Page 183 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes non compliance or contravention was not material or that the person sued ought reasonably to
be excused, having regard to all the circumstances of the case.

9.21 Criminal Liability for Misstatement in Prospectus (S. 63)

Where a prospectus contains an untrue statement, every person authorising its issue is punishable:
(i) with imprisonment for a term upto two years or (ii) with fi ne upto ` 50,000, or (iii) with both
imprisonment and fi ne. However, an expert is not criminally liable in respect of misstatements
in the prospectus.

Liability under s.68. Section 68 provides that any person who, either knowingly or recklessly
makes 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 any agreement for, or with a view to acquiring, disposing of, subscribing
for, underwriting shares or debentures shall be punishable with imprisonment for a term which
may extend to 5 years or with fine which may extend to ` one lakh or with both.

9.22 Golden Rule for Framing of Prospectus

The ‘Golden Rule’ for framing of a prospectus was laid down by Justice Kindersley in New

Brunswick & Canada Rly. & Land Co. v. Muggeridge (1860). Briefly, the rule is:
Those who issue a prospectus hold out to the public great advantages which will accrue to the
persons who will take shares in the proposed undertaking. Public is invited to take shares on the
faith of the representation contained in the prospectus. The public is at the mercy of company
promoters. Everything must, therefore, be stated with strict and scrupulous accuracy. Nothing
should be stated as fact which is not so and no fact should be omitted the existence of which
might in any degree affect the nature or quality of the principles and advantages which the
prospectus holds out as inducement to take shares. In a word, the true nature of the company’s
venture should be disclosed.
In Rex v. Kylsant (1932), the prospectus stated that dividends of 5 to 8 per cent had been regularly
paid over a long period. The truth was that the company had been incurring substantial losses
during the seven years preceding the date of the prospectus and dividends had been paid out of

the realised capital profit. Held, the prospectus was false and misleading. The statement though
true in itself was rendered false in the context in which it was stated.
A half truth, for instance, represented as a whole truth may tantamount to a false statement (Lord
Halsbury in Aarons Reefs v. Twisa).
Thus, the persons issuing the prospectus must not include in the prospectus all the relevant

particulars specified in Parts I & II of Schedule II of the Act, which are required to be stated
compulsorily but should also voluntarily disclose any other information within their knowledge
with might in any way affect the decision of the prospective investor to invest in the company.

9.23 Allotment of Shares in Fictitious Names Prohibited (S. 68A)

Following acts are punishable with imprisonment for a term extending to fi ve years:
(i) making an application to a company for acquiring or subscribing for, any shares therein

under a fictitious name; or
(ii) making a company to allot or register any transfer of shares therein to any other person in
a fi ctitious name.
Also this Section should be prominently reproduced both in the prospectus as well as in
application forms for shares.

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