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CA Intermediate · Corporate and Other Laws · Prospectus and Allotment of Securities

Sundaram Textiles Ltd, an unlisted public company, issued a prospectus on 1 June. An investor, Meera, subscribed to shares relying on a statement in it which the directors knew to be false. Which of the following correctly states the legal position?

Persons who authorised the issue of a prospectus containing a knowingly false statement face both criminal liability for fraud and civil liability to compensate the investor for loss. The liability is not limited to the company, and it does not depend on listing or on the investor's chance to verify facts.

  1. AOnly the company is liable, and the directors cannot be proceeded against personally
  2. BPersons who authorised the issue of the prospectus may be liable for fraud and also face civil liability to compensate Meera for lossCorrect
  3. CNo liability arises because Meera could have verified the facts herself
  4. DLiability arises only if the shares are subsequently listed on a stock exchange

Explanation

A person who knowingly authorises a prospectus containing a misleading statement attracts both criminal liability for fraud and civil liability to compensate persons who suffered loss. The liability is not confined to the company, so the first option is wrong. Neither the investor's ability to verify nor listing removes the liability.

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