Section 36 of the Companies Act, 2013: Punishment for Fraudulently Inducing Persons to Invest Money
Section 36 targets fraudulent inducements connected with securities and certain credit facilities. A person who knowingly or recklessly uses a false, deceptive or misleading statement, promise or forecast, or deliberately conceals a material fact, for a specified inducement is liable for action under Section 447 of the Companies Act, 2013.
What does Section 36 cover?
The provision applies to any person. Its focus is the use of dishonest or reckless representations, or deliberate concealment of material facts, to induce another person to enter into, or offer to enter into, one of the agreements specified in the section.
Substance of Section 36
A person may attract Section 36 where he or she knowingly or recklessly makes a false, deceptive or misleading statement, promise or forecast, or deliberately conceals material facts, in order to induce another person to enter into or offer to enter into:
- an agreement for, or with a view to, acquiring, disposing of, subscribing for or underwriting securities;
- an agreement whose purpose, or pretended purpose, is to secure a profit to a party from the yield of securities or by reference to fluctuations in the value of securities; or
- an agreement for, or with a view to, obtaining credit facilities from a bank or financial institution.
The statutory consequence is action under Section 447.
Essential elements of liability under Section 36
| Element | What the provision requires |
|---|---|
| Person responsible | The section is framed broadly and applies to "any person". |
| Conduct | A statement, promise or forecast that is false, deceptive or misleading, or deliberate concealment of a material fact. |
| State of mind | The statement, promise or forecast must be made knowingly or recklessly; concealment must be deliberate. |
| Purpose | The conduct must be intended to induce another person to enter into, or offer to enter into, an agreement falling within clauses (a), (b) or (c). |
| Consequence | Liability is for action under Section 447, which deals with punishment for fraud. |
Meaning of "fraud" under Section 447
Section 447 defines fraud, in relation to the affairs of a company or body corporate, broadly to include an act, omission, concealment of a fact or abuse of position committed with intent to deceive, obtain an undue advantage, or injure specified interests. The definition does not require proof of actual wrongful gain or wrongful loss in every case.
Punishment under Section 447
For fraud involving at least Rs. 10 lakh or 1% of the turnover of the company, whichever is lower, Section 447 provides imprisonment of not less than six months and up to ten years, together with a fine of not less than the amount involved in the fraud and up to three times that amount. Where the fraud involves public interest, the minimum imprisonment is three years.
Where the amount is below that statutory threshold and the fraud does not involve public interest, the second proviso to Section 447 provides imprisonment up to five years, or fine up to Rs. 50 lakh, or both.
Section 37: action by affected persons
Section 37 complements Sections 34, 35 and 36. It permits a person, group of persons or association of persons affected by a misleading statement or by the inclusion or omission of a matter in a prospectus to file a suit or take other action under those provisions, as applicable.
Practical examples
Section 36 may become relevant where an investment is solicited through a knowingly false claim about securities, where material facts are deliberately hidden to induce subscription or underwriting, or where a deceptive representation is used to induce an agreement for credit facilities from a bank or financial institution. Whether liability is established in a particular case depends on the evidence and satisfaction of the statutory ingredients.
Official legal sources
For the authoritative and updated text, refer to the Ministry of Corporate Affairs - Companies Act, 2013 and the India Code portal. Readers should verify amendments, notifications and the current statutory text before relying on the provision in a legal proceeding.
Disclaimer: This article is for general legal information and does not constitute legal advice.