This article is written by Calista Chettiar, a Second-Year BA. LL.B. (Hons.) student from NMIMS, School of Law, Bangalore.
INTRODUCTION:
When one person or a group uses another’s name to buy stock in a company illegally, they are said to have “personified” those shares. For the same reason that insider trading, stock price manipulation, and other forms of financial wrongdoing are illegal, insider knowledge of company transactions is also outlawed by law. As a deterrence against such behavior, many nations have enacted laws and regulations making it illegal to pose as a shareholder. Such violations may result in monetary fines, jail time, or other legal consequences.
SECTION 57 OF THE COMPANIES ACT OF 2013:
Punishable by imprisonment for a term which shall not be less than one year but which may extend to three years and with fine, if a person falsely represents himself as the owner of any security or interest in a company, or of any share warrant or coupon issued pursuant to this Act, and thereby obtains or attempts to obtain any such security or interest, or any such share warrant or coupon, or receives or attempts to receive any money due to any such owner.
PUNISHMENT FOR PERSONIFICATION OF A SHAREHOLDER:
Personified shareholders are those who use the identity of another individual to purchase shares of a company fraudulently. This is illegal since it can lead to insider trading, stock price manipulation, and other forms of fraud. Criminal penalties for “personifying” a shareholder are included in India’s Companies Act of 2013. This article examines the consequences of misrepresenting a shareholder in India under the Companies Act of 2013.
Under a clause of the Companies Act, 2013, a person’s shares can be canceled if they are found to be guilty of “personification of a shareholder.” If the Central Government has reasonable grounds to suspect that a shareholder is serving as a dummy director or is retaining shares in the company for the interest of another, it may instruct the firm to renounce the shares after giving the shareholder a chance at being heard.
As part of its mission to eradicate fraud and unfair trade practices from India’s securities markets, the Securities and Exchange Board of India (SEBI) has established guidelines to prohibit the personification of a shareholder. Any violation of these terms may result in disciplinary action, which may include monetary fines, the return of illicit gains, or even imprisonment.
Keep in mind that these clauses can only accomplish their goals if they are strictly adhered to. Government and regulatory bodies need to keep an eye out for and strictly enforce compliance with these restrictions to prevent shareholder personification and other fraudulent activities in the securities market.
Finally, under India’s Companies Act of 2013, sanctions are harsh for anyone who impersonates a shareholder. Punishment could include incarceration, monetary fines, loss of stock ownership, or all three. Investors will be safeguarded by these regulations, and the stock market will continue to function fairly for everyone. Strong enforcement is necessary to make sure these rules are effective in preventing shareholder personification and other economic wrongdoing.
METHODS USED TO PREVENT AND DETECT THE PERSONIFICATION OF A SHAREHOLDER:
Businesses must take steps to detect and prevent shareholder personification in accordance with provisions of the Companies Act 2013. The following methods are included in the Companies Act of 2013 to help identify and prevent shareholder personification:
- Companies must conduct KYC to confirm the identification of their stakeholders as required by the Act. Documents like Aadhar cards, Permanent Account Number cards, passports, or driver’s licenses can be used to verify a shareholder’s identity and present residence. This helps find instances of shareholder personification and steer clear of them.
- The shareholding structure of a company should be reviewed regularly to spot any signs of manipulation or unusual trading behavior. As a result, suspicious stockholder activity or unusual trading patterns can be uncovered.
- Monitoring business transactions allows for the early detection of unusual patterns. This can be done by keeping an eye on transactions and digging through trading data for unusual patterns.
- Businesses must strictly comply with regulations pertaining to the prevention of the personification of a shareholder, as outlined in guidelines published by regulatory agencies like SEBI and RBI.
- The Act promotes the use of technology to avoid and identify shareholder personification. To avoid the establishment of fictional or fraudulent shareholders, businesses can employ technologies like blockchain to increase the visibility and security of shareholder data.
- When it comes to shareholder personification, companies must have a whistleblower process in place to encourage employees and stakeholders to disclose any illegal or unethical behavior.
- Businesses are obligated to perform frequent audits in order to identify any cases of shareholder personification. Companies can benefit from audits in identifying shareholder disparities and uncovering fake or fictional investors.
- Share Transfer Restrictions the Act imposes share transfer limits in specific circumstances, such as where the transferor is a fake or fraudulent shares
ROLE OF REGULATORY BODIES IN ENSURING COMPLIANCE WITH LAWS AND REGULATIONS:
Compliance with the Companies Act requires the establishment of regulatory bodies. The regulatory bodies are responsible for carrying out the provisions of the Companies Act that pertain to corporate governance and management. The Companies Act assigns the following duties to regulatory bodies:
- The Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) are two examples of regulatory authorities that draft rules and regulations for corporate activities. With these rules in place, businesses will have a better grasp of their legal obligations and responsibilities.
- Businesses are subject to inspections and audits by regulatory organizations to check for conformity with the Companies Act. Audits and inspections like these can assist authorities to find illegal activity and punish those responsibly.
- Penalties and fines can be imposed by regulatory organizations on businesses that break the rules set forth in the Companies Act. Companies are able to operate within the law because of the threat of fines and other consequences.
- Companies must register with regulatory organizations, who then verify that they meet all necessary criteria before being officially recognized. The promoters’ identities must be checked, and the company’s registered office and name must be checked for legality.
- Disputes arising under the Companies Act are to be resolved by regulatory authorities such as the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). These courts have the authority to enforce the law and consider cases involving corporate management and governance.
Finally, under the Companies Act 2013, personification of a shareholder is a serious infraction that can lead to fraudulent actions that damage the securities market. Personal impersonation of a shareholder is punishable by imprisonment and fines under the Act. The severity of the penalties serves as a deterrent to would-be wrongdoers and aids in keeping corporate stakeholders’ faith. Companies should implement measures such as know your customer (KYC) policies, regular scrutiny of shareholding patterns, monitoring of trading activities, strict compliance with regulatory guidelines, the use of technology, a whistleblower mechanism, regular audits, and restrictions on the transfer of shares to prevent and detect personification of a shareholder. Businesses must comply with the rules of the Companies Act, and regulatory organizations like the Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI) enforce penalties and fines for those that don’t. We can stop fraudulent acts involving the personification of shareholders by strictly enforcing the legal framework and keeping the corporate sector honest.
REFERENCES:
https://ca2013.com/punishment-for-personation-of-shareholder/
https://blog.ipleaders.in/punishments-under-the-companies-act/