Punishment for Fraudulently Inducing Persons to Invest Money (Section 36)
# Punishment for Fraudulently Inducing Persons to Invest Money (Section 36)
## Scope
Section 36 punishes fraudulent inducement to invest, even if not technically through a 'prospectus'. Liability arises whether the conduct is knowing or reckless.
## Prohibited Conduct
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 offer to enter into) any of the following agreements:
## Three Categories of Targeted Agreements
#
Type of Agreement
(a)
Any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities
(b)
Any agreement (or pretended agreement) the purpose of which is to secure a profit to any party from the yield of securities or by reference to fluctuations in value of securities
(c)
Any agreement for, or with a view to, obtaining credit facilities from any bank or financial institution
## Punishment
Liable for action under Section 447 (Fraud) — same penalty structure as criminal liability for mis-statement in prospectus.
## Key Distinguishing Features
Wider than Section 34 — covers any statement inducing investment, not just prospectuses.
Includes agreements relating to credit facilities from banks/FIs — extending beyond just securities.
Mental state required: knowingly OR recklessly (recklessness suffices).
Active misstatement OR deliberate concealment both covered.
## Comparison with Section 34
Feature
Section 34
Section 36
Document
Prospectus
Any statement/promise/forecast
Mental state
Authorising the issue
Knowingly OR recklessly
Coverage
Misstatement in prospectus
Misstatement to induce investment OR credit
Penalty
Section 447
Section 447
Worked example
### Example 1
Example 1: Mr. Q, a financial advisor, recklessly told Mr. P that XYZ Ltd.'s shares would yield 40% returns within 3 months — though he had no factual basis. Mr. P bought the shares and lost money.
Answer: Yes. Mr. Q recklessly made a misleading forecast to induce Mr. P to acquire securities. Even without intentional fraud, recklessness is sufficient under Section 36. Mr. Q is liable for action under Section 447.
### Example 2
Example 2: Mr. R deliberately concealed material adverse information about ABC Ltd.'s finances to induce a bank to grant credit facilities to ABC Ltd. Does Section 36 apply?
Answer: Yes. Section 36(c) covers agreements 'for, or with a view to obtaining credit facilities from any bank or financial institution'. Mr. R's deliberate concealment to induce credit triggers Section 36, with penalty under Section 447.
⚠️ Common exam mistakes
Limiting Section 36 to securities — it also covers agreements for obtaining credit facilities from banks/FIs.
Requiring intentional fraud — recklessness is sufficient under Section 36.
Missing 'deliberate concealment of material facts' as a covered conduct (alongside affirmative misstatements).
Confusing the scope with Section 34 — Section 36 is broader and not limited to prospectuses.
Bare-Act text Section 36 · The Companies Act, 2013 · click to expand
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.