Introduction
The prospectus is a legal document[1], which is very important for companies that are looking for investors. When a company is going public or offering bonds or stocks, they issue the prospectus. It is a document that contains all key details about the company like overview of its business, financial statements, details of company management, details of offering, how company proposes to use funds, etc.
Preparing the prospectus is mandatory, as per law. Companies are legally required to issue a prospectus to ensure transparency. Without a prospectus, investors will not be able to make an informed decision, and companies will also find it difficult to find investors.
There may be mistakes or misstatements in the prospectus. The Companies Act says that a statement in the prospectus may be untrue if it is misleading and makes people invest in the company. Liability for misstatement occurs when anyone invests based on the misstatement.[2]
The law has provisions for both civil and criminal liability for misstatements in the prospectus. As per Sec 63 of the act, persons who authorized a prospectus containing untrue statements can be punished with imprisonment up to 2 years or a fine of up to 50,000 or both.
In this blog, we examine the criminal liability of promoters under Sec 34 and 337 of the act. Promoters of businesses, investors, and legal practitioners must be aware of these provisions. It is required to ensure they take care to avoid any misstatement that can make them get into legal trouble.
Understanding the Prospectus
The Indian Companies Act 2013 Sec 2(70) defines a prospectus as a document[3] that has a notice, circular, or advertisement containing an offer for purchasing or subscribing to stocks. The prospectus is an important document that is used by investors to decide whether to invest by buying shares.
A prospectus ensures transparency as it discloses complete information about the company and its operations. The prospectus contains financial statements of the companies, which will allow investors to understand its financial position before making a decision. A correct and complete prospectus ensures that investors will trust the company.
Section 26 of the Companies Act 2013 lists out the key matters[4] to be listed in a prospectus:
- General information like name, address, names of directors & promoters, and capital structure of the company.
- Offer details include the type of securities issued (equity, debentures, preference), size (number), and purpose of issue (expansion, working capital, etc.).
- Financial information with financial statements for 3 years, details on equity and debt, loans, debentures, and accounting policies of the company.
- Risk factors include internal risks (product dependency, operational risks) and external risks (market risks, economy, technology, etc).
- Discussion and analysis that covers analysis of the industry, overview of operations (product lines, services, USPs), and future strategies.
- Details of directors, promoters, and key executives.
- Details of any subsidiaries or joint ventures.
- Terms of issue include price, process of allotment, and dividend policy.
- All legal and regulatory disclosures, including litigation history and regulatory approvals, licenses, and permits.
Any misstatement in the prospectus can have serious consequences. Misrepresentations can lead to:
- Civil liability with civil suits by investors being filed against the company. The directors and promoters may have to pay fines up to 1,00,000. The company can be fined an amount ranging from 50,000 to 3,00,000 for misrepresentations or omissions.
- Investors can demand compensation if they are misled by the information.
- Criminal liability exists with a jail term of up to 2 years with or without a fine for all those who authorized the prospectus.
Legal Framework: Sections 34 and 447 of the Companies Act
Section 34: Criminal Liability for Misstatements in Prospectus
As mentioned before, a misstatement[5] is any untrue statement that is part of the prospectus. Whenever a prospectus is issued, the company and its officials must take care to prevent any misstatement. In case any statement in the prospectus is either untrue or misleading, then criminal liability is applicable as per Sec 447 of the act.
Here, what is important is that the form or context of the misstatement is taken into account. If anything has been included or left out and, as a result, anyone is misled or likely to be misled, then the criminal liability is applicable.
An exception is allowed in the law. It states that this is not applicable if it is proven that the omission was not material or the statement included in the prospectus was true. So, at the time of issuing the prospectus, if the company and its team believe that the statements they have included are true or any omission done was needed and can prove it, then criminal liability is not applicable.
It must be noted that there is no punishment prescribed under Sec 34. The punishment for misstatement is as per Sec 447.
Sec 447: Punishment for fraud
Section 447 of the Indian Companies Act lists out the punishment under the act for any fraud committed If the fraud involves an amount lesser than 10 lakh rupees and there is no public interest involved, then the punishment is imprisonment for up to 5 years or fine, which is up to 50 lakhs, or both imprisonment and punishment.
To better understand how courts have interpreted and applied these sections, we can look at the notable judgment of—SEBI v. Kunnamkulam Paper Mills Ltd. (2016). In this case, the company was investigated by SEBI for issuing a prospectus containing false and misleading information. The company here had overstated its financial position by exaggerating revenue figures and inflating asset values—all with the intent to attract investors. The investigation by SEBI revealed that the promoters and directors of the company willfully provided such misinformation violating Section 34 of the Act imposing them with criminal liability for ‘misstatements in prospectus’ The Court also held that such deliberate misrepresentation amounts to frauds and hence also invokes Section 447 as well. The accused company was penalized along with imprisonment. This case highlights the judiciary’s strict stance on corporate accountability and investor protection.
Role of Promoters in Drafting the Prospectus
As per the Companies Act, a promoter is any person[6] whose name has been mentioned in the prospectus or mentioned in the company’s annual returns. A promoter is someone who has control over the company either directly or indirectly, i.e, either as a shareholder or a high-ranking official like a Director. It is important to note that the promoter is the person whose orders or advice is taken by the Board of Directors.
The promoter has many responsibilities to fulfil towards the company[7]. One of the key responsibilities is to ensure the accuracy and completeness of the prospectus. The promoter is responsible for ensuring that the prospectus contains all relevant information that is needed. This is needed for transparency and also to ensure that any potential investor has all the information required to make a decision. Most importantly, they must ensure the information is accurate and nothing false or important has been left out. If there are any misstatements in the prospectus, all the promoters are equally liable for them. They face criminal liability and action during the law.
Defenses Available to Promoters
If a promoter faces a case of making misstatements in the prospectus, then there are certain defenses available to them. They can use these defenses to clear themselves of the charges against them under Sec 34 and Sec 447 of the Indian Companies Act.
- A Promoter can claim a defense that he did not have any knowledge of the misstatements.
- If the promoter can prove that the misstatements occurred due to an honest mistake, then it can be used as a defense.
- If the promoter can prove that the omission of any matter is not material to the prospectus, then they can use it as a defense.
It is important to note that if the prosecution shows that there is any misstatement or omission of facts in the prospectus, then the burden of proof shifts to the promoter. It will be the promoter’s responsibility to prove their defense as explained above.
In the case of B.R. Bajaj v. State of Maharashtra, promoters were accused with allegations that they had issued a prospectus containing misleading information which allegedly misrepresented the company’s financial positions and projected growth. The promoters defended themselves successfully by proving that they had relied on professional advisors, such as auditors and legal experts, and had exercised reasonable diligence in verifying such information. The court recognized this as a defence and held that promoters can avoid liability if they demonstrate they had reasonable grounds to believe the statements were true and if they act in good faith. This case established that due diligence and reliance on expert advice can serve as valid defences for promoters accused of misstatements in a prospectus.
It is, therefore, essential that the promoters ensure proper due diligence before the prospectus is issued. This is vital since the promoter faces civil and criminal liability in case of any misstatements. The promoter must:
- Review the prospectus in total to ensure that it is prepared accurately.
- Ensure all the facts are verified so there is nothing untrue in it.
- Ensure that no fact or statement that is material is omitted from the prospectus.
- Ensure that the prospectus is complete in all aspects and ensures total transparency for potential investors.
Practical Implications for Promoters and Companies
The provisions of Sec 34 and 447 of the Indian Companies Act 2013 protect the rights of investors, ensuring that they get complete information in the prospectus. Investors who subscribe to shares read the prospectus and then make a decision. If there are misstatements, then it amounts to cheating the subscribers or committing fraud. This is why these sections have been introduced.
Promoters now have to be very careful when a prospectus is issued. It is their duty individually and collectively to ensure there are no misstatements. For this, they must exercise due diligence by studying the prospectus in detail and reviewing its contents.
Promoters are busy people and may not find it easy to get time to review each and every word in the prospectus. This is where they can get help from professionals. Legal consultants and auditors can help in doing a thorough review of the prospectus. They are the right people to do the review since they are trained to examine documents properly. Promoters can use their services to ensure there are no misstatements, thereby avoiding liability.
It is not just for the promoters, but even the company suffers if there is any case. The prospectus is for the company, and any controversy due to it affects the company. The reputation of the company can be affected, and it can impact their business. Any cases under Sec 34 and 447 can impact the stock market performance of the company and defeat the purpose of raising funds and issuing a prospectus. Therefore, it is extremely important for companies, promoters, and key officials to exercise due diligence before issuing a prospectus.
Conclusion
The prospectus stands as both a beacon and a litmus test. It is a document that can either light up investor confidence or unravel the very fabric of trust. Promoters on the other hand are architects of a company’s vision who find themselves walking a tightrope: balancing ambition with accountability, and growth with governance. In my view, the Companies Act’s strict framework isn’t a shackle but rather a shield. It protects not just investors, but the very soul of entrepreneurship from the corrosion of greed. Looking into the future, I see a major shift in how businesses approach transparency. With various regulators like SEBI intensifying regulation and courts adopting a zero-tolerance stance toward fraud, the era of “creative accounting” is gasping its last breath. The future is only for those companies that treat their prospectus not as a compliance checkbox, but as a pact with stakeholders.
[1] Kanaujia, V.K., “Prospectus Regulations and Investor Protection: Insights from Global and Local Perspectives”, The Infinite 65 (1) (6) (August, 2024) <https://theinfinite.co.in/wp-content/uploads/2025/01/Prospectus.pdf>
[2] Manendra Singh., “Liability for Misstatement in Prospectus: Where to Stop?” Manupatra <https://www.manupatra.com/roundup/320/Articles/Liability%20for%20Misstatement%20in.pdf.>
[3] Gupta, B.K., “Criminal and Civil Liability for Misstatements in Prospectus, Legal Service India” <https://legalserviceindia.com/legal/article-9894-criminal-and-civil-liability-for-mis-statements-in-prospectus.html>
[4] “Matters to be Stated in Prospectus”, The Law Codes <https://thelawcodes.com/matters-to-be-stated-in-prospectus/>
[5] “Indian Companies Act 2013”, India Code Website <https://www.indiacode.nic.in/handle/123456789/2114>
[6] “Promoters of a company”, ClearTax <https://cleartax.in/s/promoters-of-a-company>
[7] “Prospectus and Misstatement in prospectus”, Law Bhoomi <https://lawbhoomi.com/prospectus-and-misstatement-in-a-prospectus-under-companies-act-2013/>
This article has been written by Aishwarya MD. For any other queries, reach out to us at: queries.ylcc@gmail.com
