This article is written by Utkarsh Nigam of New Law College, Bharti Vidyapeeth University, Pune. In this article, the author discusses the consequences of failure to get the shares listed in stock exchange named in the prospectus of a Public Company with regard to Relevant Laws. This article was written by the author while pursuing M.A in Business laws from NUJS.

Introduction

A prospectus of a company is a legal document issued by the company in case the company is issuing its securities by way of a public offer. Under Section 23 of the Companies Act, 2013 a public company can offer its securities in three following ways-

1. To the general public through way of prospectus.
2. Through private placement
3. Through an issue of right issue or bonus issue, in accordance with the provisions of the Companies Act and also the Securities Board of India Act, 1992 and the rules and regulations made thereby.

A prospectus thus is a document which is in the public domain for the potential investors, so that they can get the information about the company and make the investments accordingly. A prospectus acts like a link between the company and its potential investors and thus any misstatement in the prospectus by the company or by the officers of the company is treated with utmost strict actions under the Companies Act and the regulatory bodies like the Securities and Exchange Board of India.

Consequences of Failure with regards to Companies Act

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The Companies Act has provided for provisions which will get triggered in case there is a failure to do a particular act which has been mentioned in the prospectus issued by the company, these are-

1. According to Section 27 of the Companies Act the company cannot at any given time vary the terms of a contract specified in the prospectus of the company or for the object for which the company issued the prospectus, except subject to the prior approval and authority given by the company by way of a special resolution in a general meeting of the company.
   • Thus failure to get the shares listed by the company is a type of variation from the terms of the contract as the prospectus mentioned that the shares will get listed on a recognised stock exchange by the company.
2. The failure to get the shares listed on a stock exchange is a serious misstatement by the company which has been stated in the prospectus of the company. According to Section 34 of the Companies Act criminal liability is imposed on the company and its officers by way of lifting of corporate veil if there are any misstatements in the prospectus. It explains that where a prospectus is issued, circulated or distributed under the relevant chapter which includes any statement which is untrue or which misleads in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead the potential investors or the general public to invest in the company, every person who has authorized the issue of the prospectus will be liable under Section 447 of the Companies Act, which is a serious offence in its nature.
3. Section 447 clearly states that without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force a person who is found to be guilty of fraud shall be punishable with an imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. It is also provided that where the fraud in question involves a public interest the term of imprisonment shall not be less than three years. For the purpose of these provisions the term fraud has been defined under Section 447 which states that fraud is an act in relation to the affairs of the company or any body corporate which includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. This is directly linked with the issue of failure to get the shares listed as the shareholders were cheated by the company and were induced by the company to invest in their securities in lieu of the statements written or mentioned in the prospectus which talked about the recognised stock exchange on which the company was to get its shares listed for the purpose of trading.
4. Similarly, Section 448 also provides punishment for false statement. The section provides that if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder if any person makes a statement which is false in its materiality, knowing it to be false or if the statement made by him omits any material fact, knowing its material importance shall be held liable under Section 447 of the Companies Act.
5. Section 34 provides or imposes for criminal liability on the company and the persons involved but on the other hand Section 35 imposes a civil liability for any misstatements in the prospectus. The Section states that when a person has subscribed for securities of a company acting on any statement or statements which includes or omits any matter stated in the prospectus of the company which is misleading and if the person sustains any loss or damage as result of the misstatement given in the prospectus, the company and every person who is a director of the company at the time when the prospectus was issued by the company or the person who has authorized himself to be named in the prospectus or who has been named in the prospectus as a director of the company or has agreed to become the director of the company either immediately or after an interval of time or is a promoter of the company or who has authorized the issue of such prospectus and also includes the expert mentioned in sub section (5) of Section 26 of the Companies Act shall be held liable under Section 36 of the Companies Act. Every person held liable according to the abovementioned provisions is liable to pay compensation to every person who has suffered any such loss or damage as a consequence of such misstatement. The Section also provides that if it is proved that a prospectus has been issued with an intent to defraud the applicants for the securities of the company or any other person for any fraudulent purpose then as a result every person mentioned above shall be personally responsible without any limitation of liability for any loss or damage that has been incurred by the persons who subscribed to the securities of the company on the basis of such prospectus.
6. Section 36 provides that any person who either knowingly or carelessly makes any statement, promise or forecast which is false, misleading, deceptive or conceals any material facts so as to induce any other person to enter into any agreement for the purposes of acquiring, disposing, subscribing or underwriting any securities or by way of agreement secure any undue profit from the yielding of securities or the feign act of which is to secure undue profits to any other person from yielding of such securities or the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities or with a view to obtain credit facility from any bank or financial institution shall be held liable under Section 447 of the Companies Act. Thus Section 36 has a direct connection with the issue of not getting the shares listed by the Public company as the company has induced the public into investing money into their shares or securities very carelessly or in a manner which is false or is for a fraudulent purpose.

As the company is required to make an application and obtain approval from a stock exchange before the public offer is made or in simple words prospectus is issued after the approval is granted by the stock exchange for dealing of securities, therefore the act of listing and dealing the securities on the recognized stock exchange is mentioned in the prospectus. Thus not complying with what is mentioned in the prospectus would violate Section 27 of the Companies Act. Also as the statements were mentioned in the prospectus related to the listing and trading of the securities, relying on which the general public invested their money in the securities of the company, the failure to get the shares listed would trigger the liability of the Company and its officers under Sections 34, 35, 36, 447 and 448 as this is major misstatement in the prospectus. Due to the fact that the shares will not be listed on the stock exchange the general public will suffer huge losses and damage. The major consequence of failure to get the shares listed is that the security holders of the company, if they have the shares of the company will not be able to trade their shares in the open market and as a result would block their shares without any right of trading. The liabilities mentioned in the abovementioned sections are the consequences of failure to get the shares listed as due to the fact that shares will not be listed, which was earlier mentioned in the prospectus is a basis for triggering the liabilities on the person or persons involved in the issue of such prospectus or who has induced any other person to buy the securities of such a company who has not got its shares listed on the stock exchange. Being a material fact, this would also open the gates for enforcing Section 447 which has a criminal as well as civil nature. The definition of fraud is interpreted under the Companies Act in such a way that it covers every aspect of any illegal activity or any activity which will injure the interest of a person thus making it a serious offence under the Companies Act.

The provisions related to the securities which are to be dealt with in stock exchanges are mentioned under Section 40 of the Companies Act. The section also states under the relevant clause that if the company fails to comply the provisions of this Section or a default has been made in the compliance of this section then the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees and every officer of the company who is in default shall be punishable with an imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may exceed to three lakh rupees or both. As the matter of failure to get the shares listed involves the interest of quite a large number of people or the general public it is safe to assume that the penalties will be high and the provisions of the sections applied will be stringent as there is public money involved. The regulatory authorities such as SEBI and the relevant stock exchange also can take actions against the defaulting company.

Consequences of Failure in regards to other Laws

In case where the company fails to get its shares listed then under Section 22 of the Securities Contract and Regulation Act, 1956 where a recognised stock exchange acting in pursuance to the bye laws made by it, refuses to list the securities of any public company, the company within a specified time ( that is 15 days from the date where such reasons of refusal were given ) can appeal to the Central Government and if the Central Government sets aside the such refusal, the stock exchange will have to comply with the directions given by the Central Government. Also according to Section 22A of the Securities Contract and Regulation Act, 1956 if the recognised stock exchange acting in pursuance to the bye laws made by it, refuses to list the securities of any public company, the company shall be given appropriate reasons for the refusal and has an option to appeal to the Securities Appellate Tribunal within 15 days from the date of such refusal. The decision if sets aside the order of the Stock exchange then the recognised stock exchange will have to act in conformation with the order of the Securities Appellate Tribunal. The company is also having an option to file an appeal to the Supreme Court of India under Section 22F if the company is not satisfied with the orders of the Securities Appellate Tribunal within sixty days from the date of such order given by the Tribunal.

As the failure to get the shares listed is a misstatement involving public interest the Central Government, if thinks that it is necessary to investigate into the affairs of the company, may on receipt of the report of Registrar order an investigation on the company under Section 201 of the Companies Act. The Central Government can also if it thinks that it is necessary to investigate on the affairs of the company by the Serious Fraud Investigation Office then upon the recipe of the report of the Registrar or in Public interest may by order assign the investigation to the Serious Fraud Investigation office. The Serious Fraud Investigation Office shall appoint as many inspectors and the appointed persons shall have the power of Inspector mentioned under Section 217 of the Companies Act. The offence committed under Section 34, 36 and 447 are the grounds where the investigation can go to the Serious Fraud Investigation Office. The investigation going into the hands of the Serious Fraud Investigation Office is not a good sign for the company as the laws pertaining to the provisions of Serious Fraud Investigation Office are very stringent and the consequences of the investigation if found guilty are severe.

Also, failure to get the shares listed is bad for the image of the company as well as the company loses its trustability in the market. The creditability, the future plans etc. are also hampered as the investors will not be interested to invest their money in such an organisation which has acted in contravention to the provisions of the relevant laws applicable in the country related to the Securities Laws. The consequence of the failure of getting the securities listed to affect the public at large the most. The shareholders who subscribed for the shares mentioned in the prospectus of the company, after the allotment would not be able to trade the shares on any platform as the same has not been listed on any recognized stock exchange and thus the liquidity of the investors would get hampered. Thus shareholders are empowered with rights for the redressal of their grievances of any kind which includes the failure to get the shares listed. Firstly the shareholders or any person concerned with the same can make a complaint about the website SCORES which is the website of the SEBI complaint redressal system.

Conclusion

An investor or the general public who invest their money into the shares of a public company sometimes put their lifetime earnings in the securities in lieu of the profits which would be yielded by trading the securities of the company and if the shares fail to get listed then the small investors are heavily affected as there is no appreciable value that they can get through those purchased securities or shares. Thus the Public companies should make sure that all the formalities are completed and all the approvals are taken by the relevant regulatory authorities before the prospectus is issued to the general public. The matters stated in the prospectus should be true and fair and should reflect the true image of the company and should contain statements which are relevant to the issue of the securities and on the other hand should not contain matters which could induce the public to invest their hard earned money for a wrong purpose or for a purpose which they will not be interested in. A compliance officer should be mandatorily appointed by the company who is a company secretary whose responsibility is to check with the listing requirements given by the Securities and Exchange Board of India and the recognised stock exchange where the company wishes to lists its shares for trading. Thus it can be concluded and safely said that failure in getting the shares listed would have very severe consequences for the company as well as the officers of the company who have been mentioned in the prospectus of the company and thus the step for the same should be properly followed.