Section 456 of the Companies Act, 2013
1. Text of Section 456 (in essence)
Section 456 states:
If a company issues a prospectus with a false or misleading statement knowing it to be false, or with reckless disregard for the truth, intending to deceive the public, the company, its directors, promoters, or any person involved shall be punishable for fraud under the Companies Act, 2013.
This section targets fraudulent intent rather than mere negligence or inadvertent errors.
2. Key Points
a) Fraudulent Misstatement:
Unlike Section 454 (which may cover unintentional misstatements), Section 456 deals with willful or intentional false statements in a prospectus.
Misstatement must be knowingly false or made with intent to mislead investors.
b) Persons Liable:
The company itself.
Directors, promoters, or any person authorized to sign the prospectus.
Any person involved in preparing, issuing, or approving the prospectus with fraudulent intent.
c) Nature of Punishment:
Criminal liability applies here.
Penalties may include:
Imprisonment
Fine
Or both, depending on the severity of the fraud.
Investors may also claim civil compensation for any loss suffered, overlapping with Section 454.
d) Difference from Section 454:
Section 454: Covers misstatements, whether intentional or unintentional, primarily civil liability.
Section 456: Covers fraudulent or intentional misstatements, primarily criminal liability.
3. Key Legal Principles
Investor Protection:
Ensures that fraudulent companies and persons cannot cheat the public through misleading prospectuses.
Intent Matters:
To punish under Section 456, the intent to deceive or reckless disregard for truth must be proven.
Overlap with Other Sections:
Fraudulent misstatements may also invoke Sections 447 (fraud by company officers) and 448 (officers of company guilty of fraud).
4. Example to Understand
Suppose a company issues a prospectus claiming a new project will generate ₹50 crores revenue, even though the promoters know the project is unviable. Investors buy shares based on this prospectus:
Since the statement was knowingly false and intended to deceive investors, the company and responsible directors can be punished under Section 456.
Penalties may include imprisonment and fines, in addition to compensating the investors.
In short:
Section 456 Companies Act, 2013 deals with fraudulent misstatements in prospectuses.
It imposes criminal liability on the company and responsible persons for intentional deception.
It complements Section 454, which deals with civil liability for unintentional misstatements.
Its main purpose is to protect investors and maintain integrity in public offerings.
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