Any misrepresentation in prospectus is treated as fraud

Even as the action moves to the Securities Appellate Tribunal in the case involving the capital market regulator putting a ban on DLF Ltd and several of its directors, it may be worth taking a look at what charges of misrepresentation in initial public offer prospectus means under the Companies Act 2013.

Several company law experts and law firms that Business Standard spoke to did not want to be quoted citing conflict in business interest. To start with, there is no specific definition of misrepresentation in prospectus under the Companies Act, 2013. The way it is described is any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, said a corporate lawyer, quoting the Act.

Misrepresentation is construed as any statement which is made, which is false in any material particulars, knowing it to be false, or which omits any material fact, knowing it to be material, he added.

Civil and criminal liabilities follow if the promoters are found guilty of misrepresentation. Section 34 of the Companies Act, 2013 deals with criminal liability for misstatement it has the same liability as that of fraud under Section 447 of the Act.

As per Section 447 a person guilty of fraud shall be punishable with imprisonment for a term ranging from six months to 10 years.

He is also liable to a fine, which can extend to three times the amount involved in the fraud. In cases where the fraud involves public interest, the term of imprisonment shall not be less than three years.

Since, in this case, an IPO public interest is involved, any misstatement in the prospectus will lead to a minimum punishment of three years, said another lawyer.

Section 35 of the Companies Act provides for civil liability for misstatement in prospectus.

Under Section 36, those liable to pay compensation include the directors of the company at the time of the issue of the prospectus and the promoters, among others, to every person who has sustained loss or damage.

According to Section 37 of the Act, those seeking compensation have to file a law suit.

A corporate law expert said any claim made by an investor or a shareholder will have to be proved in a court of law. The compensation will be decided by the court bearing in mind the facts and circumstances of the case, he added.

Though the Companies Act provides for affected shareholders or investors to file class action law suit against the company, however the provision will not get invoked as this section in the Act is yet to be notified, said Rajesh Narain Gupta, managing partner, SNG & Partners.