This article has been written by Ms. Ritika Goel, a 2nd year LLB student from Faculty of Law- Delhi University.

INTRODUCTION-

The Companies Act 2013 deals with provisions relating to corporate fraud. According to section 447 of the Companies Act, 2013 any person who is found guilty of fraud shall be punishable with imprisonment of a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to the three times the amount involved in the fraud.

Corporate fraud consists of illegal, deceptive actions committed either by a company or an individual through highly qualified accounting techniques which is used to inflate a company’s apparent profits and may take years to detect. In addition, these paper attempts to identify the cause and effects of fraud on the stakeholder of the business. This Article gives us the idea about the financial scams and development of judiciary on day-to-day basis. It basically means illegal practices undertaken by a corporate or an individual person to make a tremendous profit and to have an edge over another. Corporate Fraud results in huge losses of public funds which they have entrusted to the company for better functioning. 

MEANING-

Corporate Fraud refers to the illegal and unethical activities undertaken by any company or individual which is mostly done to gain a competitive advantage over other corporations in the industry. This may also be done to showcase a better identity of the company in the market in order to attract better investors also.

White collar crimes are illegal acts committed by high class men of the society in order to achieve profits in a wrong way. This can be done in various forms such as ad hoc crimes, bribery, embezzlement, counterfeiting, forgery, tax evasion, professional crime, fraud, etc. 

This aims to go beyond the scope of powers of an employee which extends to complex and economic impact not only on the business but also on employees and other outside parties. Such dishonest activities lead to loss of revenue through theft of assets, false expenses, corruption and theft of information, fraudulent applications, and misuse of assets, dishonest business partners and fraudulent billings.

TYPES OF CORPORATE FRAUD-

There are several types of corporate frauds which can be committed by various means. However, the most common types amongst them are Financial Frauds, Misappropriation of Assets, employee fraud, vendor fraud, customer fraud and investment scams.

1. Financial Misappropriation:
   Misappropriation of payments, Fudging the books of Account, misleading the investors to invest by rapidly increasing the share price.
2. Misappropriation of Assets:
   Embezzling receipts, stealing physical assets, intellectual property rights, Dummy payments using an entity asset for personal use.
3. Corruption:
   Making or receiving improper payments, offering bribes to public officials or private officials, Abetting, taking political support to commit fraud.

Other types of frauds are related to payment, false accounting, procurement, information, insolvency and bankruptcy related frauds, theft of cash, physical assets or confidential information, misuse of accounts, procurement fraud, payroll fraud, financial accounting mis-statements, inappropriate journal vouchers, suspense accounting fraud, fraudulent expense claims, false employment credentials, bribery and corruption.

PENALTIES UNDER VARIOUS STATUTES

Section 447 of the Companies Act 2013 prescribes the punishment for fraud which shall range from 6 months to 10 years along with fine which may extend to three times of the amount involved in fraud. Section 36 of the said act is also important in that regard which prescribes punishment for fraudulently inducing persons to invest money. In addition to these, Sections 448-451 and 454 also deal with various penalties and punishments related to corporate fraud.

Under the Prevention of Money Laundering Act 2012, punishment is extended to an imprisonment from 3 to 7 years with a fine up to 5 lakh rupees.

Section 66F (Acts of Terrorism) of the Information Technology Act 2002 extends the punishment to be up to life imprisonment which endangers the unity, integrity, sovereignty or security of India by denying access to authorized personnel to a computer resource or tries to access a protected system or introduces any contamination into a system. Other regulatory legislations are Indian Contract Act 1872, Indian Penal Code 1860, Prevention of Corruption Act 2013, Information Technology Act 2008 and Prohibition of Insider Trading.

The Biggest Corporate Frauds in India

The following are the biggest corporate frauds in India:

• The Mundhra Scam was the first corporate scam that occurred in independent India. An entrepreneur named Haridas Mundhra invested Rs. 1.24 crores in government-owned LIC insurance from six different businesses in 1957. He committed this crime as a result of undue government pressure, and the LIC suffered significant financial loss. When Feroze Gandhi launched an anti-corruption drive and the Parliament approved the Life Insurance of India Act, nationalizing and consolidating businesses, the controversy took a bizarre turn. After the Parliament raised the Mundhra issue, Feroze Gandhi confronted Pt. Jawaharlal Nehru, who was India’s then-prime minister.
  He questioned if the LIC had utilized policyholder premiums to purchase shares of these Mundhra-controlled enterprises beyond their market value. A former Bombay High Court judge named M.C. Chagla J. was asked to investigate the claims in order to corroborate them. Several stockbrokers testified during a public investigation that Mundhra’s falsification would have been taken into account if the LIC investing committee had been contacted. The investigation of the finance secretary and two other officials were then decided to be necessary. However, despite his best efforts to avoid the situation, the previous financial minister was ultimately forced to retire from his position. This event resulted in significant losses for the Nehru government. As a result, Haridas Mundhra, who was also charged with additional offenses like failing to pay income tax on time, was taken into custody.

• Satyam Scam: In 1987 with the group of ten engineers he formed Satyam Computers. In 1988 he incorporated Maytas Infrastructure where he got more than 150-180 clients. The moment Y2K name and fame started fading, Ramalinga Raju realized that money will not come like this. The listing was done in 2001. Ramalinga Raju incorporated 340 small companies with CA. They used to circulate money through this and buy property of Maytas and they also created many fake accounts for circulation. The problem came from the Lehman Brothers Crisis in 2008 of United States. Due to this there was depression in real estates and it spread globally. The lands they were buying at 30k per square foot have dropped to half the price. In Satyam the entire MIS (Management Information System) was fudged as it was made entirely by Raju.
  Infrastructure Companies was in depression. Ramalinga planned Satyam to overtake Maytas Infra and constructions. He thought that if he do so than it will fill the gap. The compliance of the shareholders permission was not made which made shareholders very disturbing and they denied the overtake. He tried every aspect possible to overcome such harm but there was no way out left so finally he decided to write a letter and confess about the scam. The current position of Satyam Computers is it is merged with Tech Mahindra.

• The most significant of them is the PNB Crisis, in which Neerav Modi obtained a loan from a foreign bank using a forged letter of understanding from PNB and promised to pay it back if he missed the payment. There were 8 separate fraudulent and deceptive Letters of Understanding used. There were 11 crores of rupees worth of loans obtained between 2011 and 2017. These foreign banks were in fact branches of Indian banks that had expanded abroad. These banks then turned to PNB for reimbursement, but PNB informed them that all of the Letters of Understanding were bogus. Fraud was perpetrated, and CBI was notified of the situation. In this fraud, counterfeit letters of the agreement also included bank employees. In this instance, two officials and their families were involved. Neerav Modi, therefore, travelled abroad when the scandal occurred. Vijay Mallya fled the country as well after being charged with fraud and money laundering. In order to prevent the collapse of his Kingfisher airlines, he accepted loans totalling Rs. 9,000 crores. The Fugitive Economic Offenders Act also applies to him.

Opinion of the Judiciary upon Corporate Frauds in India

The following are the Opinion of the Judiciary over Corporate Fraud in India:

• The Supreme Court stated in Vimla v. State of NCT, Delhi that the concept of deception is a crucial component of fraud, although it did not go into great detail. Deception and harm to the individual who was duped are two components of the term “defraud.” Injury includes any harm committed to a person’s health, intellect, reputation, or any aspects of their personhood other than economic loss, which is the deprivation of property, whether it be mobile or immovable, or of money. A gain or advantage for the deceiver nearly always results in a loss or disadvantage for the victim. The second requirement is met even in uncommon situations where the misled receives a profit or advantage without also suffering a comparable loss.
• The petitioner in Vikas Agarwal v. Serious Fraud Investigation Office was called to court on charges of criminal conspiracy and violating Section 447 of the Companies Act, 2013. It was claimed that the company’s mining operations were unlawful. It was also given an unsecured loan through trust. In this case, the Supreme Court said that the definition of fraud given in the explanation section 447 of the Companies Act, 2013 makes it apparent that the instance and also to other people who have in any way participated in the conduct of the offense to obtain an unfair advantage.

Most recent developments regarding Corporate Fraud in India

With Effect From October 8, 2020, SEBI Has Revised The SEBI (LODR) Regulations, 2015 To Stipulate That In The Event That A Forensic Audit Is Initiated, Listed Businesses Must Make The Following Disclosures To Stock Exchanges:

• The Fact That a Forensic Audit Was Initiated, The Identity of The Originating Organization, And Any Available Justifications;
• Final Forensic Audit Report (Apart from Those That Were Requested by Regulatory or Enforcement Authorities), Upon Receipt by The Listed Business, Together with Any Management Comments.

The Audit Committee and Boards May Experience Considerable Concern as A Result of This New Reporting Requirement’s Lack of Any Materiality Standards Because Any Such Disclosure Might Have a Significant Impact on The Company’s Stock Price. Additionally, Speculative Media Coverage Might Incite Fear Within the Financial Community.

CONCLUSION-

Lawmakers and regulators appear to be concerned about a number of recent business scams. The Audit Committees and the Corporate Boards are concerned about the tightening of Sections 447 and 212 of the Act as well as the addition of fraud to the list of crimes covered by the PMLA. Independent directors’ already frazzled nerves have been exacerbated by strict bail terms, asset forfeiture clauses, provisions for compensation, and limitless personal culpability for directors. The attention of regulators and law enforcement authorities is shifting more and more toward criminal prosecution. Every time the Audit Committee receives a whistle-blower complaint, SEBI’s new reporting to stock exchange requirement, even the start of a forensic audit, may cause further issues.
Before accepting new board posts, independent directors now want to do an extensive due diligence investigation into the compliance and governance requirements of a company. India Inc. is gradually becoming accustomed to the new standard.

REFERENCE-

1. SFIO v. Rahul Modi fraud investigation under Section 212(1) of the Companies Act 2013 was directed into the affairs of Adarsh Group of Companies and LLPs.
2. Neeraj Singhal v. Union of India and Ors. the petitioner was taken judicial custody before such investigation could be carried out under Section 212(1)(c) into the affairs of Bhushan Steel Limited and Bhushan Steel and Power Limited.
3. Sunair Hotels Ltd. v. Union of India & Anr. an investigation was ordered to be carried into the affairs of Petitioner in the interest of public under Section 212(1)(c) of the Companies Act 2013.

Aishwarya Says:

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