Section 35 of Companies Act. Civil liability for mis-statements in prospectus.

“ (1) Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who-

(a) is a director of the company at the time of the issue of the prospectus;

(b) has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time;

(c) is a promoter of the company;

(d) has authorised the issue of the prospectus; and

(e) is an expert referred to in sub-section (5) of section 26, shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.

(2) No person shall be liable under sub-section (1),if he proves-

(a) that, having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or

(b) that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

(3) Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in subsection (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.”

Precedent pertaining to Section 35 of Companies Act – P.N.B Housing Finance Ltd. v. Karam Chand & Ors.–
PNB Housing Finance was the allegation by the SEBI against PNB Housing Finance and 12 individuals that PNB Housing Finance had violated the norms in preferential securities issuance to US-based Carlyle Group and a deal with Carlyle Group was scrapped later. The housing finance player, part of state-owned Punjab National Bank, and the 12 individuals, who were directors of the company as of May 31, 2021, jointly paid Rs 72.76 lakh towards settlement.

The amount includes Rs 44.26 lakh as legal costs, the Securities and Exchange Board of India (Sebi) said in an order on Tuesday.

The order came after PNB Housing Finance along with its directors approached Sebi proposing to settle the alleged violations of LODR (Listing Obligations and Disclosure Requirement) rules in the Carlye Group case “without admitting or denying the findings” through a settlement order.