CORPORATE FRAUDS IN INDIA EMERGING ISSUES AND LEGAL PERSPECTIVE


India is witnessing corporate frauds which have created a lot of doubts in eyes of citizens who fear financial losses incurred to them because of other frauds.

Corporates are entities that are driven by the huge financial provision by Indian and overseas Banks for their operation however recently our country has witnessed huge Non-Performing Assets better known as NPA’s. Corporates take a huge load of money from financial institutions, however, they are not paid in return causing financial institutions to derail. This has caused fear in minds of people, such as “are these deposits safe?”

Government has made legal provisions to ease out some issues and save financial institutions from falling apart. Some of the listed scams in India are LIC/ Mundhra scam, which was the first major financial fraud of the independent India. Frauds continued with an alarming regularity thereafter in every decade – the infamous Harshad Mehta, Ketan Parekh, Sahara, Satyam scams, Vijay Mallya, Nirav Modi, DHFL and Punjab and Sindh Bank.

Frauds are investigated in India by Law enforcement agencies under Indian Penal Code, 1860. Corporates are dealt with The Companies Act, 1956 however it does not have separate definition of fraud. The Companies Bill, 2008 was the original legislative proposal to replace the Companies Act, 1956 based on Dr. J.J. Irani Committee Report. The Irani report did not have any recommendation for a provision like Section 447 dealing with frauds. It seems the intervening major corporate scandals of 2007-08 led the Parliamentary Standing Committee to recommend two new legislative changes. Henceforth, there are separate definitions of fraud under Section 447 of the Companies Act, 2013 (the Act) and Creation of the Serious Fraud Investigation Office (SFIO) under Section 212 of the Act to investigate those frauds.

Other major reform brought in 2016 was the Insolvency and Bankruptcy code which is considered as one of the biggest insolvency reforms in the economic history of India. This was enacted for reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons. There were laws which were ineffective and therefore insolvency and bankruptcy code was brought in. The previous laws revolved around Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act SARFAESI –for security enforcement and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) for debt recovery by banks and financial institutions. It also included Companies Act for liquidation and winding up of the company.

Now, Fraud in IPC Section 447 of the Act starts with words stating “without prejudice to any liability including repayment of any debt under this Act or any other law” which means without affecting adversely any other legal proceedings. In the context of the said section, it signifies that the proceedings initiated under Section 447 of the Act will not be barred, provided “they do not adversely affect an action or a proceeding relating to any liability.” This includes repayment of debt initiated under any other provision of the Act or any other law for the time being in force.


Section 447 of the Act has been invoked in a few recent corporate scandals which are still at different stages of trial. Given that it is a relatively new provision, there are no direct pronouncements on this provision so far either by NCLT or the High Courts or the Supreme Court (SC). Although, this provision has been invoked by the SFIO in a few recent corporate scandals.

Section 212(14A) introduced by the Companies (Amendments) Act, 2019 provides that if the SFIO report concludes that a fraud has taken place in a company due to which, any director, KMP or other officers have taken undue advantage or benefit in the form of asset, property or cash, then the Central Government can apply to the NCLT for appropriate orders concerning disgorgement of such asset, property or cash and also hold them personally liable without any limitation of liability.

SEBI has amended the SEBI (LODR) Regulations, 2015 with effect from October 08, 2020, to provide that in case of initiation of the forensic audit, (by whatever name called), the following disclosures shall be made to the stock exchanges by the listed entities namely “the fact of initiation of forensic audit along-with name of entity initiating the audit and reasons for the same (if available) and Final forensic audit report (other than for forensic audit initiated by regulatory / enforcement agencies) on receipt by the listed entity along with comments of the management (if any).”

This new requirement to report is without any materiality thresholds, which could cause high level of anxiety to the Audit Committee and Boards as any such disclosure could have a profound impact on the stock price of the company. In addition, a speculative reporting by the media may also create panic among the investor communities.

New laws and provisions will keep checks on corporates which can cause derailment of financial institution and other frauds. A safe haven should not be created for fraudsters who can manipulate the laws accordingly. A swift action for any manipulation by law enforcement agencies can eliminate wrongdoing and strict measure against corporates will not cause any hindrance for proper functioning of the system.

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