Page 102 - DCOM106_COMPANY_LAW

Unit 7: Prospectus

12. Definition of prospectus was given under which sec. Notes
(a) 2 (30) (b) 2 (32)
(c) 2 (34) (d) 2 (36)
13. Which of the following are not required to issue prospectus?

(a) Private company (b) Incase of right issue
(c) Sweat equity issue (d) All the above
14. Which one of the following has a right to claim compensation for any loss due to
misstatement in prospectus
(a) Purchasing shares in Primary Market
(b) Secondary Market
(c) Subscribers to memo.

(d) All the above

7.6 Misstatements in Prospectus and their Consequences

According to s.65 (1): (a) 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; and (b) 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 an untrue statement is included.
The expression ‘included’ with reference to a prospectus means, included in the prospectus itself
or contained in any report or memorandum appearing on the face thereof or by reference
incorporated therein or issued therewith.

Example: A company issued a prospectus. All the statements included therein were
literally true. One of the statements disclosed the rates of dividends paid for a number of years.
But dividends had been paid not out of trading profits but out of realised capital profits. This
material fact was not disclosed. Held: The prospectus was false in material particulars and Lord
Kylsant, the managing director and chairman, who knew that it was false, was held guilty of
fraud [Rex vs. Kylsant, (1932) 1 K. B. 442].
A person who has applied for shares in the company and, who has been allotted shares, has
certain remedies against the company and the persons issuing the prospectus. But a buyer of
shares in the open market or a subscriber to the memorandum has no such right. If, however, a
prospectus is issued with the object of inducing persons to buy shares in the open market, any
person who buys shares even in the open market on the basis of the statements made in it, has
a right of action if the statements are untrue or there is material omission from the prospectus.
A false statement or omission of material facts gives rise to civil as well as criminal liability.

7.7 Statement in Lieu of Prospectus

If a public company makes a private arrangement for raising its capital then it must file a
statement in lieu of prospectus with the Registrar, at least three days before any allotment of
shares or debentures can be made. Schedule III contains a model form of a Statement in Lieu of
Prospectus in pursuance of s.70; Schedule IV contains a model form of a Statement in Lieu of
Prospectus when a private company is converted into a public company in pursuance of s.44. If
allotment of shares or debenture is made without filing the Statement in lieu of Prospectus, the

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