An initial public offering, or IPO, is the first sale of securities by a company to the public. IPO involves the submission of a prospectus, which provides prospective shareholders with considerable information about the company. An IPO is likely to result in a large, diverse group of new shareholders. As this information is the main source based on which the prospective shareholders of the company make their investment decisions, it may become the basis for litigation if shareholders suffer losses on account of wrong statements, false proclamations and negligent pronouncements in the prospectus.

Prospectus discusses the objective of the issue, details of the offer, risk factors, management perceptions thereof and notes to risk factors, past financial statements, bio-data of the directors and key officers of the company, outstanding litigation, defaults, material developments and material contracts. Prospectus is the main source of information for intending investors.

For the purpose of POSI, the offering can be an IPO/ FPO/ Rights issue/ ADR issue/ GDR issue etc.
If due diligence is not exercised and adequate care is not taken in drafting the prospectus, it can lead to error, breach of trust and duty, misleading statement, act, omission or neglect. This has serious implications in terms of liability and punishment for those associated with the prospectus as per various  sections of the Companies Act 2013.

  • Section 34: Criminal liability for misstatements in prospectus.
  • Section 35: Civil Liability for Mis-statements in Prospectus
  • Section 36: Punishment for fraudulently inducing persons to invest money.
  • Section 37: Action by affected persons.
  • Section 245: Class Action
  • Section 447: Punishment for fraud

Liability may arise under different sections of Indian Contract Act 1872

If litigation takes place in other countries, the penal provisions as applicable in the relevant jurisdiction may be harsher.

It is possible to cover liabilities from some of the above exposures under a POSI policy for claims related to the offering document, statements made in the road shows and investor presentations.

POSI affords insurance protection to Directors, Officers & Employees of the Offering Company and the Offering Company itself against the liabilities arising out of the issue of the prospectus. Additional interested parties to the prospectus can also be covered:

  • The issuing underwriter.
  • Selling shareholders.
  • Controlling shareholders.
  • Advisors to the transaction.

The policy provides indemnity to the insured persons in respect of:

  • Legal costs in defending proceedings brought against them alleging wrongful acts.
  • Any damages awarded to the claimants against the insured persons including out of court settlement

Ideally, this insurance cover should be put in place before the road show to be conducted by the issuing Company.
As in the case of other insurance policies, this POSI policy also has extensions and exclusions which need to be clearly understood before the commencement of cover so as to avoid contract unpredictability.

(The information contained and ideas expressed herein represent only a general overview of subject covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisers regarding specific coverage and/or legal issues)