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With a view to issue shares to the general publ...

With a view to issue shares to the general public a prospectus containing some false information ...

With a view to issue shares to the general public a prospectus containing some false information was issued by a company. Rahul received copy of the prospectus from the company, but did not apply for allotment of any shares. The allotment of shares to the general public was completed by the company within the stipulated period. A few months later, Rahul bought 2000 shares through the stock exchange at a higher price which later on fell sharply. He sold these shares at a heavy loss. Now he claims damages from the company for the loss suffered on the ground the prospectus issued by the company contained a false statement. Is his claim justified?

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Jeeba Aug. 16, 2018

The companies Act states that prospectus is any document that described or issued as a prospectus and includes a red herring prospectus or shelf prospectus or any notice, circular, advertisement or other document for inviting offers from the public for the subscription or purchase of any securities of a body corporate.

The prospectus and any statement therein has no legal binding either on the company or its directors, promoters or experts to a person who has not purchased securities in response to it.

Since Rahul purchased shares through the stock exchange open market which cannot be said to have bought shares on the basis of prospectus. So cannot bring action for deceit against the directors.

In the case of Peek Vs. Gurney, it stated that remedy for the damage will not be available to a person if he has not purchased the shares on the basis of prospectus.

With a view to issue shares to the general public a prospectus containing some false information was issued by a company. Rahul received copy of the prospectus from the company, but did not apply for allotment of any shares. The allotment of shares to the general public was completed by the company within the stipulated period. A few months later, Rahul bought 2000 shares through the stock exchange at a higher price which later on fell sharply. He sold these shares at a heavy loss. Now he claims damages from the company for the loss suffered on the ground the prospectus issued by the company contained a false statement. Is his claim justified?