Chapter 3: Prospectus and Allotment of Securities - Test 3: answer key

Question 1 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. Suryodaya Biotech Ltd issued a prospectus on 1 June 2026 for a public issue of equity shares. The prospectus stated that the company had 'consistently paid dividends out of trading profits', although dividends had in fact been paid out of capital profits. It further stated that 'the present value of turnover is Rs. 500 crore per annum', a statement true only if the entire installed capacity were taken into account, whereas actual capacity utilisation was 40%. Dr. Ananya, named in the prospectus as a director, had resigned and withdrawn her consent to act as director on 20 May 2026, before the prospectus was delivered to the Registrar, yet the prospectus continued to name her. Mr. Kunal, a director who authorised the issue, relied on a valuation statement furnished by Mr. Rohan, a chartered accountant, who had given his written consent; Mr. Rohan withdrew that consent on 10 June 2026, after filing but before allotment. Mr. Vikram, a promoter who authorised the issue, had reasonable grounds to believe, and did believe up to the time of allotment, that the turnover statement was true. Ms. Sneha applied for 5,000 shares on the faith of the prospectus and lost Rs. 8 lakh. Mr. Tarun read the prospectus but did not apply. The company's legal team argues that no criminal liability can arise because no loss has been proved against any director, that Dr. Ananya is protected by her withdrawal, and that Mr. Kunal is protected by his reliance on an expert.

The legal team contends that no criminal liability arises under Section 34 because no investor has proved loss against any director. Is this contention correct?

1. Yes, because loss to a subscriber is a necessary ingredient of the offence under Section 34.
2. No, because loss from the misstatement is not essential to the offence under Section 34, which attracts punishment under Section 447. (correct answer)
3. No, but the offence under Section 34 is punishable only with fine and not with imprisonment.
4. Yes, unless the company is first ordered by the Tribunal to compensate the subscribers.

Answer: B — No, because loss from the misstatement is not essential to the offence under Section 34, which attracts punishment under Section 447.

Explanation. Section 34 makes the issue, circulation or distribution of a prospectus containing an untrue or misleading statement, or a misleading inclusion or omission, an offence by every person who authorises the issue, punishable under Section 447. Loss to an investor is not an ingredient of the offence; it is relevant to civil liability under Section 35. The offence is one of strict liability, so the absence of proved loss does not exonerate the person who authorised the issue.

Where it goes wrong. Importing the 'loss or damage' ingredient of civil liability under Section 35 into the criminal offence under Section 34.

Authority. Section 34 of the Companies Act, 2013; Section 447 of the Companies Act, 2013

Question 2 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

What is Dr. Ananya's position, given that she withdrew her consent to act as director on 20 May 2026 before the prospectus was delivered to the Registrar?

1. She is protected from both civil and criminal liability because she withdrew her consent before the prospectus was filed.
2. She may escape civil liability under Section 35(2)(a) if she proves the withdrawal and that the prospectus was issued without her consent, but she cannot escape criminal liability under Section 34 on that ground. (correct answer)
3. She remains liable under both Section 34 and Section 35 because a withdrawal after being named in the prospectus is ineffective.
4. She is liable under Section 35 but not under Section 34, because she was not a director on the date of the prospectus.

Answer: B — She may escape civil liability under Section 35(2)(a) if she proves the withdrawal and that the prospectus was issued without her consent, but she cannot escape criminal liability under Section 34 on that ground.

Explanation. Section 35(2)(a) gives a civil defence where the person proves that he withdrew his consent to be a director and that the prospectus was issued without his consent or authority. That defence operates only against civil liability. The defences available under the proviso to Section 34 are limited to immateriality of the misstatement and reasonable belief in its truth. Withdrawal of consent to act as director is not a statutory defence to the criminal offence.

Where it goes wrong. Assuming that the Section 35(2) civil defences are equally available as defences to the criminal offence under Section 34.

Authority. Section 34 of the Companies Act, 2013; Section 35(2)(a) of the Companies Act, 2013

Question 3 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Can Mr. Kunal claim protection under Section 35(2)(c) on the ground that he relied on Mr. Rohan's expert statement, which was withdrawn on 10 June 2026?

1. Yes, because he bona fide relied on a chartered accountant's statement.
2. Yes, because the expert's written consent existed at the time the prospectus was filed with the Registrar.
3. No, because the defence requires that the expert had given his consent and had not withdrawn it. (correct answer)
4. No, because a director can never rely on an expert's statement as a defence.

Answer: C — No, because the defence requires that the expert had given his consent and had not withdrawn it.

Explanation. Section 35(2)(c) protects a person who proves that he made the statement on the authority of an expert whom he believed to be competent, and that the expert had given his consent and had not withdrawn it. Since Mr. Rohan withdrew his consent on 10 June 2026, before allotment, the cumulative condition is not satisfied. Bona fide reliance alone is insufficient; the statute requires the consent to subsist.

Where it goes wrong. Stopping the analysis at the existence of written consent at the filing stage and overlooking the requirement that the consent must not have been withdrawn.

Authority. Section 35(2)(c) of the Companies Act, 2013; Section 26(5) of the Companies Act, 2013

Question 4 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

How is the statement that 'the present value of turnover is Rs. 500 crore per annum', which was true only on installed capacity and not on actual utilisation, to be treated under Section 34?

1. It is not untrue because it was literally true if installed capacity is considered.
2. It is not untrue because turnover projections are matters of opinion.
3. It is deemed untrue because a statement misleading in the form and context in which it is included, or whose inclusion or omission is likely to mislead, is deemed untrue. (correct answer)
4. It is deemed untrue only if the directors personally knew it to be false.

Answer: C — It is deemed untrue because a statement misleading in the form and context in which it is included, or whose inclusion or omission is likely to mislead, is deemed untrue.

Explanation. Section 34 deems a statement untrue where it is misleading in the form and context in which it is included, or where any inclusion or omission of a matter is likely to mislead. A statement that is literally capable of a true reading but conveys a false impression of actual turnover is misleading in context, as illustrated in Smith v Chadwick. Actual knowledge of falsity is not required for the statement to be deemed untrue.

Where it goes wrong. Applying a literal-truth test and ignoring the statutory test of misleading form, context and impression.

Authority. Section 34 of the Companies Act, 2013

Question 5 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

Scenario. Vistara Agro Ltd issued a prospectus on 5 May 2026 for a public issue of 2 crore equity shares of face value Rs. 10 each at par, aggregating Rs. 20 crore. The prospectus stated the minimum subscription as Rs. 18 crore. The issue opened on 15 May 2026 and closed on 25 May 2026. Applications were received for Rs. 16 crore only. Despite the shortfall, the Board proceeded to allot shares on 10 June 2026 to all applicants. The company had collected Rs. 4 crore as application money, that is, Rs. 2 per share. The entire collection was deposited in the company's current bank account. When the shortfall came to light, the company refunded the application money on 20 July 2026 without any interest. The refunds were credited to accounts nominated by the applicants, which in several cases differed from the accounts from which the subscription had been remitted. Directors Mr. Aditya and Mr. Bhaskar were responsible for compliance. The company contends that once shares were allotted the question of refund does not arise, and that the refunds were in any case made within a reasonable time.

Was the allotment made by Vistara Agro Ltd on 10 June 2026 valid, given that applications were received for Rs. 16 crore against a stated minimum subscription of Rs. 18 crore?

1. The allotment is invalid, because the minimum subscription of Rs. 18 crore was not subscribed and the sums payable on application were not received before allotment. (correct answer)
2. The allotment is valid, because applications for Rs. 16 crore were received, being more than 75% of the issue.
3. The allotment is valid, because the company allotted the shares within 60 days of the closure of the issue.
4. The allotment is invalid only if SEBI directs the company to refund the application money.

Answer: A — The allotment is invalid, because the minimum subscription of Rs. 18 crore was not subscribed and the sums payable on application were not received before allotment.

Explanation. Section 39(1) prohibits an allotment unless the amount stated in the prospectus as the minimum subscription has been subscribed and the sums payable on application for that amount have been paid to and received by the company. Receipts of Rs. 16 crore fall short of the stated Rs. 18 crore, so the allotment is irregular. The 60-day allotment window and any SEBI direction are independent matters and do not cure the shortfall.

Where it goes wrong. Substituting a percentage of the issue size, or the 60-day allotment timeline, for the stated minimum subscription requirement.

Authority. Section 39(1) of the Companies Act, 2013

Question 6 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Did the application money of Rs. 2 per share collected by Vistara Agro Ltd comply with the requirements governing the quantum payable on application?

1. Yes, because Rs. 2 per share exceeds 5% of the nominal value of Rs. 10 per share.
2. Yes, because Rs. 4 crore is 20% of the issue size of Rs. 20 crore.
3. No, because the amount payable on application must be at least 25% of the issue price, that is Rs. 2.50 per share, and only Rs. 2 per share was collected. (correct answer)
4. No, because the entire issue price must be collected at the time of application.

Answer: C — No, because the amount payable on application must be at least 25% of the issue price, that is Rs. 2.50 per share, and only Rs. 2 per share was collected.

Explanation. Section 39(2) fixes the statutory floor at 5% of the nominal amount or such other percentage as SEBI may specify. SEBI has specified, under Regulation 47(4) of the ICDR Regulations, that the minimum sum payable on application per specified security shall be at least 25% of the issue price. At an issue price of Rs. 10, that is Rs. 2.50 per share, whereas only Rs. 2 per share was collected.

Where it goes wrong. Applying only the 5% nominal value floor in Section 39(2) and ignoring the higher SEBI-prescribed 25% of issue price.

Authority. Section 39(2) of the Companies Act, 2013; Regulation 47(4) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

Question 7 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

By when was the refund of application money due, and what is the consequence of the refund having been made on 20 July 2026 without interest?

1. The refund was due within 15 days from the closure of the issue, that is by 9 June 2026, and the delay makes the directors jointly and severally liable to repay with interest at 15% per annum. (correct answer)
2. The refund was due within 30 days from the date of the prospectus, that is by 4 June 2026, with interest at 12% per annum.
3. The refund was due within 15 days from the date of allotment, that is by 25 June 2026, with interest at 15% per annum.
4. The refund was due within 30 days from the closure of the issue, that is by 24 June 2026, and no interest is payable if the refund is made within that period.

Answer: A — The refund was due within 15 days from the closure of the issue, that is by 9 June 2026, and the delay makes the directors jointly and severally liable to repay with interest at 15% per annum.

Explanation. Where the minimum subscription is not received within 30 days of the issue of the prospectus, Section 39(3) requires the application money to be returned. Rule 11(1) fixes the refund period at 15 days from the closure of the issue. The issue closed on 25 May 2026, so refunds were due by 9 June 2026. On default, the directors and other officers responsible are jointly and severally liable to repay with interest at 15% per annum.

Where it goes wrong. Computing the refund period from the date of the prospectus or the date of allotment instead of from the closure of the issue.

Authority. Section 39(3) of the Companies Act, 2013; Rule 11(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014

Question 8 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

What penalty is attracted under Section 39(5) for the default in refunding the application money?

1. A fixed penalty of Rs. 5,000 on the company.
2. A penalty of Rs. 1,000 for each day during which the default continues or Rs. 1 lakh, whichever is less, on the company and its officer in default. (correct answer)
3. A penalty of Rs. 25 lakh on the company and Rs. 1 lakh on each director.
4. No penalty, because the refund has since been made.

Answer: B — A penalty of Rs. 1,000 for each day during which the default continues or Rs. 1 lakh, whichever is less, on the company and its officer in default.

Explanation. Section 39(5) provides that in case of default under Section 39(3) or Section 39(4), the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which the default continues or one lakh rupees, whichever is less. The penalty is recurring but capped, and subsequent refund does not erase the default already committed.

Where it goes wrong. Confusing the Section 39(5) capped daily penalty with the higher Rs. 25 lakh cap applicable to private placement defaults.

Authority. Section 39(5) of the Companies Act, 2013

Question 9 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. Meridian Renewables Ltd, an Indian listed company, decided to raise overseas capital. On 20 June 2026 its Board approved the issue of depository receipts, and on 12 July 2026 the company issued depository receipts in Luxembourg through a foreign depository bank, against underlying equity shares allotted in the name of that overseas depository bank. No special resolution was passed by the members. The depository receipts were issued by way of private placement and were listed on a foreign trading platform. Mr. Deepak, a holder of depository receipts, demanded to be treated as a member and sought voting rights at the annual general meeting, contending that he had paid for the underlying shares. Until the annual general meeting, the overseas depository voted on behalf of the receipt holders in accordance with the depository agreement. Separately, Mr. Harsh, a marketing agent of the company, knowingly made a false forecast of 'assured 24% returns' and deliberately concealed a pending insolvency petition, in order to induce Mr. Iqbal to subscribe to the company's securities. Mr. Iqbal subscribed for Rs. 25 lakh and lost Rs. 18 lakh. Mr. Harsh contends that he is not liable because he is not a director, and that since he personally made no gain, no fraud is made out.

Is the issue of depository receipts by Meridian Renewables Ltd on 12 July 2026 valid, given that only a Board resolution was passed?

1. The issue is valid because a Board resolution is sufficient for issuing depository receipts abroad.
2. The issue is valid because the depository receipts were issued by way of private placement.
3. The issue is invalid because Section 41 requires a special resolution at a general meeting before issuing depository receipts in any foreign country. (correct answer)
4. The issue is invalid because depository receipts can be issued only by unlisted companies with SEBI's prior approval.

Answer: C — The issue is invalid because Section 41 requires a special resolution at a general meeting before issuing depository receipts in any foreign country.

Explanation. Section 41 permits a company to issue depository receipts in any foreign country only after passing a special resolution in its general meeting and subject to the prescribed conditions. A Board resolution does not satisfy this requirement. The mode of issue, whether public offering, private placement or otherwise, and the company's listing status do not dispense with the special resolution.

Where it goes wrong. Assuming a Board resolution suffices for a GDR issue, or that the private placement route removes the shareholders' approval requirement.

Authority. Section 41 of the Companies Act, 2013; Companies (Issue of Global Depository Receipts) Rules, 2014

Question 10 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

In whose name must the underlying equity shares be allotted in the GDR structure adopted by Meridian Renewables Ltd?

1. In the name of the overseas depository bank. (correct answer)
2. In the names of the individual depository receipt holders.
3. In the name of the domestic custodian.
4. In the name of the foreign depository's nominee in India.

Answer: A — In the name of the overseas depository bank.

Explanation. Under the GDR framework, the underlying shares are allotted in the name of the overseas depository bank, and against those shares the overseas depository bank issues depository receipts to investors. The domestic custodian holds the shares on behalf of the overseas depository, but the shares are allotted in the depository's name. Individual receipt holders do not appear on the register of members until conversion.

Where it goes wrong. Confusing the role of the domestic custodian with that of the overseas depository bank, or assuming direct allotment to receipt holders.

Authority. Section 41 of the Companies Act, 2013; Companies (Issue of Global Depository Receipts) Rules, 2014

Question 11 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

Is Mr. Deepak entitled to vote as a member at the annual general meeting on the strength of his holding of depository receipts?

1. Yes, because he is a member once he has paid for the depository receipts.
2. Yes, provided he votes through the domestic custodian.
3. No, because he becomes a member and is entitled to vote only upon conversion of the depository receipts into the underlying shares. (correct answer)
4. Yes, if the company's Board approves his request to vote.

Answer: C — No, because he becomes a member and is entitled to vote only upon conversion of the depository receipts into the underlying shares.

Explanation. A holder of depository receipts may become a member of the company and is entitled to vote as such only on conversion of the depository receipts into underlying shares, after following the prescribed procedure. Until conversion, the overseas depository is entitled to vote on behalf of the receipt holders in accordance with the depository agreement, which is exactly what happened here.

Where it goes wrong. Equating payment for depository receipts with membership, or assuming receipt holders can vote through the custodian before conversion.

Authority. Section 41 of the Companies Act, 2013; Companies (Issue of Global Depository Receipts) Rules, 2014

Question 12 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Is Mr. Harsh liable for his knowingly false forecast and deliberate concealment of the insolvency petition, despite being a marketing agent and making no personal gain?

1. He is not liable, because Section 36 applies only to directors and promoters.
2. He is liable under Section 36 and punishable under Section 447, even though he made no personal gain. (correct answer)
3. He is not liable, because Mr. Iqbal was not allotted any shares.
4. He is liable only if Mr. Iqbal proves that the company has gone into liquidation.

Answer: B — He is liable under Section 36 and punishable under Section 447, even though he made no personal gain.

Explanation. Section 36 applies to 'any 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 into an agreement for acquiring, disposing of, subscribing for or underwriting securities. It is not confined to directors or promoters, and wrongful gain or loss is not an essential ingredient of fraud under Section 447.

Where it goes wrong. Reading Section 36 as confined to directors and promoters, or requiring proof of personal wrongful gain by the maker of the statement.

Authority. Section 36 of the Companies Act, 2013; Section 447 of the Companies Act, 2013

Question 13 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

Scenario. Zenith Agro Tech Ltd's prospectus incorrectly stated that its registered office was on the fourth floor instead of the fifth floor of the same building. A shareholder alleges criminal liability under Section 34 against the person who authorised the issue. Which defence, if proved, is available to that person under the proviso to Section 34?

Zenith Agro Tech Ltd's prospectus incorrectly stated that its registered office was on the fourth floor instead of the fifth floor of the same building. A shareholder alleges criminal liability under Section 34 against the person who authorised the issue. Which defence, if proved, is available to that person under the proviso to Section 34?

1. That the misstatement was immaterial. (correct answer)
2. That no investor actually suffered any loss.
3. That the misstatement was inserted by the promoter and not by him.
4. That the prospectus was duly filed with the Registrar.

Answer: A — That the misstatement was immaterial.

Explanation. The proviso to Section 34 provides two defences: that the misstatement or omission was immaterial, or that the person had reasonable grounds to believe, and did believe up to the time of issue, that the statement was true or that the inclusion or omission was necessary. Absence of loss is not a defence under Section 34, since loss is not an ingredient of that offence. Filing the prospectus is a compliance step, not a defence.

Where it goes wrong. Treating the absence of investor loss, or the act of filing, as a statutory defence under Section 34.

Authority. Proviso to Section 34 of the Companies Act, 2013

Question 14 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. The prospectus of Trishul Textiles Ltd was issued with the intent to defraud applicants. Mr. Neel, a promoter who authorised the issue, is proceeded against under Section 35. What is the extent of his liability?

The prospectus of Trishul Textiles Ltd was issued with the intent to defraud applicants. Mr. Neel, a promoter who authorised the issue, is proceeded against under Section 35. What is the extent of his liability?

1. His liability is limited to the fees paid for filing the prospectus.
2. He is liable only after the company is wound up and its assets exhausted.
3. He is personally responsible, without any limitation of liability, for all or any of the losses or damages incurred by persons who subscribed on the basis of the prospectus. (correct answer)
4. He is liable only to the extent of his shareholding in the company.

Answer: C — He is personally responsible, without any limitation of liability, for all or any of the losses or damages incurred by persons who subscribed on the basis of the prospectus.

Explanation. Section 35(3) provides that where it is proved that a prospectus was issued with intent to defraud applicants or for any fraudulent purpose, every person referred to in Section 35(1) is personally responsible, without any limitation of liability, for all or any of the losses or damages incurred by persons who subscribed on the basis of the prospectus. The liability is not capped by shareholding or by the company's liquidation.

Where it goes wrong. Confusing the ordinary compensation liability under Section 35(1) with the unlimited personal liability triggered by fraudulent intent.

Authority. Section 35(3) of the Companies Act, 2013

Question 15 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. Ms. Priya subscribed for shares of Kaveri Foods Ltd on the basis of a prospectus containing a misleading statement, and later transferred the shares to Mr. Rahul. Mr. Rahul now wishes to sue under Section 37 on the ground of the misstatement. Can he maintain the action?

Ms. Priya subscribed for shares of Kaveri Foods Ltd on the basis of a prospectus containing a misleading statement, and later transferred the shares to Mr. Rahul. Mr. Rahul now wishes to sue under Section 37 on the ground of the misstatement. Can he maintain the action?

1. Yes, because he is the present holder of the shares.
2. Yes, because a transferee steps into the shoes of the transferor for all purposes.
3. No, because only the company can take action for misstatement in a prospectus.
4. No, because the action under Section 37 lies at the instance of the person affected by the misleading statement, namely the original allottee, and not a subsequent transferee. (correct answer)

Answer: D — No, because the action under Section 37 lies at the instance of the person affected by the misleading statement, namely the original allottee, and not a subsequent transferee.

Explanation. Section 37 permits a suit or other action under Sections 34, 35 or 36 by any person, group of persons or association of persons affected by the misleading statement or the inclusion or omission in the prospectus. A subsequent transferee who did not subscribe on the faith of the prospectus is not a person so affected; the right belongs to the original allottee, as illustrated by the position in Peek v Gurney.

Where it goes wrong. Assuming that the right to sue travels with the shares to every subsequent holder.

Authority. Section 37 of the Companies Act, 2013; Section 34 of the Companies Act, 2013; Section 35 of the Companies Act, 2013

Question 16 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · medium

Scenario. Sagar Offshore Ltd issued depository receipts through an overseas depository. Before conversion of the receipts into underlying shares, who is entitled to vote in respect of those shares?

Sagar Offshore Ltd issued depository receipts through an overseas depository. Before conversion of the receipts into underlying shares, who is entitled to vote in respect of those shares?

1. The receipt holders, in proportion to their holding of receipts.
2. The overseas depository, on behalf of the receipt holders, in accordance with the depository agreement. (correct answer)
3. No person, since voting rights are suspended until conversion.
4. The company's Board, on behalf of the receipt holders.

Answer: B — The overseas depository, on behalf of the receipt holders, in accordance with the depository agreement.

Explanation. Until conversion of the depository receipts into underlying shares, the overseas depository is entitled to vote on behalf of the holders of the depository receipts in accordance with the agreement entered into between the depository, the receipt holders and the company. Voting rights are therefore not suspended, nor do they vest in the company's Board or in the receipt holders directly.

Where it goes wrong. Assuming that voting rights are in limbo before conversion, or that the receipt holders vote directly.

Authority. Section 41 of the Companies Act, 2013; Companies (Issue of Global Depository Receipts) Rules, 2014

Question 17 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. On failure of the issue, Nalanda Ltd refunded application money to 30 applicants by crediting amounts to bank accounts nominated by them, which in several cases differed from the accounts from which the subscription had been remitted. Is the refund valid?

On failure of the issue, Nalanda Ltd refunded application money to 30 applicants by crediting amounts to bank accounts nominated by them, which in several cases differed from the accounts from which the subscription had been remitted. Is the refund valid?

1. No, because the application money to be refunded shall be credited only to the bank account from which the subscription was remitted. (correct answer)
2. Yes, because the applicants may nominate any account for receiving the refund.
3. Yes, because the refund is complete once the money leaves the company's account.
4. No, because refunds must be made only by cheque and never by electronic credit.

Answer: A — No, because the application money to be refunded shall be credited only to the bank account from which the subscription was remitted.

Explanation. Rule 11(2) requires that application money to be refunded shall be credited only to the bank account from which the subscription was remitted. This is an anti-money-laundering safeguard. Crediting refunds to nominated accounts, even at the applicant's request, does not satisfy the rule and renders the refund non-compliant. Electronic credit is permissible, provided it is to the originating account.

Where it goes wrong. Assuming that applicant consent or nomination validates a refund to a different account.

Authority. Rule 11(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014; Section 40(3) of the Companies Act, 2013

Question 18 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. Mr. Om recklessly made an exaggerated forecast of the financial prospects of a company in order to induce a financial institution to enter into an underwriting agreement for its securities. Which statement about Section 36 is correct?

Mr. Om recklessly made an exaggerated forecast of the financial prospects of a company in order to induce a financial institution to enter into an underwriting agreement for its securities. Which statement about Section 36 is correct?

1. Section 36 applies only where the statement is made knowingly; recklessness is irrelevant.
2. Section 36 applies only to statements of existing fact and does not extend to forecasts.
3. The underwriter cannot invoke Section 36 because underwriting agreements are outside its scope.
4. Section 36 is attracted, because it covers statements, promises or forecasts made knowingly or recklessly, and expressly covers agreements for underwriting securities. (correct answer)

Answer: D — Section 36 is attracted, because it covers statements, promises or forecasts made knowingly or recklessly, and expressly covers agreements for underwriting securities.

Explanation. Section 36 covers any 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 into an agreement for acquiring, disposing of, subscribing for or underwriting securities, or for securing credit facilities. Recklessness suffices, forecasts are expressly included, and underwriting agreements are squarely within clause (a).

Where it goes wrong. Narrowing Section 36 to knowingly made statements of existing fact and excluding forecasts and underwriting agreements.

Authority. Section 36 of the Companies Act, 2013

Question 19 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. The person who authorised the issue of a prospectus of Aarambh Ltd containing an untrue statement contends that he cannot be proceeded against under Section 34 because no subscriber has suffered any loss. Is the contention valid?

The person who authorised the issue of a prospectus of Aarambh Ltd containing an untrue statement contends that he cannot be proceeded against under Section 34 because no subscriber has suffered any loss. Is the contention valid?

1. Yes, because loss is a necessary ingredient of the offence under Section 34.
2. Yes, because Section 34 provides only a civil remedy and not a criminal one.
3. No, because for an offence under Section 34 loss from the misstatement is not essential; the offence is complete on the untrue or misleading statement being included. (correct answer)
4. No, because loss to every subscriber is presumed once the statement is shown to be untrue.

Answer: C — No, because for an offence under Section 34 loss from the misstatement is not essential; the offence is complete on the untrue or misleading statement being included.

Explanation. Section 34 criminalises the issue, circulation or distribution of a prospectus containing an untrue or misleading statement or a misleading inclusion or omission. Loss is not an ingredient; it belongs to the civil liability regime under Section 35. The offence is one of strict liability, so the absence of proved loss does not defeat a prosecution, and no presumption of loss to each subscriber is required.

Where it goes wrong. Confusing the civil compensation requirement of loss under Section 35 with the elements of the criminal offence under Section 34.

Authority. Section 34 of the Companies Act, 2013; Section 447 of the Companies Act, 2013

Question 20 · 2 marks · Chapter 3: Prospectus and Allotment of Securities · hard

Scenario. Pinnacle Pharma Ltd's prospectus included a statement purporting to be made by an expert, CA Mr. Yash, who held 12% of the company's equity shares and was engaged in its promotion. The prospectus recorded that he had given his written consent. Is the inclusion of his statement permissible under Section 26(5)?

Pinnacle Pharma Ltd's prospectus included a statement purporting to be made by an expert, CA Mr. Yash, who held 12% of the company's equity shares and was engaged in its promotion. The prospectus recorded that he had given his written consent. Is the inclusion of his statement permissible under Section 26(5)?

1. Yes, provided the expert has given his written consent to the issue of the prospectus.
2. No, because a prospectus shall not include a statement purporting to be made by an expert who is engaged or interested in the formation, promotion or management of the company. (correct answer)
3. Yes, because an expert's shareholding in the company is irrelevant to the inclusion of his statement.
4. No, because an expert must be appointed by the Board only after the prospectus has been filed with the Registrar.

Answer: B — No, because a prospectus shall not include a statement purporting to be made by an expert who is engaged or interested in the formation, promotion or management of the company.

Explanation. Section 26(5) prohibits the inclusion of a statement purporting to be made by an expert where he is engaged or interested in the formation, promotion or management of the company, or has not given written consent, or has withdrawn consent before delivery of the prospectus to the Registrar. Written consent cannot cure the disqualification arising from the expert's engagement in promotion and 12% shareholding.

Where it goes wrong. Treating written consent as the only condition under Section 26(5) and ignoring the independence disqualification.

Authority. Section 26(5) of the Companies Act, 2013; Section 2(38) of the Companies Act, 2013