This article has been written by Ms.Taranjot Kaur, a 1st year law student of Panjab University,Chandigarh.
Introduction –
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. Corporate Fraud results in huge losses of public funds which they have entrusted to the company for better functioning. White-collar crimes are criminal actions carried out by wealthy men in society in an effort to make money the wrong way. This can take many different forms, including professional crime, fraud, tax evasion, bribery, counterfeiting, forging, and ad hoc crimes. 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. 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. 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.
Sections related to Corporate Fraud:
Section 447: Punishment for Fraud – This section of the Companies Act 2013 provides the legal framework related to the punishment of a person who has committed fraud against a company. It states that any person who is found to be guilty of fraud shall be punished with imprisonment for a period of up to 10 years and/or with a fine which shall not be less than the amount of fraud involved, but which may extend to three times the amount of fraud involved.
Section 447A: Punishment for False Statement -This section of the Companies Act 2013 states that if any person makes a false statement in any return, report or other document to be furnished to the registrar, he shall be punishable with imprisonment which may extend up to three years or with a fine which may extend to five thousand rupees or with both.
Sections 448, 449, 450: Punishment for forgery – These sections of the Companies Act 2013 deal with forgery offences against the company. Any person who is found guilty of forgery, either of the company’s documents or of any other documents falsifying the likeness of the company’s documents, shall be punished with imprisonment which may extend upto 7 years, along with a fine of five thousand rupees or thrice the amount of fraud involved, whichever is higher.
Section 517: Punishment for Non-Compliance of Orders of Central Government– This Section of the Companies Act 2013 provides the legal sanction and punishment for non-compliance of the orders of the Central Government in respect of fraud and misfeasance committed by any company. It states that any company or any officer of the company who is found guilty of non-compliance of the Central Government’s orders shall be liable to a fine which may extend to one lakh rupees and in case of continuing default, a further fine which may extend to five thousand rupees for each day during which such default continues.
Sections 542 to 548: Penalty for Non-Compliance of various Provisions of Companies Act – These sections of the Companies Act 2013 provide legal sanction and punishment for non-compliance of various provisions of the Companies Act by a company or its officers. Any officer who is found guilty of non-compliance of any of the provisions mentioned in the Companies Act shall be liable to a fine which may extend to five thousand rupees and, in the case of continuing defaults, to further fine which may extend to hundred rupees for each day during which such default continues.
Biggest Corporate Frauds –
Haridas Mundhra Scam – The Mundhra Scam was the first corporate scam that occurred in independent India. The story starts near about 1930s when a person is born in the small businessman house named Haridas Mundhra. The beginning of his profession started very well as he used to sell bulbs. Afterwards, he was addicted to money and his passion to earn money was always high which kept him attractive, he reached Mumbai around the 1950s. He reached Dalal Street where he sees how people with some thousands/lakhs make crores and therefore he started working himself as a jobber & rigger.While doing his work so well he started shares rigging. Haridas Mundhra was not only manipulating shares but also floating false shares. In 1957 Haridas earned 4 crore rupees. Later on he got six hot shares, some of the are- Angelo brothers and British India Corporation. After that he realised that if he wants to progress in India and he requires a political support. He knew that to maintain sentiments he has to bring huge investments and there is no one better than institutional investors other than LIC to do so. He took the help of politics and pressurised LIC to buy these five to six shares.The question was raised in the Rai Bareilly seat sitting in Parliament that why would someone invest in sinking company? There was lot of ruckus that time. But on 16th December 1957 Firoz Gandhi as per his investigative journalism proved by the confidential documents that T.T krishnamachari (Finance Minister) was involved in this. Haridas Mundhra was sentenced to 22 years of imprisonment and finance minister was told to resigned. The result of this scam was Around 55 lakhs investors who invested in LIC lost their money.
Satyam Scam – In 1987 with the group of ten engineers Satyam 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.
Conclusion –
Corporate fraud is a serious offence and it is increasing day by day.Corporate frauds and scams greatly erode corporate wealth. Corporate India as a whole has a vested interest in preventing and minimising corporate frauds and scams. Independent directors on audit committees provide one of the best ways of reinforcing internal audit and annual statutory audit. Their independence must be strengthened. With respect to incentives, in end executive compensation is about ethics and can only be sparingly controlled.The solutions to corporate fraud must be comprehensive and all encompassing. There must be more stringent laws under Sebi PMLA , Companies Act 2013 so that nobody can even think to do that.It is also very important that all the sections of Companies Act are properly complied with in order to protect the interest of investors and stakeholders from corporate fraud.
References –
Aishwarya Says:
The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.
If you would also like to contribute to my website, then do share your articles or poems to secondinnings.hr@gmail.com
Join our Whatsapp Group for latest Job Opening