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

Zenith Agro Ltd, an unlisted public company, issued a prospectus on 1 June to raise capital. The prospectus contained a statement that the company had already secured a large export order, though no such order existed. Rakesh subscribed to shares relying on this statement and suffered loss. Under the Companies Act, 2013, what is the legal position regarding Rakesh's remedy?

Rakesh can claim compensation from every person who authorised the issue of the prospectus, including directors and promoters. A prospectus containing an untrue or misleading statement makes these persons liable for loss suffered by subscribers who relied on it, so liability is not confined to the company.

  1. ARakesh can claim compensation from every person who authorised the issue of the prospectus, as the statement is untrue and misleadingCorrect
  2. BRakesh can claim compensation only from the company, and not from its directors
  3. CRakesh has no remedy because the prospectus is only an invitation to offer
  4. DRakesh can only rescind the allotment but cannot claim any compensation

Explanation

A person who subscribes on the basis of a prospectus containing a misleading statement can claim compensation for loss from every person who authorised the issue of the prospectus, such as directors and promoters. The company is not the only person liable, so the option limiting liability to the company is wrong. The claim is not barred merely because a prospectus is an invitation to offer.

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