# Section 36 — Fraudulent Inducement to Invest

## Trigger

Liability is attracted when any person, either knowingly or recklessly:

makes a statement, promise or forecast that is false, deceptive or misleading, OR
deliberately conceals any material fact,

with intent to induce another person to enter into (or offer to enter into) one of the listed agreements below.

## Three Categories of Targeted Agreements

The inducement must be aimed at causing the other party to enter into:

1. Securities-acquisition agreements — any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities.

2. Yield-based profit agreements — any agreement whose purpose / pretended purpose is to secure a profit for a party from the yield of securities or by reference to fluctuations in the value of securities.

3. Credit-facility agreements — any agreement for, or with a view to, obtaining credit facilities from a bank or financial institution.

## Consequence

Penalty under Section 447 (fraud) — same penalty matrix as for Section 34.

## Why Section 36 is distinct from Sections 34/35

Sections 34 & 35 operate through a prospectus.
Section 36 operates outside the prospectus regime — it catches any fraudulent statement aimed at inducing investment or credit, e.g. social-media tips, broker pitches, manipulative WhatsApp groups, fake investment seminars.
A single act can attract Section 36 even if no formal prospectus was issued.

## Statutory Definitions (Companion concepts)

### Fraud (Section 447 Explanation)

"Fraud" in relation to affairs of a company / body corporate includes:

any act,
omission,
concealment of any fact, or
abuse of position,

committed by any person, or by any other person with their connivance, in any manner, with intent:

to deceive,
to gain undue advantage from, or
to injure the interests of the company, shareholders, creditors or any other person,

whether or not there is any wrongful gain or wrongful loss.

Key point: No actual gain/loss needed — intent alone suffices.

### Wrongful Gain

Gain by unlawful means of property to which the person gaining is NOT legally entitled.

### Wrongful Loss

Loss by unlawful means of property to which the person losing IS legally entitled.

## Memory Hook — "K-or-R" plus "S-Y-C"

Knowingly or Recklessly (mental state)
Target agreements: Securities, Yield-based profit, Credit facilities

Worked example

### Example 1

Example 1 — Securities tip

A, a self-styled 'market guru', circulates a misleading WhatsApp message guaranteeing a 50% return on shares of L Ltd. (which he knows is loss-making) to induce people to subscribe to L Ltd.'s rights issue.

Treatment: A is liable under Section 36(a) — fraudulent inducement to subscribe securities — punishable under Section 447.

### Example 2

Example 2 — Credit facility inducement

B, a borrower, deliberately conceals his existing defaults and submits forged financial statements to induce a bank to grant a ₹20 crore credit facility.

Treatment: B is liable under Section 36(c) — inducement to obtain credit facilities from a bank by deliberate concealment of material facts.

### Example 3

Example 3 — Fraud without loss

C, a director, deliberately conceals a related-party transaction to deceive shareholders. The company actually makes a profit and no shareholder suffers actual loss.

Treatment: Under the explanation to Section 447, the act still amounts to fraud because fraud does not require any wrongful gain or wrongful loss — intent to deceive suffices.

⚠️ Common exam mistakes

Limiting Section 36 to prospectus-related statements — it covers a far broader range of inducements, including bank credit applications.
Believing actual loss or gain must occur for 'fraud' to exist — the definition expressly clarifies that wrongful gain / loss is not necessary.
Conflating 'wrongful gain' and 'wrongful loss' — gain is by someone not entitled; loss is to someone who was entitled.
Ignoring the 'recklessly' standard — Section 36 catches not only knowing falsehoods but also reckless statements.
Forgetting that deliberate concealment of a material fact is itself an offence under Section 36, even without an affirmative false statement.

Bare-Act text Section 36 read with Section 447 · Companies Act, 2013 · click to expand

Section 36: Punishment for Fraudulently Inducing Persons to Invest Money. Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,— (a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or (b) any agreement, 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 (c) any agreement for, or with a view to obtaining credit facilities from any bank or financial institution, shall be liable for action under section 447.

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Punishment for Fraudulently Inducing Persons to Invest Money (Section 36) — and Meaning of Fraud / Wrongful Gain / Wrongful Loss

Worked example

⚠️ Common exam mistakes