issue or through private placement by complying with the provisions of
Part II of Chapter III. [S, 42]
AnExplanation to the section says that apublic offer includes initial pub-
lic offer or further public offer of securities to the public by a company,
or an offer for sale of securities to the public by an existing shareholder,
through issue of a prospectus.

:r8 a
SEBI's Power to regulate Issue and Transfer of Securities, etc [S. 24]
Lus" This section empowers SEBI to administer certain provisions of thg
]ans Companies Act by making regulations for that purpose. Such provisions
red are those contained in Chapters III and IV and Section 127 insofar as they
rred relate to issue and transfeiof securities and non-payment of dividend by
rent listed companies or those companies which intend to get their securities
26 INTRODUCTION TO COMPANY LAW [s.25

listed on any recognised stock exchange. The rest of provisions have to be

in the administration of the Central Government. The Explanation to Sub-
section (1)provides for removal of doubts. It says that all Powers relating to
all other matters relating to prospectus, return of allotment, redemption of
preference shares and any other matter specifically provided in the Act are
to be exercised by the Central Government, the Tribunal or the Registrar,
as the case may be.
Section 24Q) is as follows: The Securities and Exchange Board shall, in
respect of matters specified in Section 24(1) and the matters delegated to it
under Section 458(1)(Proolso) exercise the powers conferred uPon it under
Sections 11(1), (2A), (3) and (4),lL-A,11-B, and 11-D SEBI 4ct,7992.

Documents containing Offer of Securities for Sale, Deemed

Prospectus [S.25]
Where a company allots or agrees to allot any securities of the com-
pany with a view to those securities being offered for sale to the public,
any document by which the offer for sale is made to the public is to be
deemed for all purposes as a prosPectus issued by the comPany. All enact-
ments and ruIes of law as to contents of prospectus and as to liability for
misstatement in and omissions from prospectus or otherwise relating to
prospectus are to become applicable. This is subject to modifications sPee-
ified in Section 25(3) and (a). The original allotment is presumed to have
been made with a view of offering them to the public where (L) shares
are offered to the public within six months of allotment and (2) where at
the date of offer to the public the whole of the consideration has not been
received by the company. [S. 25(2)]
Section 26 which provides for matters to be stated in the prospectus is
applicable to the offer for sale with the following additional requirements:
(a) a statement of the net amount received or to be received as considera-
tion for the securities to which the offer relates; (b) the time and place at
which the underlying contract for allotment may be inspected; and (c) the
persons making the offer were named in the prospectus as directors of the
company. [S.25(3)]
Where the person making the offer is a company or firm, it is.to be suffi-
cient if the offering document is signed on behalf of the company by its two
directors or by not less than one-half of the partners of the firm. [S. 25(4)j
The provisions of the Act relating to prospectus and the penal provi-
sions are attracted only when the prospectus has been issued. "Issued"
means issued to the public. "Public" includes any section of the public,
whether selected as members or debenture holders of a company con-
cerned or as clients of the person issuing ProsPectus or in any other
manner. Thus, where 3000 copies were distributed among the members
of certain gas companies only, it was held to be an offer of shares to the
public.7s But where a company's prospectus was given to a solicitor of the

75. South of Engtand Natural Gas and Petroleum Co Ltd, re, (1911) 1 Ch 573. 3
 s.261 PROSPECTUS AND ALLOTMENT OF SECURITIES 27
lS.25i

company and he forwarded it to one of his clients, this did not amount to
l tobe
an issue to the public and accordingly the provisions of the Act relating
: Sub.
to liability for omissions, etc were not attracted.T6 The term "issue" is not
:ingto
jonof satisfied by a single private communication. There must be some measure
of publicity, however modest.
tct are

;istrar, Contents of Prospectus (Matters to be Stated in Prospectus) tS. 261

Every prospectus issued by or on behalf of a company either on its for-
rall, in mation or subsequently on behalf of a person engaged or interested in the
:d to it formation of a public company has to be dated and signed and has to con-
under tain the following information: (i) names and addresses of the registered
offices of the company, company secretary, chief financial officer, auditors,
legal advisers, bankers, trustees, if any, underwriters and such other per-
sons as may be prescribed; (ii) dates of opening and closing of the issue
and declaration about issue of allotment letters and refunds within the
3 com-
prescribed time; (iil) statement by the Board of Directors about the sep-
public,
arate bank account where receipts of issue are to be kept and details of
stobe
utilisation and non-utilisation of receipts of previous issues; (lu) underwrit-
i enact-
ing details; (u) consent of directors, auditors, bankers to the issue, expert's
lity fot
opinion and of such other person as may be prescribed; (ai) authority for
ting to
the issue and details of resolution passed for it; (oii) procedure and time
&
E
E
is sPec-
schedule for allotment and issue of securities; (oiii) capital structure of
E
F.

;o have E
€ the company in the manner which may be prescribed; (lx) main objects
shares
t of public otter, terms of the present issue and such other particulars as
here at rF
may be prescribed; (r) main objects and present business and its location,
of been g
E
schedule of implementation of the project; (ri) particulars relating to (A)
e
E management perception of risk factors specific to the project; (B) gestation
ectus is
{ period of the projec! (C) extent of progress in the project; (D) deadlines
:ments: F

:
for completion of the projecf and (E) any litigation or legal action pend-
midera-
ing or taken by a Government Department or a statutory body during the
place at
last five years immediately preceding the year of the issue of prospectus
1(c)the
against the promoter of the company; (xii) minimum subscriptiory amount
ls of the
payable by way of premium, issue of shares otherwise than on cash; (xiii)
details of directors including their appointments and remuneratiory and
be suffi-
such particulars of the nature and extent of their interests in the company
litstwo
as may be prescribed; and (xra) disclosures in such manner as may be pre-
,. 25(4)l
scribed about sources of the promoters' contribution.
il provi-
'lssued" (bl Reports.-Following reports for the purposes of the financial infor-
r public, matiory namely, (i) reports by the auditors of the company about its prof-
ny con- its and losses and assets and liabilities and such other matters as may be
ry otlrer prescribed; (ii) rcports relating to profits and losses for each of the five
oembers financial years (or less as the case may be) immediately preceding the
:s to the financial year of the issue of prospectus including such reports of its sub-
or of the sidiaries and in such manner as may be prescribed; (iii) reports made in the

76. Nashv Lynde,1929 AC 158 (HL).

28 INTRODUCTION TO COMPANY LAW !s.26

prescribed manner by the auditors upon profits and losses of business for
each of the five financial years (or less period), immediately preceding the
issue and assets and liabilities of business on the last date of the accounts
not exceeding 180 days before the issue; (io) reports about the business ot
transaction as to which proceeds of the securities are to be applied directly
or indirectly; (cl a statement about compliance of provisions of the Act and
a statement to the effect that nothing in the prospectus is contrary to the
provisions of the Ac! Securities Contracts (Regulation) Act,1956 and SEBI
Act,1992 and rules and regulations made under it; {dl such other matters
and other reports as may be prescribed.
(2) Sub-section (2) provides that nothing in the Sub-section (1) is to apply
(a) to issue to existing members or debenture holders of a prospectus or
form of application relating to shares or debentures, whether the applicant
has a right to renounce the shares or not (under 5.62) in favour of any other
person; or (b) issue of a prospectus or form of application relating to shares
or debentures which is in all respects uniform with shares or debentures
previously issued and for the time being dealt in or quoted on a recognised
stock exchange.
(3) The provisions of Sub-section (1) are to apply to a prospectus or form
of applicationwhetherissued on formation of the company or subsequently.
@l Filing of copy with Registrar.-Sub-section (4) provides that no pro-
spectus is to be issued by or on behalf of or in relation to an intended
company unless on or before the date of its publication a copy has been
delivered to the Registrar for registration. The copy should be signed by
every person who is named in the prospectus as a director or proposed
director or by his duly authorised attorney.
(5) Statement of independent expert.-A prospectus is not to include a
statement purporting to be made by an expert unless the expert is a person
who is not and has not been engaged in the formatiory promotion or man-
agement of the company and has given his consent to the issue of prospec-
tus and has not withdrawn his consent before delivery of a copy to the
Registrar. The term "expert" has been defined by Section 2(38) as includ-
ing an engineeq, a valuer, chartered'accountant, company secretary, cost
accountant and any other person who has the power or authority to issue a
certificate in pursuance of any law for the time being inforce. A statement
to that effect has to be included in the prospectus.
statement that a copy hasbeen delioered to Registrar [s. 26(6)].-The
prospectus has to state on the face of it that a copy has been delivered to
the Registrar. The statemeht has also to specify the documents which have
been delivered along with the copy of the prospectus.
Registration of prospectus by Registrar [S. 25(7)].-The Registrar is
not to register a prospectus unless the requirements of section with respect
to registration have been complied with and it is accompanied by consent
in writing of all the persons named in the prospectus.
 r
F

PROSPECTUS AND ALLOTMENT OF SECURITIES

29
Ss.26-281

is to be valid
:or Date of issue after registtationls.26(8)1.-No prospectus
was
he if it is issued for more ihan 9o days after the date on which a,copy
rts delivered to the Registrar.
is issued in con-
or Penalty for contraoention ts. 26(9)].-If a prospectus
ti,v travention of the provisions of the section, the company
become'I:^"ilh-
rrd able with fine of not less than Rs 50,000 but
extending up to Rs 3,.09,0.00
punishable
he E".y person who is knowinglya p-arty to such aprospectus is or with fine
years
iBI with imprisonment for a terriwhlchmay extend to three
trs ofnotlessthanRs50000butextendinguptoRs3,00,000orboth'
27]
:,IY variation in terms of contract or objects stated in Prospectus [s'
or obiects for which
or The terms of a contract referred to in the prospectus
lnt the prospectus has been issued canbe varied
only with the authority of the
resolution' The
1er ;;Jp""i, given Uy it i" general meeting by way of special
detaits of the"notice which has to be given to the
shareholders
r€s ;;";'..i#; one in vernacular
res
'are
to be published in newsBaPers (one in English and
of the company
ed iu"g"ug"f circulating in the lity *n"o the registered office
is situate indicating"ctearty the justification for such
variation' The second
rm proaisoto Sub-sectlon (1) ulto pt"t.ribes that such company is-not to use
fo.t buying' trading or oth-
l1y. any amount raiseJ by iitt,o"gn the prospetyt
company'
r0- ..*ir. dealing in equity shares of any othel listed i'e' those rvho
ed Sub-section Bl pr}iaes that the dissenting shareholders,
offer by promoters or
ten did not agree to the variation are to be given an exit
manner and condi-
by controlling shareholders at such exit prte and in,such
for this purpose'77
;ed tions as may u" ,p".iriud by sEBI by making regulations
(Deemed Prospectus)
offer of sale of shares to certain Members
ea ts.28I
with the Board
;On where certain members of a company,_fn consultation
law, propose to offer the
1n- of Directors, and in accordance with applicable
ec- whole or a part holding of shaiei to the public, they may do so in
ot,t"l.
ihe accordancuiitt the prescribed procedure' [Sub-s (1)]
rd- sub_section (2) privides that^any documeT
bv which the offer of sale
issued by the
ost of shares to the f,iUfi. is made'is to Ue deemed' a prospectus
contents of prospectus and
€a company urd, ti"r"fore, all requirements as to
ent liability misstatements and omissions become applicable'
28(3)]'-The members
Members, responsibitity in the mafter of sale-ts.
shares are Pro-
lhe whether individual or bodies corporate or both, whose
the com-
:to por"a to be .ff"r"a to the public, hu,r" collectively to authorise
lVe '0u., to take all actions on their behalf for carrying out the transaction'
incurred by it
They have also to reimburse the.comPany for all expenses
irs on this matter.
ect
ent 77. Madan Gopal Jajoo v lJnion of lndia,AlR 1992 De|253, achange in the deployment of issue
of shareholders in general meeting would be a
fraud on
proceeds *i nlr* tt
" "or.,r'"r,t
shareholders.
 30 INTRODUCTION TO COMPANY LAW [5s.22,29-31

Public offer of Securities to be in Dematerialised Form IS. 22I

Every company making a public offer and such other class or classes
of companies as may be prescribed have to issue their securities only in
dematerialised form by complying with the provisions of the Depositories
4ct,1996 and regulations made under it. [S.29(1)]
Any other company may convert its securities into dematerialised form
or issue its securities in physical form. t5.29(2))

Advertisement of Prospectus [S. 30]

where an advertisement of a company/s prospectus is pubtished in any
manner, it is necessary to specify in it the contents of the company's mem-
orandum as regards the objects, liability of members and the amount of the
company's share capitaf the names of signatories to the memorandum and
the number of share subscribed by them and its capital structure.

Shelf Prospectus [S. 31]

SEBI has to provide by making regulations for any class or classes of
companies which may file a shelf prospectus with the Registrar at the stage
of first offer of securities. It has to indicate a period not exceeding one year
as the period of validity of such prospectus. The period is to commence
form the date of opening of the first offer of securities under such prospec-
tus. In respect of iny second or subsequent offer of such securities issued
during the period of validity of such prospectus, no further prospectus is
required. [S.38(1)]
lnformation Memorandum [s. 31(2N.-A company filing a sherf pro-
spectus is required to file an information memorandum containing all
the material facts relating to new charges created, changes in the finan-
cial position of the company occurring since the first offer of securities or
between the preceding offer and succeeding offer. Other particulars may
also be prescribed. Filing has to be done with the gegistrar within the pre-
scribed time prior to the issue of second or subsequent offer of securities
under the shelf prospectus. The Prooiso to the sub-section has it that where
a comPany or any other Person has received applications for allotment of
securities along with advance payments before the occurrence of any such
change information of the change must be given to him. If they express
the desire to withdraw their application, within L5 days, their money must
be refunded to them.
After filing of an information memorandum, if any offer of securities
is made, the memorandum together with shelf prospectus is deemed to
be a prospectus. The Explanation to Sub-section (3) says that for the pur-
poses of the section, the expression "shelf prospectus" means a prospectus
in respect of which the securities or class of securities included in it are
issued for subscription in one or more issues over a certain period without
the issue of further prospectus.
 T:
E
B .\
E

31 s.321 PROSPECTUS AND ALLOTMENT OF SECURITIES \'

ii
31
Red Herring Prospectus [S.32]
es A company proposing to make an offer of securities may issue a red
in
-herring prospectus prior to the issue of a prospectus. ts. 32(1)] sueh pro-
ES spectus has to be filed with the Registrar at least three days befor" th"
opening of the subscription list and the offer. ts. 32(A A red herring pro-
spectus carries the same obligations as are applicable to a prospeitus.
Any variation between the red herring prospectus and a prospectus is to
be highlighted as variations in the prospectus. [S. 32(3) upo" closing of
the offer of securities, the prospectus has to state the totaliapital raiJed,
ny whether by way of debt or share capital and the closing price of securities
n- and any other details which are not included in the red-herring prospectus
he has to be filed with the Registrar and SEBI. tS. 32(4)l
rd The Explanatioz to the section says that for the purposes of the section,
the expression "red herring" *"ur,r a prospectuswhich does not include
complete particulars of the quantum or price of the securities.
of Remedies for Misrepresentation
ge The fear of heavy liability and criminal sanctions have controlled the
ar directors' tendency of "using extravagant terms and flattering descrip-
ce tion". The law allows the following remedies for misrepresentation.
tc-
:d l.
Damages for ileceif.-Those who issue a prospectus with fraudulent
statements are liable to pay damages to anyone who purchased shares on
is
the faith of the prospectu s.ln Derry v peek,zB the prospectus of a company
stated that the company had been authorised to use steam power in mov-
o- ing its trams. The authority was in fact subject to the approvil of the Board
rll of Tradg which refused its approval. Yet the directorc *e." held to be not
n- guilty of fraud, because they were hones! whereas fraud requires a state-
or ment which the maker knows to be false, or does notbelieve ii to be true or
ay is too reckless as to its truth. The company may also be sued for damages
"e-
provided that the fraudulent statement was made by its officers within ihe
CS
scope of their authority, though in that case as laid down by the House
,re
of Lords in Houldxoorth v City of Glasgorn Bank,Ts the contract of allotment
of must first be rescinded. But the (UK) Misrepresentation Act, 1967, now
ch "entitles the Court to award damages in lieu of rescission". The provisions
:SS
of section 75, Indian Contract Act,1872 are to the same effect.
rst
2. compensation under section35.-The acquittal of the directors by
the House of Lords in Derry v Peek caused such widespread resentment
es
that- within a year the Directors Liability Act, 1g90 was passed which
to
l'r-
rendered directors liable for false statements, although they might have
believed their assertions to be substantially true. The provisions of this
us
Act were re-enacted in Section 62, (Indian) Companies Acf L956. Now they
re
are included in Section 35 of 2013 Act. Following persons are liable under
ut
the section: (1) every person who is a director at inl time of the issue of the

78. (1889) 74 AC337:(1886-e0) All ER Rep 1 (HL).

7e. (1880) s AC 317 (HL).
 32 INTRODUCTION TO COMPANY LAW [s.32

{ i;;
prospectus; (2) every person who has authorised himself to be named as
I

l_ a director in the prospectus; (3) every promoter of the company; (4) every
j'
person who has authorised the issue of the prospectus; (5) every person
l
who is an expert referred to in Section 26(5). Their liability is joint and sev-
eral. The person who is made liable may recover contribution from others
equally guilty. They are liable to compensate the investor for any loss sus-
tained by him by reason of any statement. Subject to the special defences
allowed under the sectiory they are liable for every untrue statement.
A person sued under the section is entitled to the following special
defences: (1) That he withdrew his consent to be a director before the pro-
spectus was issued and that it was issued without his authority or con-
sent. (2) That the prospectus was issued without his knowledge or consent
and on becoming aware he forthwith gave reasonable public notice to that
effect. (3) That he was ignorant of the untrue statement and on becom-
ing aware of it, he withdrew his consent by a reasonable public notice.
This must obviously be done before allotment. ( ) That "he had reasonable
ground to believe and did up to the time of allotment believe the state-
ments to be true".InDerry v Peek, the directors were held not liable because
they honestly believed their statement to be true. But under Section 62 of
1956 Act, and present Section 35 mere honesty was and is not enougft
the honest belief must be based upon reasonable grounds. Thus, where a
prospectus was issued by the directors under the assurance given by the
promoters that everything was alright they were held liable for untrue
statements because to put faith upon promoters is not reasonable.80 (5) That
the untrue statement was contained in the report of an expert and he had
reasonable ground to believe and did up to the time of allotment believe
the expert to be competent and, if it was in some pubtic official document,
that it was a correct and fair representation of the document. The points
from (3) to (5) are not there in the new section. But they will become appli-
cable as a matter of common law.
3. Resciss ion for misrepresentation.--The shareholder can also sue
the company for rescission of the contract. Under this remedy the con-
tract is cancelled and the money'given by the shareholder refunded.
Under Section 75, 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. The right is lost in the following
circumstances:
1. By ffirmation.-If the allottee with full knowledge of the mis-
representation upholds the contrac! he cannot afterwards rescind.
Affirmation may be express or implied. An implied affirmation takes place
by the shareholder's conduct, where, for example, he endeavours to sell his
shareg attends meetings of the company, receives dividends or pays cal1s.81
2. By uflreqsoflable delay.-"Any man who claims to retire from a
company on the ground that he was induced to become a member by
80. Adamsv Thrift, (1915) 2 Ch 21 (CA).
81. Dunlop TruJlault Cycle and Tuke Mfg. Co, re, ex p Shearman, (1896) 66 LI Ch?5.
 r
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t,,

s.32 s.341 PROSPECTUS AND ALLOTMENT OF SECURITIES 33

das misrepresentatiory is bound to come at the earliest possible moment after

very he becomes aware of the misrepresentation." An action after five months
:fSOft was held to be too 1ate.82
. sev- 3.By comtneflcement of winding up.-The right of rescission is lost on
thers the commencement of the winding up of the company. "But where a share-
i SUS- holder has started active proceedings to be relieved of his shares, the pass-
ences
ing of the winding up order during their pendency would not prevent his
getting the relief."83
pecial
When Statement Deemed to be Untrue
e pro-
r con- A statement is deemed to be untrue if it is false in the form and context in
)nsent which it is included. Omissions which are calculated to mislead shall also
to that render the prospectus false. In R v Lord Kyls,ant,sa a prospectus correctly
,ecom- disclosed that the company had paid dividends from 1911 to 1927,but did
notice' not disclose that the company had suffered losses from l92l onwards and
;onable dividends had been paid out of war-time profits. Thus, although what the
3 state- prospectus said was true, it was held to be a misleading prospectus and
)ecause those who issued it were held liable to punishment. Where a statement is
n 62 of- true at the time of the issue of the prospectus, but ceases to be so when
:nough, allotment is made, the allotment is voidable.ss Further, it.is necessary to
where a avail of the above remedies that the plaintiff should have purchased his
r by the shares on the faith of the prospectus directly from the company. A pur-
: untrue chaser of shares in the open market has no remedy against the company
(5) That or its officers even if he was influenced by the prospectus.s5 But where a
t he had company has so placed its prospectus as to induce purchases of shares in
t beiieve the open market, the liability follows.8T
)cument/
Criminat Liability for Misstatements in Prospectus [S. 34]
re Points
rne aPPli- Where a prospectus issued, circulated or distributed includes any
statement which is untrue or misleading in forrn or context in which it
is included or where any inclusion or omission of any matter is likely to
aho sue
con- mislead, every person who authorises the issue of such prospectus is to be
'the liable under Section 447 (liability for fraudulent conduct)
refunded'
The Proaiso to the section says that nothing in the section is to apply to
a contract
a Person who proves that such statement or omission was immaterial or
sustained
that he had reasonable grounds to believe and believed so up to the time
following
of issue of the prospectus that the statement was true or the inclusion or
omission was necessary.
f the mis-
is rescind'
takes Place 82. Christineaille Rubbter Estates Ltd, re,1911 WN 216:87LJ Ch 63.
:s to sell his 83. Desai J in Shiromani Sugar Mills Ltd v Debi Prasad, AIR 1950 All 508, 513.
84. (1e32) 1. KB 442 (CCA).
pays calls'81 85. TS Rajagopala lyer v South lndian Rubber Works Ltd, (1942) zMLl 228.
tire from a
86. Peekv Gurney, (1873) LR 6HL377: (1861-13) ALI ER Rep 116: 43 LI Ch 19.
member bY 87. Andrews v Mockford, (1896) 1 QB 372 (CA); Kisan Mehta v Unioersal Luggage Mfg Co Ltd,
(1988) 63 Comp Cas 398 (Bom), no public interest litigation by a person who has not
invested.
25.
 34 INTRODUCTION TO COMPANY LAW lSs.37-38,73

/ Fraudulently inducing persons to lnvest Money IS.38I

A person who either knowingly or recklessly makes any statemen!
promise or forecast which is false, deceptive or misleading, or deliberately
conceals any material facts for the purpose of inducing a person to enter
into any agreement for acquiring, disposing of or subscribing for, or under-
writing securities; or any agreement the purpose or pretended purpose of
which is to secure a profit to any of the parties from the yield of securities
or by reason of fluctuations in the value of securities; or any agreement
for, or with a view to obtaining credit facilities from any bank or financial
institutiory is to be liable for action under Section 447 (fraudulent conduct).
Who can sue under Sections 34,35 and 36 tS.37I
A suit may be filed or any other action can be taken under Sections 34,
35 or 36by any person or group of persons or any association of persons
affected by any misleading statement or for the inclusion or omission of
any matter in the prospectus.

Personation for Acquisition of Securities [5. 38]

The purpose of the provision is to prevent allotment of securities in
fictitious names. Accordingly, no application should be made to a com-
Pany for acquiring or subscribing for any securities in a fictitious name.
Similarly, no one should induce a company to allot or register any trans-
fer of securities in a fictitious name. The penalty for this offence is action
under Section 447 (punishment for fraud). Every company which issues
a prospectus is required to reproduce prominently the provisions of the
section in the prospectus and application forms. A person who gets secu-
rities allotted in a fictitious name becomes liable as a shareholder. Where
a person carried on business under an assumed name and took shares in
that name, his trustee in bankruptcy could not avoid the 1iabi1ity.88 When a
person has been convicted under the section, the court may also order dis-
gorgement of gain, lf any, made by him. The court may also order seizure
and disposal of securities in his possession. The amount received through
disgorgement or disposal of securities is to be credited to the Investor
Education and Protection Fund. tS. 38(3) & (4)l

ACCEPTANCE OF DEPOSITS BY COMPANIES IS. 73]

The provisions relating to deposits are contained in Sections 73 to 76
of Chapter v, Companies Act,2013. Section 73 opens with the declarhtion
that on the commencement of the Act of 2013, no company is to invite,
accept, or renew deposits under the Act from the public except in a man-
ner provided in this Chapter. The Prorsiso to this declaration immediately
adds that nothing in this sub-section is to apply to a banking company
and a non-banking financial company as defined in the RBI Act, 1934 and

88. Central Klondyke Gold Mining and Trading Co Ltd, re, Savigny's Case (1898) 5 Mans.336. A
person who abets such conduct is equally liable.