Section 454 of the Companies Act, 2013
1. Text of Section 454 (in essence)
Section 454 states:
If a company, or any person authorized by the company to sign the prospectus, issues a prospectus which includes untrue statements or misstatements, they shall be liable to pay compensation to any person who subscribes for shares or debentures based on that prospectus and suffers a loss.
2. Key Points
a) What is a Prospectus?
A prospectus is a document issued by a company to the public, inviting people to subscribe to shares, debentures, or other securities.
It must contain true and accurate information about the company’s financials, business, and risks.
b) Who is Liable?
The company itself.
Directors, promoters, or any person authorized to sign the prospectus.
c) Nature of Liability:
Civil liability (compensation for loss) to subscribers.
Criminal liability may also arise under Sections 447 and 448 if fraud or willful misstatement is involved.
d) Requirement for Compensation:
The person subscribing to the shares/debentures must have suffered actual loss due to reliance on the false or misleading prospectus.
Liability arises even if the person issuing the prospectus was not aware of the falsehood, unless it can be proven they exercised due diligence.
3. Key Legal Principles
Objective:
Protect investors from financial loss caused by misleading or false statements in the prospectus.
Due Diligence Defence:
Officers or directors may defend themselves by proving reasonable care and due diligence was exercised before issuing the prospectus.
Extent of Liability:
Compensation is limited to the actual loss suffered by the investor.
Applies to both public and private companies issuing shares to the public.
4. Example to Understand
Suppose a company issues a prospectus claiming its profits for the last year were ₹10 crores, but in reality, they were ₹5 crores. Based on this prospectus, investors buy shares:
If investors lose money because the statement was false, the company and its directors can be held liable under Section 454 to compensate them.
If the directors can prove they genuinely believed the information was correct and exercised due diligence, liability may be mitigated.
In short:
Section 454 Companies Act, 2013 protects investors from misstatements in prospectuses.
It imposes civil liability on the company and authorized persons to compensate investors for losses.
It encourages transparency and honesty in public offerings.
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