Process is the key:
Investigation means, a formal inquiry or systematic study. The purpose of any investigation is to explore in detail the allegations, to examine the evidence in depth and to determine specifically whether such wrong has been committed, and if so, person responsible for such act. When such investigation is held in the corporate world it rarely hides from news bulletin, as it impacts the larger section of the society. The crimes committed by a corporation, or by individuals acting on behalf of a corporation or other business entity, it is known as corporate fraud. Corporate fraud refers to the activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company. Time after time, the ancient maxim, “Power tends to corrupt and absolute power corrupts absolutely” have proven its sanctity and applicability in the human society. When greed and self-assurance grow too strong or when the fear of getting caught disappears, truly staggering crimes can be perpetrated. From keeping billions of dollars in debt off the balance sheets to selling millions of dollars of stocks only days before a company posts a devastating loss, there is a wide array of corporate frauds that have forced the legal system to improvise and enact to prevent future crimes. But, as soon as laws are made, loopholes are found and inevitably widened.
“Ignorantia juris non excusat”
Section 210 of the Companies Act, 2013 empowers the Government to investigate into the affairs of the company.
1. ‘Where the central government is of the opinion, that it is necessary to investigate into the affairs of a company,-
a. On receipt of a report of the registrar or inspector under section 208;
b. On intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or
c. In public interest, it may order an investigation into the affairs of the company.
2. Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs of a company ought to be investigated, the central government shall order an investigation into the affairs of the company.
3. For the purpose of this section, the central Government may appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the central government may direct’.
It is crystal clear in the provision that, central government is the supreme authority on the corporate fraud investigations. In the year 2003, to fulfill its obligation under the Act, the Central Government established an office called, the Serious Fraud Investigation Office to investigate frauds relating to company. The sole purpose behind the establishment of SFIO was protection of interest of the investors. Investors are the real owners of the company but the power of management of the company is vested in the board of directors. There are chances to abuse of power like committing fraud, by few directors of the company. Therefore Central Government has established SFIO to deal specially with Investigation of corporate frauds, to prevent and catch such crimes.
THE POWER TO CURB:
The SFIO shall conduct the investigation in the manner and follow the procedure provided under Section 212. The company, its officers and employees, who are or have been in employment of the company, shall be responsible to provide all information, explanation, documents and assistance to the investigating officer as he may require for conduct of the investigation. Further, it provides that, notwithstanding anything contained in the Code of Criminal Procedure 1973, the offences covered under sub-sections (5) and (6) of S.7, S.34, S.36, S.38(1), S.46(5), S.56(7), S.66(10), S.140(5), S.206(4), S.213, S.229, S.251(1), S.339(3), S.448 which attract the punishment for fraud provided under Section 447 of the Companies Act, 2013 shall be cognizable and no person accused of any offence under these sections shall be released on bail or on his own bond unless it fulfills conditions provided under Section 212.
When a case has already been assigned to SFIO no other agency of the government has the authority to proceed to investigate an offence which committed under this Act. As per the notification by the Ministry of Corporate Affairs in August 17, powers of arrest have also been bestowed upon by the government. Though the powers of arrest have been made limited to the Director, Additional Director and Assistant Director who during the investigation of a serious fraud have a reason to believe that a person has committed an offence under Section 212, he may arrest such person on the prior written approval of the director of SFIO. In case of Investigation of a foreign company or a government company, the Director has a reason to believe to arrest a person, a prior approval of central government is necessary. On completion of the investigation, SFIO has to submit the investigation report to the Central Government and the copy of the report shall be sent to any person who demands the same. On receipt of report, the Government may direct the SFIO to initiate prosecution against the company, employees or officers or any person connected with the affairs of the company.
The Tribunal under the Act may, if satisfied that there are circumstances suggesting after the investigation that, the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose; persons concerned in the formation of the company or the management of its affairs have in connection there with been guilty of fraud, then, every officer of the company who is in default and the person or persons concerned in the information of the company or the management of its affairs shall be punishable for fraud in the manner as provided in Section 447 of the Act.
FAMOUS CORPORATE FRAUDS: Investigated
East Indian Company:
The East India Company was a Crown chartered trading company. It was owned privately but had a mandate to benefit the British State commercially and politically. First and foremost, the EIC was an agent of the Crown. It was first Multinational Corporation in the world that pursued investment opportunities as well as territorial power. EIC employees based in India sought commercial profits for themselves, the Crown and East India House; while they acquired Indian Territory aggressively on behalf of the Empire. In late 1700s Edmund Burke, Robert Clive, (the founder of the empire) and Warren Hastings, (India’s Governor General), brought up on impeachment charges laden with corruption issues. Though the trial failed to convict anybody, to achieve all of these ends, the EIC’s corporate conduct was inconsistent. Sometimes, the Company complied with ethical practice in safety and financial matters. At other times it readily engaged in economic theft and bribes, or breached civil liberties and human rights. The concept of corporate social responsibility was secondary to its interests. The company was subsequently wound up under East India Company Stock Redemption Act, 1874.
Mundhra Scam- First Scam of Independent India :
Haridas Mundhra, an industrialist and stock speculator sold fictitious shares to Life Insurance Corporation (LIC) and thereby defrauding LIC by 125 Crores. Mr. Jawahar Lal Nehru, (then Prime Minister), set up a one-man commission headed by Justice Chagla to Investigate. Justice Chagla concluded the matter and Haridas was found guilty and was sentenced to imprisonment of 22 years and T.T. Krishnamachari, (then Finance Minister) resigned from his position.
Satyam Scam:
SFIO investigated the Satyam scam and had opined in their report that the directors of the organisation were not involved in the accounting fraud. The SFIO had a 14,000-page report submitted to the government, marking the end of a three-month-long investigation. SFIO had investigated and interrogated the directors and opined that the fraud was done allegedly by the chairman and other top executives of the company. The Central Government, after it was admitted by the chairman that there is a fraud of around Rs.7,000 Crores at the company, and probe by SFIO was ordered into the scam. The independent directors came under scanner when Satyam said that the proposal of taking over two firms was taken unanimously, though the independent directors had given their disclosure before the SFIO that they had no knowledge of the same.
Deccan Chronicle Holding Ltd (DCHL):
This Hyderabad based company which owns two English daily newspapers namely Asian Age and Deccan Chronicle came under the scanner of SFIO which found it to be running in contravention of about 20 sections of the Companies Act which included those provisions having a punishment of imprisonment. The Deccan Chronicle later on registered with BIFR. But it did not suppress the lenders to take action against the company.
Harshad Mehta Scam Case :
The Harshad Mehta Scam shocked the entire economy of India. He fooled many investors by taking advantage of the loopholes of the system.
Scandal details
Harshad Mehta obtained fake Bank receipts from small Banks.
The said Bank Receipts were further passed on to other banks as security to obtain cash.
This money was used to drive up the prices of stocks in the stock market.
Bubble of stock market manipulation and fake bank receipts busted.
Drastically impacted the stock market, economy and progress of the country.
Banking system was swindled was swindled of a whopping of Rs. 5000 crores.
Even, the chairman of one of the bank committed suicide.
This scam can be called as one of the biggest white collar crime as the case was mainly regarding the manipulation of accounts and providing misleading information.
Sahara vs. SEBI:
It was a case of issuing misleading information and clause in prospectus of company.
Here the question raised that whether the private placement of shares can be treated as offer?
In this cases, Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) floated an issue of option of fully convertible debenture (OFCD’s) to more than million investors and termed their issued debenture as private placement, with a defence that the company did not intend to get their OFCD’s listed because the security which have been issued is a Hybrid Security.
During this period, the company had total collection of over Rs.17,656 Crores. This amount was collected from 30 million of investors.
The Hon’ble Supreme Court on 31st august, 2012 in one of the most anticipated judgment of recent times has directed the Sahara Group and its two group companies SIRECL and SHICL to refund around Rs.17,400 Crores to their investors within 3 months.
Supreme Court also ruled that SEBI has myriad powers to invest listed and unlisted companies functioning regarding the issue of securities in order to secure the interest of investors. This was the landmark judgment in the field of Indian corporate Law.
2G Spectrum Scam Cases:
2G scam was basically a telecommunication and a political scandal. In this scandal many Politicians were involved. The scam was about the allocation of unified access service license. The former telecom minister A Raja has evaded norms at every level and carried out the dubious 2G scam in the year 2008.
CONCLUSION:
Despite giving so much power by the Act, SFIO still has to face a lot of hurdles and challenges while performing their functions. For the reasons like, dependence on Central Government for accountability and information of an investigation, inadequate resources and manpower, the SFIO lacks in tackling the Corporate Frauds as effectively as it is expected. Other than Companies Act, there are many anti-fraud regulations and guidance regarding corporate frauds, viz., section 17 of the Indian Contract Act 1872, Section 25 of the Indian Penal Code 1860, Prevention of Corruption Act 1988, Prevention of Money Laundering Act, 2002, Clause 49 of the Listing Agreement, Securities and Exchange Board of India Act 1992, CARO Act 2003, section 6 of Essential Commodities Act 1955, section 43-44 of Information Technologies Act 2002. But, in this fast growing world of advanced technologies and greed fed corruptions, day by day it’s getting more challenging for the authorities to find the culprits and bring them to justice. Therefore, it is required to enact new regulations with changing time. After all, time change and changes everything with it.
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