This article has been written by Bhavana Nair, a student of Army Institute of Law, Mohali

Introduction 

For a company to function and expand, capital is necessary. It is essential for companies to raise capital in the appropriate amount, in the right form, at the right time, and at the right price in a competitive and rapidly evolving business climate. Therefore, flexibility is required to manage capital dynamically and enable capital reallocation between firms. A wide range of financial instruments must be usable in the context of a streamlined statutory and regulatory framework in order to provide quicker access to capital and better capital management. Such a framework ought to give issuers who meet the requirements more flexibility and enable the operation of a market for the acquisition of corporate control.

However, issues pertaining to the management and maintenance of capital are as crucial. As a result, the law should effectively address ownership rights by enabling proper registration of ownership, the transfer of shares, the exercise of voting rights, an equitable division of company profits, and participation in decision-making based on reporting requirements that enable corporates to conduct their financial operations in a transparent manner. It should also make it easier to prevent managerial entrenchment, disclose genuine control structures, and restrict insider trading. We believe that in order to ensure the legitimacy of corporate operations in the eyes of the stakeholders, worldwide best practises should be modified to the Indian context.

Punishment for Fraudulently Inducing Persons to invest money

Any person who intentionally hides any material facts or makes false, fraudulent, or misleading statements, promises, or forecasts in order to induce another party to enter into, or propose to engage into —

1. any agreement for, or with a view to, purchasing, selling, subscribing to, or underwriting securities;
2.  any arrangement whose actual or purported goal is to ensure that one party makes money from the yield on securities or from changes in the value of securities; or
3. Any agreement for or with the intention of obtaining credit facilities from a bank or other financial institution is subject to section 447 enforcement.

With the exception of sub-part (c) of section 36, which is a new company law jurisprudence that hasn’t been properly explored, section 36 of the new Companies Act, 2013, is nearly a carbon copy of section 68 of the previous Act of 1956. Here, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 And The Securitization And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 are combined to create additional remedies for banks and/or financial institutions to recover their debts from the companies.

As per Section 35, when a person purchases securities from a company based on a deceptive statement, or the inclusion or absence of any information in the prospectus, and suffers loss or harm as a result, the company and everyone who—

1. serves as a director of the company at the time the prospectus is released;
2. has authorised himself to be named and is listed as a director of the company in the prospectus, or has consented to become such a director, either immediately or after a certain amount of time;
3. active promoter of the business;
4. has approved the prospectus’ issuance; and
5. is an expert as defined in Section 26 subsection (5).

shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to every person who has sustained such loss or damage.

Any person, group of people, or association of people who have been harmed by a misleading statement or the inclusion or absence of any matter in the prospectus may file a lawsuit or take any other legal action under Sections 34, 35, or 36, according to Section 37.

Fraud under Companies Act 2013

Since a person who fraudulently induces another person or an entity to invest money is to be liable under Section 447, it is important to understand Section 447 in detail. 

The definition of fraud and the penalties for perpetrating fraud are both provided under Section 447 of the Act. Fraud is defined inclusively as under: “Fraud in relation to affairs of a company or any body corporate includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.” 

The term makes it clear that not all actions, omissions, falsifications of information, or positional misuse will result in fraud. The actions, omissions, falsification of information, or misuse must be done with the intent to deceive, obtain an unfair advantage, harm the interests of the company, its shareholders, creditors, or any other person in order to be considered fraud. Thus, the idea of mens rea is introduced. Further, whether or not such actions, omissions, concealment of information, or abuse of power result in “wrongful gain” or “wrongful loss” would still constitute fraud; that is, it is crucial that the crime was committed with that goal rather than the outcome. 

“Wrongful gain” is defined as a gain made through illegal means from property to which the person making the gain has no legal claim. In a similar vein, “wrongful loss” has been defined as the illegal loss of property to which the losing party has a legal claim. As a result, for something to be considered fraud, the following conditions must be met: 

1. there must have been some kind of act, omission, concealment of fact, or abuse of position; 
2. these acts, omissions, concealment of fact, or abuse of position must have been motivated by mens rea; and 
3. Regardless of whether they led to “wrongful gain” or “wrongful loss,” they were unlawful. 

The word “person” is used in the definition of fraud, giving it a fairly broad scope. This means that it refers to anyone involved in the business affairs of the company, not just a certain set of officials, directors, or employees. Therefore, he will be guilty of committing fraud regardless of who that person is as long as they do so in the context of the company’s affairs and fall within the definition of fraud.

Judges have considered the phrase “intent to deceive” in light of Section 463 of the IPC. In the case of Vimla v. State, it was determined that while the concept of deceit is a fundamental component of fraud, it does not exhaust it. Deception and injury to the one who was deceived are two components of the term “defraud.”

The offence under Section 447 of the Act is cognisable, non-bailable and non-compoundable.

Punishment for fraud 

The Act has created harsh penalties for those who are found guilty of fraud. Fraud is a crime punishable by a minimum of six months in prison and a maximum of ten years in prison if it involves at least INR 10 lakh or 1% of the company’s annual turnover, whichever is lower. The amount of the fine cannot be less than the amount of the fraud and cannot be greater than three times the amount of the fraud. However, the sentence must not be shorter than three years if the fraud in question involves the public interest.

For instance, if fraud is perpetrated by the omission of information from the prospectus of an initial public offer with the intention of misleading the public shareholders, the minimum sentence will be three years because it involves a matter of public interest.

In a similar vein, it may be argued that public interest is at stake when a private limited company obtains bank financing based on fraudulent financial statements because the lending bank had taken public deposits. As a result, both the private limited company and those involved in this case would be found guilty of fraud, punishable by a minimum of three years in prison. In addition to term of imprisonment, there is also a fine that is equal to the amount involved in the fraud and that can go up to three times that amount.

It is important to highlight that, in cases where the new Act mandates debt repayment, the penalty for fraud is in addition to any other liability specified by the new Act, including debt repayment. This means that in addition to the penalties specified for fraud under Section 447, the individual who commits fraud must also bear that other liability. For instance, Section 75, which governs the repayment of deposits to the public, stipulates that each officer of the company who was in charge of accepting the deposit will be personally liable in addition to the company’s liability under Section 447 if the deposit is not repaid in full or in part within the time frame specified and that the deposit was accepted with the intent to defraud the depositors or for any other fraudulent purpose. As a result, these officers will be responsible for both their personal liabilities and their Section 447 liabilities. According to Section 447, any other liability specified by the New Act is in addition to the punishment for fraud provided therein.

According to Section 446A of the Act, the Court must take into account the following five factors before determining the appropriate fine or sentence: (a) the size of the company; (b) the type of business it conducts; (c) harm to the public interest; (d) the nature of the default; and (e) whether the default has been repeated.

Conclusion 

The law makers and regulators appear to be concerned about a number of recent business frauds. The PMLA’s inclusion of fraud as a crime and the Act’s tightening of Sections 447 and 212 have concerned the Audit Committees and Corporate Boards. Independent directors’ already frazzled nerves have been exacerbated by strict bail terms, asset forfeiture clauses, claw back provisions for compensation, and unlimited personal culpability for directors. The attention of regulators and law enforcement authorities is shifting more and more toward criminal prosecution.

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