Section 37 of the Companies Act, 2013: Action by Persons Affected by a Misleading Prospectus

Section 37 of the Companies Act, 2013 enables a person, group of persons or association of persons affected by a misleading statement, inclusion or omission in a prospectus to institute a suit or take other action under Sections 34, 35 or 36 of the Act.

What is Section 37 of the Companies Act, 2013?

Section 37 is part of the statutory framework governing prospectuses and the issue of securities under the Companies Act, 2013. It provides an express remedy to persons affected by misleading information in a prospectus.

The provision is important because liability relating to a misleading prospectus is not confined to regulatory enforcement. Depending upon the circumstances, an affected person may rely upon the remedies provided by Sections 34, 35 and 36 of the Companies Act, 2013.

Text and Meaning of Section 37

In substance, Section 37 provides that a suit may be filed, or any other action may be taken under Section 34, Section 35 or Section 36, by any person, group of persons or association of persons affected by a misleading statement or by the inclusion or omission of any matter in a prospectus.

Therefore, Section 37 operates as an enabling provision connecting an affected investor or other affected person with the liabilities and remedies contained in the preceding provisions dealing with a misleading prospectus and fraudulent inducement.

Who can take action under Section 37?

The language of Section 37 is wider than a remedy available only to one individual. Action may be taken by:

an individual person affected by the prospectus;
a group of affected persons; or
an association of affected persons.

The person or group relying on Section 37 must be affected by a misleading statement or by the inclusion or omission of matter in the prospectus.

What type of prospectus problem is covered?

Section 37 expressly refers to three forms of potentially actionable prospectus content:

a misleading statement;
the inclusion of matter that gives rise to liability under the relevant provisions; and
the omission of matter from the prospectus.

Whether a particular statement, inclusion or omission gives rise to criminal liability, civil liability or action for fraudulent inducement depends upon the requirements of Sections 34, 35 and 36 respectively.

Relationship between Sections 34, 35, 36 and 37

Section 34 - Criminal liability for misstatements in prospectus

Section 34 of the Companies Act, 2013 deals with criminal liability where a prospectus includes a statement that is untrue or misleading in its form or context, or where the inclusion or omission of matter is likely to mislead, subject to the statutory requirements and available defence.

Section 35 - Civil liability for misstatements in prospectus

Section 35 of the Companies Act, 2013 provides for civil liability and compensation where a person subscribes for securities acting on a misleading statement, inclusion or omission in a prospectus and sustains loss or damage as a consequence.

Section 36 - Fraudulently inducing persons to invest money

Section 36 of the Companies Act, 2013 addresses conduct involving knowingly or recklessly making false, deceptive or misleading statements, promises or forecasts, or deliberately concealing material facts, for specified forms of inducement relating to securities or credit facilities. The section provides for action under Section 447.

Section 37 - Right of affected persons to act

Section 37 brings these provisions together from the perspective of an affected person. It expressly recognises that a person, group of persons or association of persons affected by the relevant prospectus content may file a suit or take other action under Sections 34, 35 or 36, as applicable.

Why is Section 37 important for investors?

A prospectus is an important disclosure document used in connection with an offer of securities. Investors may rely on the information disclosed in it when deciding whether to subscribe for securities. Misleading statements or material omissions can therefore have direct consequences for investment decisions.

Section 37 expressly recognises the ability of affected persons to pursue the remedies available under the provisions governing criminal liability, civil liability and fraudulent inducement.

Can a group of investors take action?

Yes. Section 37 expressly refers not only to "any person" but also to a "group of persons" and an "association of persons". The availability and form of any particular proceeding will nevertheless depend upon the facts, the remedy invoked and the applicable procedural law.

What should an affected person examine?

In a dispute involving an allegedly misleading prospectus, relevant material may include the prospectus itself, the allegedly misleading statement or omission, subscription and allotment records, supporting disclosures, communications concerning the offer, and evidence of any resulting loss or damage.

The requirements are not identical under Sections 34, 35 and 36. Accordingly, the nature of the alleged misconduct and the remedy sought should be examined against the particular statutory provision being invoked.

Note: Section 37 should be read together with Sections 34, 35 and 36 and other applicable provisions of the Companies Act, 2013 and securities law. The appropriate remedy depends upon the facts of the particular case.

Official statutory and regulatory resources

For the current statutory text and securities-market information, readers should refer to the official Ministry of Corporate Affairs, India Code and Securities and Exchange Board of India resources.