Section 36 of Companies Act, 2013: How the Law Protects Investors from Fraud

Understanding Why Section 36 Exists at All

Money moves on trust.
Whether it’s an investor putting funds into a company or a bank extending credit, decisions are usually based on what the company says about itself. Numbers. Projections. Promises.

That’s exactly where things can go wrong.

The Companies Act, 2013 recognised this risk early on. And that’s why Section 36 of Companies Act, 2013 exists. Its purpose is simple, really. If someone induces another person to invest, buy securities, or grant credit using lies, half-truths, or reckless claims, the law steps in. Hard.

Section 36 is not about technical non-compliance. It’s about fraudulent inducement. Deliberate or reckless behaviour that pushes someone into a financial decision they may not have taken if the truth was known.

What Section 36 of Companies Act, 2013 Actually Deals With

At its core, Section 36 criminalises misleading conduct connected to investments and borrowing.

If a person:

• knowingly makes a false statement,

• recklessly provides incorrect information, or

• deliberately hides material facts

and that behaviour induces someone to invest in a company, purchase securities, or provide loans, then Section 36 gets triggered.

What’s important here is the scope. It is wide. This section does not protect only shareholders. It also protects lenders, creditors, and anyone entering into financial arrangements based on company information.

And no, it’s not limited to directors alone.

Who Can Be Held Liable Under Section 36

This is where many people get uncomfortable.

Liability under Section 36 of Companies Act, 2013 extends to:

• Directors

• Promoters

• Managers

• Officers

• Any person involved in investor communication

So if someone is pitching, presenting, issuing documents, or even casually communicating misleading facts that influence a financial decision, they can be pulled into the net.

The law does not care about job titles. It cares about conduct.

Fraudulent Inducement – Not Always Loud, Sometimes Silent

Fraud is not always dramatic.

Sometimes it’s exaggerated growth projections.
Sometimes it’s conveniently ignoring liabilities.
Sometimes it’s optimism presented as certainty.

Section 36 recognises that fraud can be subtle. That’s why even reckless misstatements or concealment of material facts can attract liability.

Silence, when disclosure is required, can be just as damaging as a lie.

Penalties and Punishment Under Section 36

The consequences are serious. As they should be.

Violation of Section 36 can lead to:

• Imprisonment, depending on the gravity

• Monetary fines on individuals and companies

• Regulatory restrictions affecting operations

This is not a slap-on-the-wrist provision. It’s meant to act as a strong deterrent. The idea is simple. If misleading investors becomes risky, fewer people will attempt it.

How Section 36 Plays Out in Real Life

This section is not theoretical. It is used.

There have been cases where companies issued misleading prospectuses, projecting unrealistic revenue growth just to attract funding. When numbers didn’t add up and complaints surfaced, authorities invoked Section 36.

In other situations, companies hid significant liabilities while negotiating loans. Once auditors flagged inconsistencies, directors were questioned. The defence of “oversight” didn’t hold when facts showed conscious concealment.

The message is clear. Paper trails matter. Statements matter.

Investor Protection Is the Heart of Section 36

Everything about Section 36 of Companies Act, 2013 revolves around one thing.
Informed decision-making.

Investors and lenders must have access to:

• Accurate financial statements

• True disclosure of assets and liabilities

• Clear risk factors

• Honest terms of investment or credit

When information is clean, disputes reduce. Confidence improves. Markets function better. Section 36 quietly supports all of that by punishing dishonesty.

Practical Compliance – What Companies Should Actually Do

Compliance is not complicated, but it requires discipline.

Companies should:

• Cross-verify all figures in prospectuses and presentations

• Disclose material risks honestly

• Avoid aggressive or unrealistic projections

• Conduct internal legal reviews of investor-facing documents

• Train senior management on liability exposure

Most Section 36 issues arise not from intent alone, but from carelessness mixed with pressure to raise funds quickly.

Common Mistakes That Trigger Section 36

Some patterns appear again and again:

• Inflated revenue forecasts

• Suppressed liabilities

• Vague risk disclosures

• Misrepresentation while obtaining loans

None of these age well. Once money changes hands and expectations are unmet, scrutiny begins. And Section 36 waits quietly in the background.

Impact on Corporate Governance

Section 36 indirectly improves governance.

When directors know they can be personally questioned for misleading statements, decision-making becomes more cautious. Documentation improves. Internal checks get stronger.

Good governance is not just ethics. It’s self-preservation.

Final Thoughts

Section 36 of Companies Act, 2013 sends a very clear signal.
Raising money comes with responsibility.

If you speak, speak truthfully.
If you project, project carefully.
If you omit, make sure it’s not material.

Trust, once broken, is expensive to repair. This section exists to prevent that damage before it spreads.

Need help reviewing investor documents or ensuring compliance under Section 36?

Get professional, practical guidance at Callmyca.com — because prevention is always cheaper than penalties.