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Unit 9: Prospectus

(viii) Any application for subscription which is acted upon by the company or underwriters or Notes
bankers to the issue without having given enough information of any variations, or the
particulars of withdrawing the offer or opportunity for cancelling the post-dated cheques
or stock-invest or stop payments for such payments shall be void. Further, the applicants
shall be entitled to receive a refund or return of its post-dated cheques or stock-invest or
subscription moneys on cancellation of its application, as if the said application had never
been made and the applicants are entitled to receive back their original application and
interest at 15% from the date of encashment till payment of realisation.

(ix) Upon the closing of the offer of securities, a final prospectus stating therein the total capital
raised, whether by way of debt or share capital and the closing price of the securities and
any other details as were not complete in the red-herring prospectus shall be filed in a case

of listed public company with SEBI and Registrar and in any other case with the Registrar
only.
9.18 Statement in Lieu of Prospectus (S. 70)

If a public company makes a private arrangement for raising its capital then it must fi le 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

allottee may avoid it within two months after the statutory meeting, or where no such meeting
is to be held, within two months of the allotment. Contravention also renders the company and
every director liable to a fi ne upto ` 10,000.
9.19 Liability for Untrue Statements in the Prospectus (Ss.62-63)

The prospective shareholders are entitled to all true disclosures in the prospectus. The persons
issuing the prospectus are bound to state everything accurately and not omit material facts.

What is an untrue statement? 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 profi ts. This
material fact was not disclosed. Held, that 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 v. 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 including 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.

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