Corporate and Other Laws · Prospectus and Allotment of Securities

Misstatement in Prospectus and Liabilities Under Sections 34, 35 and 36

Updated 4 October 2026 · Fact-checked

A misstatement in a prospectus is an untrue or misleading statement, or a misleading inclusion or omission. Section 34 gives criminal liability through Section 447 for those who authorise it. Section 35 gives civil compensation to subscribers who suffered loss. Section 36 punishes fraudulently inducing investment. Answer by stating the provision, applying the facts, and concluding.

Understand Misstatement in Prospectus and Liabilities

A prospectus invites the public to put money into a company. Investors rely on it because they cannot check the company's affairs themselves. So the law makes those behind the prospectus answerable if it misleads.

The law works on two tracks. Criminal liability (Section 34) punishes those who authorise a prospectus containing an untrue or misleading statement. Civil liability (Section 35) lets a subscriber who lost money claim compensation. A third provision, Section 36, is wider: it covers anyone who fraudulently induces a person to invest, whether or not a prospectus is involved.

Under Section 34, a prospectus is caught if it includes a statement that is untrue or misleading in form or context, or if any inclusion or omission of a matter is likely to mislead. Note that an omission can be enough. Liability is under Section 447, the Act's fraud provision, which you should simply cite as the punishing section.

Under Section 35, the person must have subscribed for securities acting on the misleading statement, and must have sustained loss or damage as a result. Both reliance and loss matter. The company and the persons listed in the section are liable to pay compensation.

Each track has defences. The defences are the part examiners love, because a fact pattern usually hides one.

Key rules to remember

Section 34: criminal liability: Untrue or misleading statement (or misleading inclusion/omission) in prospectus → every person who authorises the issue is liable under Section 447; Defence: he proves the statement or omission was immaterial, or he had reasonable grounds to believe, and did believe up to the time of issue, that the statement was true or the inclusion or omission was necessary.
Section 35(1): who pays compensation: Company + director at time of issue + person who has authorised himself to be named and is named in the prospectus as a director, or has agreed to become a director + promoter + person who authorised the issue + expert under Section 26(5); Pays compensation to every person who subscribed acting on the misleading prospectus and sustained loss or damage. This is without prejudice to punishment under Section 36.
Section 35(2): defences: (a) withdrew consent as director before issue, and prospectus issued without his authority or consent; (b) issued without his knowledge or consent, and on becoming aware he forthwith gave reasonable public notice; (c) expert's statement fairly and correctly represented, and he reasonably believed the expert was competent and had consented; For (c), he must also have believed up to the time of issue that the expert had given consent under Section 26(5) and had not withdrawn it before filing a copy of the prospectus with the Registrar or, to his knowledge, before allotment.
Section 35(3): fraud: Prospectus issued with intent to defraud or for any fraudulent purpose → every person in Section 35(1) is personally responsible without any limitation of liability; Applies to losses of anyone who subscribed on the basis of the prospectus.
Section 36: fraudulent inducement: Knowingly or recklessly making a false, deceptive or misleading statement, promise or forecast, or deliberately concealing material facts, to induce another to enter an agreement → liable for action under Section 447; Covers agreements to acquire, dispose of, subscribe for or underwrite securities; agreements to secure profit from yield of or fluctuations in securities; and agreements to obtain credit facilities from a bank or financial institution.

How to solve Misstatement in Prospectus and Liabilities questions

Use this order for any problem on misstatement in a prospectus. It mirrors the provision-facts-conclusion format that earns step marks.

1Identify the defect: is there an untrue or misleading statement, or a misleading inclusion or omission, in the prospectus? Quote the facts.
2Decide the type of claim: a subscriber seeking compensation (civil, Section 35), a question of punishment of those who authorised the issue (criminal, Section 34), or a deliberate false inducement to invest (Section 36).
3For civil liability, check that the person subscribed acting on the statement and suffered loss or damage. If either is missing, Section 35(1) does not help him.
4List who is liable: the company, directors at the time of issue, persons who authorised themselves to be named as directors or agreed to become directors, promoters, persons who authorised the issue, and experts under Section 26(5).
5Test each person against the defences: withdrawal of consent, issue without knowledge or consent plus public notice, expert-statement defence, or under Section 34 immateriality or reasonable belief.
6Check for fraud. If the prospectus was issued with intent to defraud, state Section 35(3): unlimited personal responsibility.
7Write the conclusion person by person, naming the section that applies to each.

Quickest way: Quick MCQ and written-answer routine

When to use it: Use under time pressure, both for MCQs worth 1 or 2 marks and for a 5 to 6 mark descriptive answer.

Match the keyword to the section: criminal and authorised the issue means Section 34; compensation or loss to subscriber means Section 35; false promise, forecast or concealment to induce means Section 36.
In MCQs, eliminate any option that gives compensation under Section 34 or imprisonment under Section 35. Section 34 and Section 36 lead to Section 447; Section 35 is about compensation.
Look for the defence in the facts: consent withdrawn, issued without knowledge, public notice, expert correctly quoted, immaterial statement.
In a written answer, use three short parts: Provision (quote the key words), Application (tie each fact to a person), Conclusion (who is liable, who is not).
Always add one line on Section 35(3) if the facts mention intent to defraud.

Common mistakes in Misstatement in Prospectus and Liabilities

Treating Section 34 and Section 35 as the same liability.
Both deal with misleading prospectuses, so they blur together.
Fix: Remember: Section 34 is criminal and operates through Section 447; Section 35 is civil and gives compensation to subscribers.
Giving compensation to anyone who read the prospectus.
Students forget that Section 35(1) needs subscription acting on the statement and resulting loss or damage.
Fix: Check three facts: subscribed, relied on the misleading statement, suffered loss.
Saying a director who did not know of the misstatement is always liable.
Students ignore the defences in Section 35(2).
Fix: Look for withdrawal of consent before issue, or issue without knowledge or consent with prompt reasonable public notice.
Forgetting that omissions count.
Students read 'misstatement' as only a false statement.
Fix: Section 34 also covers any inclusion or omission of a matter likely to mislead.
Ignoring Section 36 or limiting it to prospectuses.
The chapter heading focuses on the prospectus.
Fix: Section 36 applies to any person who knowingly or recklessly makes a false or misleading statement, promise or forecast, or deliberately conceals material facts, to induce an agreement of the listed kinds.
Missing the unlimited liability for fraud.
Students stop at ordinary compensation.
Fix: If intent to defraud is proved, Section 35(3) makes every person in Section 35(1) personally responsible without any limitation of liability.

Worked examples

Example 1

A company issued a prospectus that stated its main plant was fully owned. In fact it was under a heavy mortgage, and this was not disclosed. Ravi, a director when the prospectus was issued, had authorised the issue of the prospectus. Meera subscribed for shares relying on the statement and lost money when the share price fell after the mortgage came to light. Advise Meera on her remedies.

Show the solution

Provision: Section 35(1) makes the company and every director at the time of issue liable to pay compensation to a person who subscribed acting on a misleading statement, or on the inclusion or omission of a matter in the prospectus, and sustained loss or damage. Section 34 makes every person who authorises the issue liable under Section 447 if the prospectus has a misleading statement or omission.
Application: The statement that the plant was fully owned, with the mortgage omitted, is misleading. Meera subscribed relying on it and suffered loss. Ravi was a director at the time of issue and authorised the issue of the prospectus.
Defences: The facts show no withdrawal of consent, no issue without Ravi's knowledge, and no expert involved. So Ravi, a director at the time of issue, has no Section 35(2) defence on these facts. Under Section 34 he could only escape by proving immateriality or reasonable belief in the truth of the statement, which is unlikely for a mortgage over the main plant.
Conclusion: Meera can claim compensation from the company and from Ravi (and other persons within Section 35(1)). Because Ravi authorised the issue, he is also exposed to action under Section 447 via Section 34.

Answer: Meera can claim compensation under Section 35(1) from the company and from Ravi, who, as a director at the time of issue, has no Section 35(2) defence on these facts. Ravi, having authorised the prospectus, also faces criminal liability under Section 34 through Section 447.

Example 2

Anil agreed to become a director of Zeta Ltd. Before the prospectus was issued he withdrew his consent in writing. Zeta Ltd still issued the prospectus naming him as a director, and it contained a misleading statement. Sunil subscribed for shares relying on it and lost money. Can Sunil recover compensation from Anil?

Show the solution

Provision: Under Section 35(1)(b), a person who has authorised himself to be named and is named in the prospectus as a director, or has agreed to become a director, is liable for a misleading prospectus. Section 35(2)(a) says no person is liable if he proves that, having consented to become a director, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent.
Application: Anil agreed to become a director, so he falls within Section 35(1)(b). He withdrew his consent before issue, and the facts show the prospectus was issued without his authority or consent, since Zeta Ltd named him despite his withdrawal.
Burden: Anil must prove these facts. He has written proof of withdrawal.
Conclusion: Anil can rely on Section 35(2)(a) and is not liable. Sunil can still claim compensation from Zeta Ltd and from other persons liable under Section 35(1), such as the directors at the time of issue.

Answer: Sunil cannot recover from Anil, because Anil proves withdrawal of consent before issue and that the prospectus was issued without his authority or consent (Section 35(2)(a)). Sunil can claim from the company and the other persons liable under Section 35(1).

Exam tips

Write the section number with the rule: Section 34 for criminal liability, Section 35 for civil liability, Section 36 for fraudulent inducement.
Always hunt for the defence hidden in the facts: consent withdrawn, issue without knowledge, public notice, expert correctly quoted, or reasonable belief.
In case-study answers, assess each person separately: company, director, promoter, expert, person who authorised the issue.
Quote key phrases from the sections, such as 'untrue or misleading in form or context', to show you know the statutory test.
For MCQs, link Section 447 to Sections 34 and 36, and compensation to Section 35.

Practice questions from Prospectus and Allotment of Securities

Misstatement in Prospectus and Liabilities: frequently asked questions

What is the difference between Section 34 and Section 35 of the Companies Act, 2013?

Section 34 deals with criminal liability: every person who authorises a prospectus with an untrue or misleading statement is liable under Section 447. Section 35 deals with civil liability: the company and listed persons must compensate subscribers who suffered loss by acting on the misleading prospectus.

Who can claim compensation under Section 35?

A person who subscribed for securities acting on a misleading statement, or inclusion or omission, in the prospectus and sustained loss or damage as a result. Both reliance and loss must be shown.

What does Section 36 cover?

It punishes a person who knowingly or recklessly makes a false, deceptive or misleading statement, promise or forecast, or deliberately conceals material facts, to induce another to enter certain agreements. These relate to securities, profit from securities, or obtaining credit facilities from a bank or financial institution. Such a person is liable for action under Section 447.

Can an expert be liable for a misstatement in a prospectus?

Yes. An expert referred to in Section 26(5) is among the persons liable to pay compensation under Section 35(1). The expert-statement defence in Section 35(2)(c) protects others who fairly and correctly reproduced the expert's statement and reasonably believed in the expert's competence and consent.