COMPANY LAW PROJECT

AMITY UNIVERSITY

AMITY LAW SCHOOL-1

TOPIC: CONCEPT OF CORPORATE FRAUD UNDER THE

COMPANIES ACT, 2013
SUBMITTED BY:
AKSHEETA MEHTA

A3211114049

B.A,LL.B(H)

SECTION – A

ACKNOWLEDGEMENT
I Aksheeta Mehta of B.A,LL.B(H) with Enrollment number A3211114049 would like to

express my special thanks of gratitude to my teacher Mr. Rituraj Sinha who gave me the golden

opportunity to do this wonderful project on the topic concept of corporate fraud under the

companies act, 2013 which also helped me in doing a lot of Research and I came to know about

so many new things. I am really thankful him.

 WHAT IS CORPORATE FRAUD?

In the backdrop of several corporate scams, there was widespread criticism that the Companies
Act, 1956 (“Old Act”) did not adequately cover detection, prevention and punishment of corporate
frauds. The Old Act did not explicitly elucidate the concept of ‘fraud’. It did not provide for an
effective investigation mechanism. It did not provide for stringent punishment. To address these
shortcomings and effectively deal with corporate fraud, the new Companies Act, 2013 (“New Act”)
introduced certain new provisions and modified old provisions. Though it is widely believed that
these new provisions will address the growing problem of corporate fraud, they are yet to be
tested.

DEFINITION OF FRAUD

One of the salient features of the New Act is that, it provides for a definition of the term ‘fraud’.
Explanation to Section 447 of the New Act defines ‘fraud’ 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."

This definition is not an exhaustive definition; rather it is an inclusive definition. It leaves

necessary scope for the courts to cover other commission/omission within the ambit of the
definition. Further, the term ‘any person’ used in the definition gives it a wide coverage to include
any person who has committed the fraud, instead of restricting it to certain officers, directors or
employees of the company.

PUNISHMENT FOR FRAUD

The New Act has introduced stringent punishment for the persons who are found to be guilty of
fraud. Under Section 447 of the New Act any person, who is found to be guilty of Corporate
Fraud under the Companies Act, 2013 A study and critical analysis of provisions relating to
fraud under the new Companies Act, 2013 ,fraud, shall be punishable with imprisonment for a
term which shall not be less than six months but which may extend to ten years. The offenders
are also additionally liable to pay fine which shall not be less than the amount involved in the
fraud, but which may extend to three times the amount involved in the fraud. Moreover, where
the fraud in question involves public interest, the term of imprisonment cannot be less than three
years. The offence under Section 447 of the New Act is cognizable, non-bailable and non-
compoundable.
Section on 447 of the Companies Act, 2013 often now referred as one of the draconian section
of the new Act deals with provision relating to punishment for fraud. It reads as : “Without
prejudice to any liability including repayment of any debt under this Act or any other law for
the time being in force, any person who is found to be guilty of fraud, shall be punishable with
imprisonment for a term which shall not be less than 6 months but which may extend to 10
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 3 times the amount involved in the fraud: Where the fraud in
question involves public interest, the term of imprisonment shall not be less than 3 years”.
Companies Act, 2013 has provided punishment for fraud as provided under section 447 in
around 20 sections of the Act e.g. u/s 7(5), 7(6), 8(11), 34, 36, 38(1), 46(5), 56(7), 66(10), 75,
140(5), 206(4), 213, 229, 251(1), 266(1), 339(3), 448 etc. for directors, key managerial
personnel, auditors and/or officers of company. Thus, the new Act goes beyond professional
liability for fraud and extends to personal liability if a company contravenes such provisions.

PUNISHMENT FOR OTHER OFFENCES

One of the distinct features in the New Act is that the punishment under Section 447 of the New
Act is not only applicable to the cases of fraud, but also to various other offences as specified in
about fifteen distinct provisions of the New Act. Some of these provisions found place in the
Old Act as well; however, each offence was punishable with distinctive punishments. Below is
a comparative table of provisions/offences under the New Act having punishment as per Section
447 of the New Act with the corresponding sections and punishment under the Old Act
OFFENCE OF FRAUD NON- COMPOUNDABLE As the punishment for Fraud is both
imprisonment and fine, it is considered a non-compoundable offence. It shows that, the
commission of Fraud has become a serious offence in the eyes of law. The Act has provided
punishment for fraud under section 447 and around 20 sections of the Act talk about fraud
committed by the directors, key managerial personnel, auditors and/or officers of company.
Thus, the new Act goes beyond professional liability for fraud and extends to personal
liability, if a company contravenes such provisions. Here, the contravention of the provisions of
the Act with an intention to deceive are also considered as fraud, to name a few acts amounting
to fraud:-

1. Furnishing of false information at the time of incorporation of company by promoters,

first directors or any other person – Sec 7(5)&(6)
2. Managing the affairs of the non-profit company fraudulently – Sec 8(11)
3. Misrepresenting any material information in prospectus – Sec 34
4. Inducing any person fraudulently to invest money – Sec 36
5. Making of applications for acquisition of any securities in fictitious names – Sec 38(1)
6. Issue of duplicate shares of company with intent to defraud or deceive – Sec 46(5)
7. Transfer of any shares by depository or depository participant with an intent to defraud,
deceive any person – Sec 56(7)
8. Concealment of name or misrepresenting the amount of claim knowingly of any creditor
– Sec 66(10)
9. Failure to repay deposit with intent to defraud depositor -Sec 75(1)
10. Furnishing of false statement, mutilation, destruction of secretarial documents – Sec 229
11. Conducting business to defraud its creditors, members or any other person – Sec 213
(proviso)

FRAUD REPORTING UNDER THE COMPANIES ACT, 2013 Section 143(12) to 143(15)
of the Act contain provisions relating to reporting of Fraud, where the statutory auditor (who is
appointed as per Section 139 of the Act), cost auditor who is appointed as per Section 148 of the
Act) and the secretarial auditor (who is appointed as per Section 204 of the Act) are responsible
to detect Fraud. In the event of detection of any Fraud, they have to first inform the Board of
Directors and then to the Central government. Fraud Reporting is defined in Section 143 (12)
of the Act as “notwithstanding anything contained in this section, if an auditor of a company, in
the course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or employees
of the company, he shall immediately report the matter to the Central Government within such
time and in such manner as prescribed under the Companies (Audit & Auditors), Rules ,
2014.” Section 143 (13) : No duty to which an auditor of a company may be subject to shall be
regarded as having been contravened by reason of his reporting the matter referred to in sub-
section (12) of Section 143 of the Act if it is done in good faith. Section 143(14): The
provisions of this section shall mutatis mutandis apply to—

a. the cost accountant in practice conducting cost audit under section 148; or
b. the company secretary in practice conducting secretarial audit under section 204.

Serious Fraud Investigation Office The New Act empowers the Central Government to
establish an office to be called the Serious Fraud Investigation Office (SFIO) to investigate
frauds relating to a company. Though SFIO had been set up by the Central Government by
way of a resolution in 2003 itself, it attained a statutory recognition only under this Act.
SFIO, under the New Act, will have more powers, including the power to arrest.

(a) Same punishment for distinctive offences As mentioned above, various offences which
had distinctive punishments will now be punishable under one provision, i.e. Section 447 of
the New Act. Though some of these offences could be interrelated with each other, it cannot
be said forthrightly that these offences are similar in nature. Visibly, there is no coherent
reasoning as to why all these

offences are required to be punished under Section 447 of

the New Act with such stringent punishment, particularly when definition of ‘fraud’ itself gives
a wide coverage. This could possibly lead to overlapping of offences and thereby cause
confusion. (b) Investigation by other agencies Section 447 of the New Act provides that a
person will be held liable for ‘fraud’ under the Section ‘without prejudice to any liability
including repayment of any debt under this Act or any other law for the time being in force’.
Though it appears that the intention is to ensure that a person who is punished under Section
447 of the New Act is not absolved of his liability of repayment of any debt, use of the terms
‘including’ and ‘any other law’ may lead to a possible ambiguity. Given a literal interpretation
of this clause, a person can be held liable under Section 447 of the New Act as well as any other
provision of law. For example, this could mean that, if a person commits an act which falls
under Section 447 of the New Act as well as Section 420 of the Indian Penal Code, 1860, then
he could be prosecuted under both the provisions separately and simultaneously. Though
Section 212 of the New Act provides that where any case has been assigned by the Central
Government to the SFIO for investigation under the New Act, no other investigating agency of
Central Government or any State Government shall proceed with investigation in such case in
respect of any offence under the New Act, it could lead to possible confusion in the scenarios
where: (i) other investigating agency investigates the same act/omission which is also an
offence under a different Act, and (ii) other investigating agency investigates offences under the
New Act combined with few other offences under a different Act. These provisions might create
confusion, particularly when a special investigating agency, like Economic Offences Wing or
Central Bureau of Investigation, will investigate a case which will also partially or fully fall
under the scope of SFIO.
(C) NATURE OF COGNIZANCE

An offence that is punishable under Section 447 of the New Act is cognizable. A cognizable
offence, as defined under the Code of Criminal Procedure, 1973 means a case in which, a
police officer may arrest without warrant. In case of an offence under Section 447 of the
New Act, though it is a cognizable offence, SFIO can investigate into the affairs of a
company only upon direction from the Central Government. SFIO does not have any power
to take suo motu cognizance.

It is also to be noted that the Special Court cannot take cognizance of any offence except upon a
complaint in writing made by SFIO or Central Government. Though the New Act has granted
vast powers to the SFIO, absence of suo motu cognizance and requirement of direction from the
Central Government will only mean that it may not be practically possible for SFIO to take
urgent and immediate measures. (d) Limitations on granting bail Section 212 of the New Act
provides that no person accused of any offence under certain sectionswhich are punishable
under Section 447 of the New Act shall be released on bail or on his own bond unless: (i) The
Public Prosecutor has been given an opportunity to oppose the application for such release; and
(ii) Where the Public Prosecutor opposes the application, the court is satisfied that there are
reasonable grounds for believing that he is not guilty of such offence and that he is not likely to
commit any offence while on bail. Further, the limitation on granting bail specified above is in
addition to the limitations under the Code of Criminal Procedure, 1973 or any other law for the
time being in force on granting of bail. Considering the wide range of offences which can be
brought into the ambit of Section 447 of the New Act, the aforesaid bail condition, if not
implemented in the right spirit, can be draconian and also against the basic fundamental rights.
In order to draw a parallel, these are the same bail conditions which are enshrined in: The
Terrorists Affected Areas (Special Courts) Act, 1984 [Section 15(5)], Maharashtra Control of
Organized Crime Act, 1999 [Section 21], The Drugs and Cosmetics Act, 1940 [Section 36AC],
and The Narcotic Drugs and Psychotropic Substances Act, 1985 [Section 37].

5 OF THE BIGGEST CORPORATE SCAMMERS IN INDIA

1. SUBRATA ROY, SAHARA

Sahara Group chairman Subrata Roy and Vijay Mallya had a lot in common. Both
successful businessmen had a passion for sports. The two also had their own IPL teams,
Sahara Pune Warriors and Royal Challengers Bangalore (after resigning as the chief of UB
Group Mallya is technically not the owner of RCB). In fact, the duo jointly owns the
Sahara Force India Formula 1 team.
Sahara Group was accused of failing to refund over Rs. 20,000 crore to its more than 30
million small investors which it collected through two unlisted companies of Sahara.
In 2011, SEBI ordered Sahara to refund this amount with interest to the investors, as the
issue was not in compliance with the requirements applicable to the public offerings of
securities.
Roy was arrested on 28 February 2014 and still remains behind bars as an under-trial. His
proposal to settlement of the matter was rejected by the court and SEBI.
2. RAMALINGA RAJU, SATYAM COMPUTERS
B Ramalinga Raju, the founder of Satyam Computers, got into trouble after he admitted to
inflating the company revenue, profit and profit margins for every single quarter over a
period of 5 years, from 2003-2008. The amount embezzled by him is estimated to be
around Rs. 7,200 crore.
In April 2015, Ramalinga Raju and his brothers were sentenced to 7 years in jail, and fined
Rs. 5.5 crore.
3. SUDIPTA SEN, SARADHA CHIT FUND
Saradha group which ran a chit fund in West Bengal had collected around ₹200 to 300
billion from investors with a promise of high returns for their investments.
The company which enjoyed strong political backings collapsed in April 2013. The amount
investors lost is estimated to be between Rs. 2060 – 2400 crores.
4. KETAN PAREKH
Parekh was involved in circular trading and stock manipulation through 1999-2001 in a
host of companies. He borrowed from banks like Global Trust Bank and Madhavpura
Mercantile Co-operative bank, and manipulated a host of stocks popularly known as K-10
stocks.
Parekh has spent only 1 year in jail but has been banned from trading in the Indian stock
markets till 2017.
5. RAM SUMIRAN PAL, SPEAK ASIA
Speak Asia was an online trading company founded by Ram Sumiran Pal and his brother.
Pal and his associates duped at least 24 lakh investors for Rs 2,200 crore in the scam
extending to Singapore, Italy, and Brazil, among others.
They took over or set up multi-level marketing companies registered in foreign countries
attracting investments due to their global profile. There were some buyouts in Brazil as
well. These were later used to launder money. One such company, Speak Asia, in
Singapore, was introduced in India in 2010.
 BIBLIOGRAPHY

Books:

1. G.K Kapoor- Company law and practice

2. Company Law- Avtar Singh

Websites:

1. http://www.investopedia.com
2. 9871375391