MAJOR CAUTIONS UNDER PUBLIC OFFER (COMPANIES ACT, 2013)

In recent posts, we discussed provisions of Chapter III of the Companies Act, 2013. This is time to discuss major penal provisions in this chapter.

CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS (SECTION 34):

Where a prospectus, issued, circulated or distributed:

a)    includes any statement which is untrue or misleading in form or context in which it is included; or

b)   where any inclusion or omission of any matter is likely to mislead;

Every person who authorises the issue of such prospectus shall be liable under section 447 i.e. fraud.

Defences available in this section are:

a)    Person prove that statement or omission was immaterial;

b)   Person has reasonable ground to believe and did believe that statement was true; or

c)    Person has reasonable ground to believe and did believe that the inclusion or omission was necessary.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (SECTION 35):

Where a person has subscribed for securities of a company acting upon any misleading statement, inclusion or omission and has sustained any loss or damage as its consequence, the company and every person who –

a)    is a director at the time of the issue of prospectus;

b)   has named  as director or as proposed director with his consent;

c)    is a promoter of the company;

d)    has authorised the issue of the prospectus; and

e)    is an expert;

shall be liable to pay compensation to effected person.

This civil liability shall be in addition to the criminal liability under section 36.

Extreme caution:

Where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.

Defences under this section are:

a)    he has withdrawn his consent or never give his consent;

b)   the prospectus was issued without his knowledge or consent and when he become aware, gave a reasonable public notice that prospectus was issued without his knowledge or consent.

PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY (SECTION 36):

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,—

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or

(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial institution;

shall be liable for action under section 447 i.e. fraud.

ACTION BY AFFECTED PERSON (SECTION 37):

A suit may be filed or any other action may be taken under section 34 or section 35 or section 36 by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus.

PUNISHMENT FOR PERSONATION FOR ACQUISITION ETC OF SECURITIES (SECTION 38):

Any person who—

(a) makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing for, its securities; or

(b) makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or

(c) otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name,

shall be liable for action under section 447 i.e. fraud.

This provision shall be prominently reproduced in every prospectus issued by a company and in every form of application for securities.

Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by, and seizure and disposal of the securities in possession of, such person.

The amount received through disgorgement or disposal of securities under subsection (3) shall be credited to the Investor Education and Protection Fund.

OTHER PENAL PROVISIONS OF CHAPTER III:

If a company makes any default in complying with the provisions of section 33, it shall be liable to a penalty of fifty thousand rupees for each default.

In case of any default under sub-section (3) or sub-section (4) of 39, the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

If a default is made in complying with the provisions of section 40, the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both.

If a company makes an offer or accepts monies in contravention of section 42, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

These are cautions under Chapter III of the Companies Act, 2013

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