Prospectus: contents, kinds and liability for misstatement

1. Meaning

Under section 2(70) a prospectus means any document described or issued as a prospectus, and includes a red herring prospectus (section 32), a shelf prospectus (section 31), and any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate. The essential element is an invitation to the public. An offer made privately to identified persons is a private placement under section 42, not a prospectus, but an offer to more than the prescribed number of persons is deemed a public offer whatever it is called (section 42, Explanation III). Only a public company can issue a prospectus (section 23(1)(a)).

2. Kinds of prospectus

• Deemed prospectus (section 25). Where a company allots securities to an issuing house or intermediary with a view to their being offered for sale to the public, the offer document is deemed to be the company's prospectus, and liability for misstatements attaches accordingly. An offer for sale within six months of allotment, or before the company receives the whole consideration, is evidence of that intention.
• Shelf prospectus (section 31). Classes of companies specified by SEBI (banks and public financial institutions, for example) may file a shelf prospectus valid for up to one year from the opening of the first offer, and make further offers without a fresh prospectus, filing an information memorandum with material changes before each subsequent offer.
• Red herring prospectus (section 32). Issued before the final prospectus in a book-built issue; it does not contain the full particulars of price or quantity. It must be filed with the Registrar at least three days before the subscription list opens, carries the same obligations as a prospectus, and any variation between it and the final prospectus must be highlighted.
• Abridged prospectus (section 33). A memorandum containing the salient features of the prospectus as specified by SEBI. Every application form must be accompanied by it, except in an underwriting invitation or where the securities are not offered to the public.

3. Contents and formalities: section 26

Under the original section 26(1) the Act itself listed the matters to be stated: the names of directors and promoters, the objects of the issue, the minimum subscription, the dates of opening and closing, the reports of auditors and experts, details of litigation and so on. The 2017 Amendment substituted a shorter rule: every prospectus shall be dated and signed and shall state such information and set out such reports on financial information as may be specified by SEBI in consultation with the Central Government. The detailed contents are now in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, which in substance require the same heads of information and more: general information on the issuer and the issue, capital structure, objects and the means of financing them, risk factors, management and promoters, financial statements, outstanding litigation and material developments.

Section 26 still requires:

• a declaration of compliance with the Act, the Securities Contracts (Regulation) Act and the SEBI Act (section 26(1)(c));
• filing with the Registrar, on or before publication, of a copy signed by every director or proposed director (section 26(4));
• the written consent of an expert whose statement is included, the expert being a person not engaged in the formation or management of the company (section 26(5));
• a statement on its face that a copy has been filed (section 26(6)); and
• issue within ninety days of filing, failing which the prospectus is invalid (section 26(8)).

The terms of a contract referred to in the prospectus, or the objects of the issue, can be varied only by special resolution, with newspaper publication and an exit offer to dissenting shareholders (section 27).

The governing principle is the “golden rule” of New Brunswick and Canada Railway Co. v. Muggeridge (1860): those who issue a prospectus must state everything with strict and scrupulous accuracy, and must not only abstain from stating as fact what is not so, but omit no fact within their knowledge whose existence might in any degree affect the nature, extent or quality of the privileges and advantages the prospectus holds out.

4. What is a misstatement

Section 34 treats a statement as untrue if it is untrue or misleading in the form or context in which it is included, and also covers an inclusion or omission likely to mislead. A statement literally true may therefore be a misstatement. In Rex v. Kylsant (1932) the prospectus truthfully said the company had paid regular dividends over many years, but concealed that in the recent years it had made heavy losses and paid dividends out of past reserves. The chairman was convicted: the document, read as a whole, was false by reason of what it left out.

5. Civil liability

Against the company: rescission. A subscriber induced by a material misstatement of fact in the prospectus may rescind the contract of allotment and recover his money. He must act promptly, before the company goes into winding up, and must have relied on the statement. Only an original allottee who subscribed on the prospectus can rescind; a purchaser in the market cannot: Peek v. Gurney (House of Lords, 1873).

Statutory compensation: section 35. Where a person subscribed acting on a misleading statement, inclusion or omission in the prospectus and sustained loss, the company and every person who was a director at the time of issue, agreed to be named as director, is a promoter, authorised the issue, or is an expert under section 26(5), is liable to compensate him (section 35(1)). A person escapes if he proves (section 35(2)) that:

• he withdrew his consent to be a director before issue and it was issued without his authority; or
• it was issued without his knowledge or consent and, on becoming aware, he forthwith gave reasonable public notice of that; or
• as regards an expert's statement, it fairly represented the expert's report and he had reasonable ground to believe the expert was competent and had consented.

Where the prospectus was issued with intent to defraud, every such person is personally liable without any limitation for the losses (section 35(3)).

Damages for deceit at common law. The subscriber may also sue for fraud, but must prove that the maker knew the statement to be false, or made it without belief in its truth, or recklessly: Derry v. Peek (House of Lords, 1889), where directors who honestly but wrongly believed they had consent to use steam power were held not liable in deceit. That decision is why the statutory remedy, which does not require proof of fraud, matters.

6. Criminal liability

• Section 34. Every person who authorises the issue of a prospectus containing an untrue or misleading statement is liable under section 447 (fraud: imprisonment of six months to ten years and fine of at least the amount involved, up to three times). He escapes if he proves the statement was immaterial, or that he had reasonable grounds to believe, and did believe up to issue, that it was true.
• Section 36. Fraudulently inducing persons to invest money by false, deceptive or misleading statements, promises or forecasts, or by deliberate concealment, is likewise punishable under section 447.
• Section 37. A suit or other action under sections 34, 35 or 36 may be brought by any person, group of persons or association of persons affected.

How this is examined

June 2025 asked “What is prospectus? Explain its contents” for 10 marks; January 2026 set a short note on “content of a prospectus”. Begin with section 2(70), give the kinds briefly, and then the contents. Say plainly that since 2018 section 26(1) refers to the information specified by SEBI, then list the main heads, and add the formalities of section 26(4) to (8). An essay on liability for misstatement needs sections 34 and 35 with their defences, the golden rule, Kylsant and Derry v. Peek.