BUSINESS LAW

CIA :-2
Case study on misstatement of
prospectus.
 Question

 A company issues a prospectus in a newspaper.

Relying on the prospectus X purchases some
shares. He sell the shares almost immediately to
Y. Subsequently an official discovers some errors
in the newspaper version of the prospectus. A
clarification is issued regarding the same. In the
meantime the price of the shares crash. Y brings
an action against the company, its officials and
SEBI for the misstatement in the prospectus.
Decide.
 Prospectus
 Section 2(36) of the companies act 1956:
prospectus means any document described or
issued as a prospectus and includes any notice,
circular, advertisement or other document
inviting deposits from the public or inviting
offers from the public for the subscription or
purchase of any shares in or debentures of a
body corporate.
 Misstatement and Remedy
 Misstatement includes an untrue statement or
omission of any matter intended to mislead the
investor.
 Remedy is available against the company,
every director,promoters,any authorized
person or experts.
 Remedy is available on to a person who has
subscribed for shares or debentures on the faith
of the prospectus. The allot-tee has to prove:
 Material fact was misrepresented
 He acted on such misrepresentation
 Suffered damages in consequence there of.
 The securities must not have been purchased
from the secondary market.
 Current Case
 In the current case Mr. X bought shares of the
company based on the prospectus issued in the
news paper. These shares were sold to Mr. Y.
 Hence it can be said that Mr. Y bought the
shares from a secondary market and not based
on the prospectus. Therefore it can be said that
he did not act based on the misstatement of the
prospectus even though the errors might be
significant.
 Conclusion
 As per the case law of “Peek vs. Gurney”
 No remedy is available for Mr. Y.
 Hence he can not bring any action against the
company, its officials and SEBI for the
misstatement in the prospectus.
 Thank you

 Presented by :-
Mukul Kumar Bucha
Roll No. 08D0410
B’com E