Companies Act Section 388

Companies Act, Section 388: Provisions Relating to Expert’s Consent and Allotment in Prospectuses of Foreign Companies

Section 388 of the Companies Act, 2013, establishes safeguards regarding the use of expert statements in a prospectus issued in India by or on behalf of a company incorporated, or proposed to be incorporated, outside India. It also ensures that the prospectus binds applicants and issuers to certain statutory provisions concerning the allotment of securities.

To protect investors in India from misleading or unauthenticated statements attributed to experts in foreign company prospectuses.
To ensure that allotment procedures for securities offered through such prospectuses are subject to Indian legal requirements.
1. Restriction on Issue of Prospectus Without Expert’s Consent

No person is permitted to issue, circulate, or distribute in India any prospectus inviting subscription to securities of a foreign company (whether already incorporated or proposed to be incorporated, and whether or not it has a place of business in India) if:

The prospectus includes a statement purporting to be made by an expert (for example, a valuer, accountant, engineer, or legal adviser), and the expert has not given written consent to the inclusion of the statement in the prospectus in the form and context in which it appears.
The expert initially gave consent but withdrew it before the delivery of the prospectus for registration, or the prospectus fails to include a clear statement that the expert has given, and has not withdrawn, his consent.
Purpose of this requirement:
This ensures that investors can rely on expert opinions included in a prospectus, as such opinions must be expressly authorized by the expert. It prevents unauthorized or distorted use of an expert’s name or statement, thereby protecting both the reputation of experts and the interests of investors.

2. Prospectus Must Bind All Parties to Indian Legal Provisions

A prospectus for securities of a foreign company cannot be issued in India unless it has the effect that:

Every application for securities made in pursuance of the prospectus binds all parties concerned by the provisions of Sections 33 and 40, to the extent applicable. These sections, broadly speaking, deal with:

Section 33: Requirement that every form of application for securities must be accompanied by a prospectus that complies with legal requirements.
Section 40: Provisions relating to securities to be dealt with in stock exchanges, including mandatory listing requirements.
Impact: This ensures that foreign companies issuing securities in India through a prospectus are subject to the same rules of allotment and listing as Indian companies, maintaining a level playing field and safeguarding investor rights.

3. Meaning of “Statement Included in a Prospectus”

For the purposes of this section, a statement shall be deemed to be included in a prospectus if it:

Appears on the face of the prospectus itself, or is contained in any report or memorandum that is either incorporated in the prospectus by reference or issued along with the prospectus.
This broad interpretation prevents companies from avoiding liability by placing expert statements in “attached reports” or “background memoranda” instead of the main body of the prospectus. If the statement is presented to investors together with the prospectus, it is treated as part of the prospectus.