# Remedies for Misstatements in Prospectus

An investor harmed by a misleading prospectus has three civil remedies available — each with its own preconditions and limits.

## A. Right of Rescission

### When to Seek Rescission?

A person who purchased shares based on a misleading prospectus can apply to court for rescission under the Indian Contract Act, 1872.

### Effect of Rescission

1. The agreement to buy shares becomes voidable at the option of the subscriber.

2. If rescinded:

Company removes the subscriber from the Register of Members;
Returns the money paid with interest and incidental costs.

3. Compensation for damages from non-fulfillment can also be claimed under Section 75 of the Indian Contract Act, 1872.

### Exceptions — When Rescission is NOT Available

1. Subsequent purchasers from the secondary market cannot rescind — they didn't rely on the prospectus when contracting with the company.

2. Subscribers to the MOA cannot seek rescission — they signed the MOA itself, not influenced by the prospectus.

## B. Right of Action for Damages

### When to Claim?

If the misstatement amounts to fraud, the investor has the right to claim damages — even if the company is in liquidation.

### Pre-requisites to Claim Damages

1. There was fraudulent misrepresentation in the prospectus;

2. The person was intended to act on it;

3. The person suffered damages due to acting on the fraudulent misrepresentation.

## C. Damages for Deceit

### When Available?

The deceit remedy is available under Section 19 of the Indian Contract Act, 1872 — even if rescission is lost (e.g., due to negligence or the company going into liquidation).

### Pre-requisites

1. There was a fraudulent misstatement of material facts;

2. The person is the original allottee who actually saw the prospectus;

3. The person was actually deceived by the misstatement.

## Summary Comparison

Remedy	Source	Key Condition	Available Even If…
Rescission	Indian Contract Act	Misleading prospectus, original allottee	—
Damages (Action)	Common law / Contract Act	Fraud + intent + loss	Company in liquidation
Damages (Deceit)	Sec 19 Indian Contract Act	Fraud + saw prospectus + deceived	Rescission is lost

## Crucial Point

These remedies are available in addition to statutory remedies under Sec 34 (criminal) and Sec 35 (civil compensation). The investor can pursue multiple tracks.

Worked example

### Example 1

Example 1: Mr. A subscribes to 1,000 shares of ABC Ltd. based on a fraudulent prospectus overstating profits. ABC Ltd. is later wound up. Can Mr. A still claim damages?

Answer: Yes. The 'action for damages' remedy is available even if the company is in liquidation, provided fraud, intent, and loss are proved.

### Example 2

Example 2: Mr. B bought shares of ABC Ltd. from the stock exchange 1 year after the IPO, having read the prospectus. He now claims rescission against the company. Will he succeed?

Answer: No. Subsequent purchasers from the market cannot rescind — they did not contract with the company on the basis of the prospectus.

### Example 3

Example 3: Mr. C is the original allottee. He delays bringing his rescission action for 2 years (after discovering the misstatement), by which time the company has gone into liquidation. Has he lost all remedies?

Answer: Rescission may be lost due to delay/laches and liquidation, but damages for deceit under Sec 19 ICA may still be available if he can prove fraudulent misstatement, his reliance on the prospectus, and actual deception.

⚠️ Common exam mistakes

Thinking subsequent market purchasers can rescind — they cannot.
Mistakenly believing rescission is lost if company is in liquidation — damages for deceit are still available.
Confusing 'damages for deceit' (Sec 19 ICA) with 'civil liability' under Sec 35 — these are independent remedies.
Subscribers to the MOA seeking rescission — barred since MOA signature is not prospectus-based.
Missing that interest and incidental costs are payable on rescission, not just the principal.

Bare-Act text Section 19, Indian Contract Act, 1872 (also Sec 75 ICA) · Indian Contract Act, 1872 (read with Companies Act, 2013) · click to expand

Section 19, Indian Contract Act, 1872: When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.

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Remedies for Misstatements in Prospectus — Rescission, Damages, Deceit

Worked example

⚠️ Common exam mistakes