Dr.

Ram Manohar Lohiya National Law University WHITE COLLAR CRIME

DR. RAM MAHOHAR LOHIYA

NATIONAL LAW UNIVERSITY

FINAL DRAFT:

ANALYSIS OF SHARDA CHIT FUND SCAM AND

EXISITING LEGAL REGIME
SUBMITTED BY: UNDER THE GUIDANCE OF:

HIMANSHU VERMA Mr. Malay Pandey

ROLL NO: 150101055 FACULTY OF LAW

SECTION ‘A’ DR. RAM MANOHAR LOHIYA

SEMESTER IX NATIONAL LAW UNIVERSITY

B.A. LLB (Hons.) LUCKNOW

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 ACKNOWLEDGEMENT

It is indeed my privilege to present this project on ‘ANALYSIS OF SHARDA CHIT FUND SCAM AND
EXISITING LEGAL REGIME’, to my teacher, Mr. Malay Pandey.

I would like to thank Mr. Malay Pandey, Assistant Professor of Law, National Law University
Lucknow, for giving us the freedom to research on the topic in whatever way we deemed fit, and for
giving us valuable information and advice regarding the same. This paper has broadened my
understanding of the current scenario on “ANALYSIS OF SHARDA CHIT FUND SCAM AND EXISITING
LEGAL REGIME. Sir’s continuous support and guidance throughout the course of preparing this
project has been a morale-booster and has made me work harder.

I would also like to thank everyone – teachers, family and peers – for giving me valuable information
and helping me formulate ideas through stimulating discussions and a cohesive work environment to
turn my ideas and stray thoughts into this coherent research.

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INTRODUCTION
Ponzi scheme is the scheme in which investors are paid from money collected from new investors
instead of the scheme's earnings. It works as long as new investors keep coming in.
Ponzi schemes are named after Charles Ponzi, an Italian who conned investors in the US and
Canada. He promised clients a 50 per cent profit in 45 days by buying discounted postal reply
coupons in other countries and redeeming them at face value in the US as a form of arbitrage.
These postal reply coupons were used by people in one country to send to a correspondent in
another country, who could use them to pay for the postage for reply. These were priced at the cost
of postage in the country of purchase but could be exchanged for stamps to cover the cost of
postage in the country where redeemed; if these values were different, there was a profit to be
made.
Ponzi claimed a net profit of 400 per cent could be made. In reality, however, the cost of
transactions was higher than the profit to be made. Ponzi, though, continued to pay the promised
returns to investors through money collected from new investors. His scheme caused investors a
loss of $20 million in 1920.

I. MODE OF OPERATION

A number of such schemes, termed as Ponzi, Chit funds or pyramid schemes, have been busted by
the authorities in recent years. The way these scammers operate is strikingly similar-assure high
returns to investors, offer to pay in instalments, and pay the first few instalments as promised so
that more investors are attracted through word-of-mouth publicity. For instance, the Citibank
manager did give 20 per cent annual returns to some investors before he was busted.

Most Ponzi schemes operate under the semblance of multi-level marketing (MLM). Some of them are
registered as companies under the Companies Act, some even flaunt an ISO certification, but in most
cases they do not have the approval to collect deposits from the public.

They market their schemes aggressively, mostly in rural and semi-rural areas, where awareness
levels are low. They also use a network of agents, who are offered high commissions.

II. CASE STUDY OF SARADHA CHIT FUND

India has been flooded with various Ponzi schemes that take advantage of innocent investors
looking for alternate banking options. Because of the lack of the access to formal banks, low-
income Indians often rely on informal banking. These informal banks invariably consist of money
lenders who charge interest at inflated rates and were soon replaced by more sophisticated methods
of conning people through disguised Ponzi schemes. Fundraising is done through legal activities

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 such as collective investment schemes, non-convertible debentures and preference shares, as well
as illegally through hoax financial instruments such as fictitious ventures in construction and
tourism. The rapid spread of Ponzi schemes, especially in North India, has various causes, not the
least of which include the lack of awareness about banking norms, steadily falling interest rates,
lack of legal action against such activities, and the security of political patronage.
The Ponzi scheme run by Saradha Group collected money from investors by issuing redeemable
bonds and secured debentures and promising incredulously high profits from reasonable
investments. Local agents were hired throughout the state of West Bengal and given huge cash
payouts from investor deposits to expand quickly, eventually forming a conglomerate of more than
200 companies. This syndicate was used to launder money and confuse regulators like SEBI. In
April 2013, the scheme collapsed completely causing a loss of approximately US $5 billion and
bankrupting many of its low-income investors.
SEBI first detected something suspicious in the group’s activities in 2009. It challenged Saradha
because the company had not complied with the Indian Companies Act, which requires any
company raising money from more than 50 investors to have a formal prospectus, and categorical
permission from SEBI, the market regulator. The Saradha Group sought to evade prosecution by
expanding the number of companies, thus creating a convoluted web of interconnected players.
This created innumerable complications for SEBI, which labored to investigate Saradha in spite of
them. In 2012, Saradha decided to switch it up by resorting to different fundraising activities, such
as collective investment schemes (CIS) that were disguised as tourism packages, real estate
projects, and the like. Many investors were duped into investing in what they thought was a chit
fund. This, too, was an attempt to get SEBI off its back, as chit funds fall under the jurisdiction of
the state government, not SEBI. However, SEBI managed to identify the group was not, in fact,
raising capital through a chit fund scheme and ordered Saradha to immediately stop its activities
until cleared by SEBI. SEBI had previously warned the state government of West Bengal about
Saradha Group’s hoax chit fund activities in 2011 but to no avail. Both the government as well as
Saradha generally ignored SEBI until the company finally went bust in 2013.
After the scandal broke, an inquiry commission investigated the group, and a relief fund of
approximately US
$90 million protected low-income investors. In 2014, the Supreme Court transferred all
investigations in the Saradha case to the Central Bureau of Investigation (CBI) amid allegations of
political interference in the state- ordered investigation.

FINANCIAL OPERATIONS

The companies that were comprised by Saradha Group were incorporated in 2006.
Its name is a cacography of Sarada Devi, the wife and spiritual counterpart of Ramakrishna

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Paramahamsa—a nineteenth- century mystic of Bengal. This duplicitous association gave Saradha
Group a veneer of respectability. Like all Ponzi schemes, Saradha Group promised higher returns
in fanciful but credible investments. Its funds were sold on commission by agents recruited from
local rural communities. Between 25 and 40% of the deposit was returned to these agents as
commissions and lucrative gifts to quickly build up a wide agent pyramid. The group used a nexus
of companies to launder money and evade regulators.
Initially, the frontline companies collected money from the public by issuing secured debentures
and redeemable preferential bonds. Under Indian Securities regulations and section 67 of the
Indian Companies Act (1956), a company cannot raise capital from more than 50 people without
issuing a proper prospectus and balance sheet. Its accounts must be audited and it must also have
explicit permission to operate from the market regulator Securities and Exchange Board of
India (SEBI).
SEBI first confronted Saradha Group in 2009. Saradha Group adapted by opening up to 200 new
companies to create more cross-holdings. This created an extremely complex tiered corporate
structure to confound SEBI by hampering their ability to consolidate blame. SEBI persisted in its
investigation through 2010. Saradha Group reacted by changing its methods of raising capital. In
West Bengal, Jharkhand, Assam and Chhattisgarh, it began operating variations of collective
investment schemes (CIS) involving tourism packages, forward travel and hotel booking timeshare
credit transfer, real estate, infrastructure finance, and motorcycle manufacturing. Investors
were rarely informed about the true nature of their investments. Instead, many were told they
would get high returns after a fixed period. With other investors, the investment was fraudulently
sold in the form of a chit fund. Under the Chit Fund Act (1982), chit funds are regulated by state
governments rather than SEBI.
SEBI warned the state government of West Bengal about Saradha Group's chit fund activities in
2011, again prompting Saradha Group to change its methods. This time, it acquired and sold large
numbers of shares of various listed companies then embezzled the proceeds of the sale through
accounts which as of September 2014 have not been identified. Meanwhile, Saradha Group
started laundering a large portion of its funds to Dubai South Africa and Singapore. By 2012, SEBI
was able to classify the group's activities as collective investment schemes rather than chit funds—
and demanded that it immediately stop operating its investment schemes until it received
permission to operate from SEBI. Saradha Group did not comply with this ruling and continued to
operate until its collapse in April 2013.

III. POLITICAL PLAYERS IN SARADHA CORPORATE FRAUD

The political interference in the Saradha Group case is more apparent. Several members of the
West Bengal ruling party, the Trinamool Congress (TMC), personally benefitted from the scheme.

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For instance, there are many reports that suggest Sudipto Sen, Chairman of the Saradha Group,
bought paintings by Mamata Banerjee, the Chief Minister of West Bengal, whose government later
issued circulars to public libraries to display newspapers published by Saradha. Several Members
of Parliament were connected to Saradha. In an 18-page confessional to the CBI, Sudipto Sen
admitted to illicitly paying huge sums of investor money to many politicians. Many high profile
personalities, including Transport Minister Madan Mitra and actor and TMC member Satabdi Roy,
publicly endorsed the Saradha Group.

IV. HUGE LOSS OF INVESTORS

The schemes run by Saradha were primarily aimed at low-income people who did not have access
to formal banking. Unsurprisingly, these low income investors were hit hardest by the scam. When
the Ponzi scheme collapsed, it caused severe financial loss to its 1.7 million investors, but the
poorer population of West Bengal bore the worst brunt. Many were bankrupted, and a great
number resorted to suicide.
The Saradha case undoubtedly represents the worst kind of damage unethical practices in business
can beget. The ramifications of the actions of a few conniving businessmen and politicians can still
be felt throughout rural West Bengal. There is no doubt that conning poor people into investing in
a hoax scheme, only to abandon them when it collapses, falls in the far dark end of the ethical
spectrum. Therefore, corporate scams of this nature not only symbolize the ethical and moral
standards of a company but on a larger scale represent those of the country and her people. This
sort of generalization can cause foreign companies to lose interest in investing in a country and
could cost India (or any country, for that matter) dearly.

V. POTENTIAL SOLUTIONS TO SAFEGUARD INVESTORS

A recent survey by Grant Thornton and Assocham finds that cases of financial fraud have risen in
India over the last few years and become one of the main factors deterring foreign companies from
investing in India. As the economy grows to keep pace with the steadily growing needs of the
population, corporate fraud is disastrous for India. To bring about a visible decline in the culture of
corporate scams in India, three major systematic changes can and need to take place.
Firstly, laws protecting whistleblowers are imperative. The likelihood of people coming forth to
willingly provide information will be a lot higher if they are provided with basic assurances.
Safety from political threats and job security can ensure more people will be willing to volunteer
information and increase transparency in the Indian corporate sector. Secondly, federal and market
regulators need a greater level of autonomy than they presently enjoy. The Reserve Bank of India,
SEBI and other regulators can only be efficient provided their work is not directed by political
influences. Thirdly, and perhaps most importantly, there is a crucial need for judicial reform in

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 India. The judicial system’s slow-moving course causes needless delays and allows corporate
violators to find underhanded methods to evade justice. Corporate cases, especially cases of such
magnitude, need to be fast-tracked to reach resolution quickly so violators can be dealt severe and
immediate consequences.

WHITE COLLAR CRIMES UNDER INDIAN STATUTES

Indian Companies Act, 2013

Introduction

A Company is basically a form of business organization and it runs according to the business traits
and commercial practices. Being a sub system of the economic-social system operating in the
society, it affects and is affected by the economic and cultures of the society. The concept of social
responsibilities of companies is now so widely accepted that it is rare to bear any view expressed to
contrary. Even those who stoutly defend company’s primary object to make profits agree that
the profit-making should be pursued in a socially responsible way, by which they usually
mean that it should be done for the well being of their employees giving due regards to public, its
shareholders and keeping paramount also the national interest. The Companies Act 2013, guarantees
several rights to investors and also regulates the affairs of a company with a view to ensure efficient
functioning of a company so that investors may receive their due returns of the capital invested
by them and their rights and interests are adequately protected. Investors are the real owners of a
company but the power of management of the company is vested in the Board of Directors.

There are chances to abuse of power like committing fraud, by few directors of the company.
As we know that there is close nexus between corporate governance and ethics but conflicts between
these two are also bound to occur. Corporate fraud, an inevitable incident occurring, in recent,
is an aggravated form of corruption in corporate world. It is difficult to prevent and to catch such
white collar crimes. Such incidents reduce the interest and trust in corporate investments and in turn
reduce the confidence on the government. The Companies Act empowers the Central
Government with the right to investigate the affairs of the company, especially in cases of an alleged
fraud or even in the oppression of the minority shareholders.

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Fraud in Companies Act, 2013

The Companies (Amendment) Act, 20151 is a harbinger of positive trends in the ease of doing
business for Indian companies. Prior to the new Companies Act, 2013 Fraud was largely seen as a
broad legal concept. The old Companies Act already provides punishment for fraud in various
sections but the new Act has come with more specific and clear provisions relating to fraud and fraud
reporting. The scope and coverage is very wide unlike Companies Act, 1956. Auditors have always
had an important role to play in enhancing the credibility of the financial information. With the
introduction of section 143(12) of the Companies Act, 2013, the Central Government is apparently
seeking the support of the auditors in bringing in greater transparency and discipline in the corporate
world to protect the interests of the shareholders as also the public, at large. The increasing rate of
white collar crimes demands stiff penalties, exemplary punishments, and effective enforcement of law
with the right spirit.

Persons Covered for Reporting on Fraud under Section 143(12) of the Companies Act, 2013:

The reporting requirement under Section 143(12) is for the followings:

 Statutory Auditors of the company and also equally applies to the:

 Cost Accountant in practice, conducting cost audit under Section 148 of the Act; and
 to the Company Secretary in practice, conducting secretarial audit under Section 204 of
the Act
 Branch Auditor appointed under Section 139 to the extent it relates to the concerned
branch

The Central Government has also set up the Serious Fraud Investigation Office (SFIO) in the
ministry of corporate affairs, a specialized, multi-disciplinary organization to deal with serious cases
of corporate fraud. This was also a major recommendation made by the Naresh Chandra Committee
which was set up by the government on 21 st August 2002 on corporate governance.
Headquarters of this office is located in New Delhi, with field offices located in major cities
throughout India. The SFIO is headed by a director not below the rank of a Joint Secretary
to the Government of India having knowledge and experience in dealing with the matters
relating to corporate affairs and also consist of experts from various disciplines. 2

The SFIO will only deal with investigation of corporate frauds characterized by:

1
The Companies (Amendment) Bill received the assent of the President on the 25 th May, 2015 and published in
official Gazette of India on 26th May, 2015 and became “THE COMPANIES (AMENDMENT) ACT, 2015.
This Act shall come into force on 26th May, 2015.
2
S. 211

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a) Complexity and having inter- departmental and multi-disciplinary ramifications.

b) Substantial involvement of public interest in terms of monetary misappropriation or in terms of

number of persons affected and

c) The possibility of investigations leading to or contributing towards a clear improvement in

systems, law of procedure.3

The other experts are appointed by the Central Government from amongst persons of ability, integrity
and experience in the field of banking, Corporate Affairs, Taxation, Forensic audit, Capital
Market, Information Technology, Law, or Other fields as required.

It is concluded that SFIO is performing well to find out the corporate frauds, during recent
time which reflects the good corporate governance in our country. Minister of State for
Corporate Affairs Nirmala Sitharaman has informed the Lok Sabha on 25 th July, 2014, in a
written reply that corporate frauds worth more than Rs 10,800 crore have been detected by
SFIO during its probes in nearly three-and-half years. It has completed probes in 78 cases of
corporate frauds since 2011-12 till June-end of this year. Now, Market Research and Analysis Unit
(MRAU) has been set up in SFIO to analyse media reports relating to financial frauds and for
conducting market surveillance of such corporate. In order to strengthen MRAU's functioning,
an expert committee was constituted and on the basis of its recommendations a forensic lab
with appropriate technology and skilled technical manpower has been set up in SFIO. This
will, certainly protect the investor’s interest and will also bring back the confidence of investors
in Indian capital market

Indian Penal Code

PUBLIC SERVANT UNLAWFULLY ENGAGING IN TRADE

Faith is reposed in a public servant and if public servants are allowed to engage in trade they would
not be able to devote their undivided attention to their official work. Moreover they may take unfair
advantage over other traders of their official position for the advancement of their trade. So keeping
this aspect in mind S.168 of the Code provides:

“whoever, being a public servant, and being legally bound as such public servant not to engage in
trade, engages in trade, shall be punished with simple imprisonment for a term which may extend to
one year, or with fine, or with both.”4

3
S. 212(1)
4
Section 168 of the Indian Penal Code, 1860

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Trade in its wider sense covers every kind of trade, business, profession, occupation, calling or
industry. According to Oxford Dictionary5:

“Trade means the act or process of buying, selling, or exchanging commodities, at either wholesale or
retail, with in a country or between countries.”

The Supreme Court in State of Gujarat v. Mahesh KumarThakkar6has held that trade in its narrow
sense means “exchange of goods for goods or for money with object of making profit” and in its
widest sense means “any business with a view to earn profit.” The Court ruled that where a tracer in
the office of Sub-Divisional Soil Conservation Office took earned leave and during that period of
leave obtained training as an Electrical Signal Maintainer from the railway administration, it was held
that he cannot be convicted under section168 of the Indian Penal Code, 1860as he has not engaged
himself in any trade even though he was receiving stipend from the railways during the period of his
training.

Similarly, in State of Maharastra v. Chandrakant Solanki7, the Supreme Court has held that
engagement as agent of insurance company on commission basis does not amount to engaging in
trade within the meaning of section 168 of the Code. The ‘commission’ does not include profits
because commission is an amount settled beforehand which goes to the person who brings business to
the company, whereas profits are whatever the company finally earns after deducting all expenditure
and it goes to the company. Thus, where the accused was working as Inspector on probation in
National Insurance Company, engaged him by running two insurance companies and received agent’s
commission, it cannot be said that he engaged himself in trade.

Similarly, in State of Gujarat v. Mahesh Kumar Dheerajlal Thakkar,8the Supreme Court has held
that ‘private practice’ cannot be termed as ‘trade’ as accepting of ‘fee’ does not involve profit making,
which is an essential ingredient of the term ‘trade’.

So we may conclude that if public servants were allowed to engage in trade they would not be able to
devote their undivided attention to their official work.

5
Arnold Fischer,Oxford Advanced Learner’s Dictionary 245 (1985).

6
AIR 1980 SC 1167. See also Motilal and Ors.v. The Government of Uttar Pradesh and Ors,.AIR 1951 All 257,
JagmohanSahu and Anr. v. State of Orissa1977 Cri LJ 1394 (Ori), Niranjal Shankar Golikari v. The Century
Shipping and Mfg Co. Ltd., AIR 1967 SC 1098, Girish v. State of KarnatakaILR 1994 Kar. 439
7
1995 Cri LJ 832(Mah)
8
AIR 1980 SC 1167

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PUBLIC SERVANT UNLAWFULLY BUYING OR BIDDING FOR PROPERTY

Under Section 169 of Indian Penal Code,1860, public servant is prohibited from unlawfully buying or
bidding for property. This section is an extension of section168 of the Code. The scope of the section
is limited to property sold by a public servant in his official capacity. This is based on the principle
that, as he is placed in an advantageous position over the other, he might influence the sale in his
favour. But if the sale is unconnected with the official position of the public servant, he is not
prohibited from purchasing or bidding for the property, and the section is not attracted. For instance,
purchase of an impounded pony by a police officer, 9 and of a buffalo belonging to a District Board at
an auction by a member of board were neither covered by this section. 10 It would be profitable for us
to reproduce the language of S.169 of the Code which runs as under:

“Whoever, being a public servant, and being legally bound as such public servant, not to purchase or
bid for certain property, purchases or bids for that property, either in his own name or in the name of
another, or jointly, or in shares with others, shall be punished with simple imprisonment for a term
which may extend to two years, or with fine, or with both; and the property, if purchased, shall be
confiscated.”11

The Supreme Court of India in R. Sai Bharathi v. J. Jayalalitha12,has held that under section 169 of
Indian Penal Code, 1860 public servant is prohibited from unlawfully buying or bidding for property
but such prohibition must flow from enacted law or rules/regulation framed there under. No executive
order could be considered such a law. Hence code of conduct framed by Governor laying guidelines
for conduct of ministers have no statutory force and are not enforceable in court of law. As such Chief
Minister is not legally prohibited from purchasing land belonging to government owned company.
The charge under sections 169 of Indian Penal Code, 1860 is therefore liable to fail.

BRIBERY

Bribery is an act of giving money or gift giving that alters the behavior of the recipient. Bribery
constitutes a crime and is defined by Black’s Law Dictionary 13 as the offering, giving, receiving, or
soliciting of any item of value to influence the actions of an official or other person in charge of a
public or legal duty. Bribery as used in Encyclopedia Americana 14 is said to be voluntary receiving or
giving anything of value in payment for an official act done or to be done and that it is not confined to
judicial officers or other persons concerned in the administration of justice, but it extends to all
9
Rajkristo Biswa(1871 ) 16 WR(Cri) 62.
10
Suraj Narian Chaube v State,AIR 1938 Bom. 565.
11
Section 169 of the Indian Penal Code, 1860.
12
AIR 2004 SC 692.
13
Henry Campbell Black, Black’s Law Dictionary 39 (1968)
14
Drake De Kay,Encyclopedia Americana 205 (1968)

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officers concerned with the administration of the Government Executive, Legislative and Judicial and
under the approximate circumstance military. The Supreme of Court of India has observed that bribe
is not charity but shrewd business. Bribe is given not only to get things unlawfully done but also to
get lawful things done promptly.15With the coalition governments coming into power during 1990’s
instability of government have become a common phenomenon in India. As a result of this, the anti-
defection law instead of being an inhibitor of floor crossing became an opportunity for elected
members to make quick money.

In P.V. Narsimha Rao v. State16,Sibu Soren & Suraj Mandal took money to save the Narsimha Rao
Government from toppling. Political leader would tend to maintain their political parties financially
sound and at the same time insure themselves and their families against uncertainties of future. This
led to increasing nexus between politicians and organized criminal.
Section 171-B which deals with bribery runs as under-
(1) Whoever—
(i) gives a gratification to any person with the object of inducing him or any other
person to exercise any electoral right or of rewarding any person for having exercised any such right;
or
(ii) accepts either for himself or for any other person any gratification as a reward for exercising any
such right or for inducing or attempting to induce any other person to
exercise any such right; commits the offence of bribery:

Provided that a declaration of public policy or a promise of public action shall not be
an offence under this section.
(2) A person who offers, or agrees to give, or offers or attempts to procure, a gratification shall be
deemed to give a gratification.

COUNTERFEITING INDIAN COINS

The Code has severally penalized the counterfeiting of Indian coin and in this regard section 232 of
the Code provides that whoever counterfeits, or knowingly performs any part of the process of
counterfeiting Indian Coin, shall be punished with imprisonment for life, or with imprisonment of
either description for a which may extent to ten years, and shall also be liable to fine.
The Supreme Court in Velayudham Pillai v. Emperor,17has held that one of the basic elements of
counterfeiting is intention to practice deception or practicing resemblance with knowledge that this
resemblance is likely to result deception. Therefore, any act by which deception cannot be intended or
any act from which likely result of deception cannot be deduced cannot amount to deception. So when

15
Som Parkash v. State of Delhi AIR 1974 SC 989
16
AIR 1998 SC 2120
17
AIR 1937 Mad. 711

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there is no intention to circulate the coin and the offender only puts a counterfeit coin in the house of
his enemy, the act cannot amount to an offence under Section 232.
DELIVERY OF INDIAN COIN POSSESSSED WITH KNOWLEDGE THAT IT IS
COUNTERFEIT
Delivery of Indian coin to another with the knowledge of its being counterfeit is a very serious
offence and same is punishable with ten years imprisonment and with fine. 18The offence under section
240 has the following essential ingredients:
(1) That the accused fraudulently or with intent that fraud may be committed was possessed of
counterfeit coins;
(2) That the accused had the knowledge at the time when he became possessed of it that it was a
counterfeit coin;
(3) That the delivery of the Indian coin was made with the knowledge it was counterfeit.
The Hon’ble Court in Ganga v. State,19has held that particular knowledge about the coin being
counterfeit is not necessary to be established by positive evidence. The circumstances might indicate
on which a reasonable presumption could be raised that the accused ought to have known at the time
when he became possessed of the coin that they were counterfeit.

MISAPPROPRIATION OF PUBLIC PROPERTY AND CRIMINAL BREACH OF TRUST

Sections 403 to 409 of the Indian Penal Code 1860 deal with the offences of dishonest
misappropriation of property and criminal breach of trust.
DISHONEST MISAPPROPRIATION OF PROPERTY
Misappropriation means the intentional, illegal use of the property or funds of another person for one's
own use or other unauthorized purpose, particularly by a public official, a trustee of a trust, an
executor or administrator of a dead person's estate, or by any person with a responsibility to care for
and protect another's assets (a fiduciary duty) 20. Section 403 of the Indian Penal Code 1860 deals with
offence of dishonest misappropriation of property. It provides that:
“whoever dishonestly misappropriates or converts to his own use any movable property, shall be
punished with imprisonment of either description for a term which may extend to two years, or with
fine, or with both.”
Dishonesty is an essential ingredient of the offence and the Code provides that whoever does anything
with the intention of causing wrongful gain to one person or wrongful loss to another person, is said
to do that thing "dishonestly."

18
Section 240 of the Indian Penal Code, 1860
19
1957 All LJ 283

20
Gerald N. Hill and Kathleen T. Hill.,The People's Law Dictionary 122 (2005)

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The Supreme Court in Bhagiram Dome v. Abar Dome,21has held that under Section 403 criminal
misappropriation takes place when the possession has been innocently come by, but where, by a
subsequent change of intention or from the knowledge of some new fact which the party was not
previously acquainted, the retaining become wrongful and fraudulent.
CRIMINAL BREACH OF TRUST
The offence of criminal breach of trust has been defined under section 405 of the Code which reads as
under:
“Whoever being in any manner entrusted with property or with any dominion over property,
dishonestly misappropriates or coverts to his own use that property, or dishonestly uses or disposes of
that property in violation of any direction of law prescribing the mode in which such trust is be
discharged, or of any legal contract, express or implied, which he has made touching the discharge of
such trust, or wilfully suffers any other person so to do, commits in “criminal breach of trust”.
The gist of the offence of criminal breach of trust as defined under section 405 of the Indian Penal
Code, 1860 is ‘dishonest misappropriation’ or ‘conversion to own use’, another person’s property.
The essential ingredients of the offence of criminal breach of trust are as under:
(1)The accused must be entrusted with the property or with dominion over it,
(2)The person so entrusted must use that property, or;
(3)The accused must dishonestly use or dispose of that property or wilfully suffer any other person to
do so in violation,
(a) of any direction of law prescribing the mode in which such trust is to be discharged, or;
(b)of any legal contract made touching the discharge of such trust.
The Supreme Court of India in V.R. Dalal v. Yugendra Narang Thakkar,22has held that the first
ingredient of criminal breach of trust is entrustment and where it missing, the same would not
constitute a criminal breach of trust. Breach of trust may be held to be a civil wrong but when mens
rea is involved it gives rise to criminal liability also. 23
In criminal breach of trust if the misappropriation is for a temporary period it would constitute a
criminal breach of trust.24
PUNISHMENT FOR CRIMINAL BREACH OF TRUST
Section 406 of the Code provides punishment for the offence of criminal breach of trust which reads
as under:
“Whoever commits criminal breach of trust shall be punished with imprisonment of either description
for a term which may extend to three years, or with fine, or with both”.

21
(1965) Cri LJ 562
22
AIR 2008 SC 2793
23
Sudhir Shantilal Mehta v. CBI(2009) 8 SCC 1
24
R. Venkatkrishan v. CBI (2009) 11 SCC 737

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The Supreme Court in Onkar Nath Mishra v. State (NCT of Delhi),25has held that in the
commission of the offence of criminal breach of trust two distinct parts are involved. The first
consists of the creation an obligation in relation to property over which dominion or control is
acquired by accused. The second is a misappropriation or dealing with property dishonestly and
contrary to the terms of the obligation created.

CRIMINAL BREACH OF TRUST BY PUBLIC SERVANT OR BY BANKER, MERCHANT

OR AGENT
The acts of criminal breach of trust done by strangers is treated less harshly than acts of criminal
breach of trust on part of the persons who enjoy special trust and also in a position to be privy to a lot
of information or authority or on account of the status enjoyed by them, say as in the case of a public
servant. In respect of public servants a much more stringent punishment of life imprisonment or
imprisonment up to 10 years with fine is provided. This is because of special status and the trust
which a public servant enjoys in the eyes of the public as a representative of the government or
government owed enterprises. The Code provides that whoever, being in any manner entrusted with
property, or with any dominion over property in his capacity of a public servant or in the way of his
business as a banker, merchant, factor, broker, attorney or agent, commits breach of trust in respect of
that property, shall be punished with imprisonment for life, or with imprisonment of either description
for a term which may extend to ten years, and shall also be liable to fine. 26
The persons having a fiduciary relationship between them have a greater responsibility for honesty as
they have more control over the property entrusted to them, due to their special relationship. Under
this section the punishment is severe and the persons of fiduciary relationship have been classified as
public servants, bankers, factors, brokers, attorneys and agents.
In Bagga Singh v. State of Punjab,27the appellant was a taxation clerk in the Municipal Committee,
Sangrur. He had collected arrears of tax from tax-payers but the sum was not deposited in the funds of
the committee after collection but was deposited after about 5 months. He pleaded that money was
deposited with the cashier Madan Lal a co-accused who had defaulted the same. But the cashier
proved that he had not received any such sum and was acquitted by lower court. Mr. Bagga Singh had
not obtained a receipt from the cashier for passing the money to him. It was held that there was no
practice to pass on money to the cashier without obtaining receipt and the accused clerk had not
obtained any such receipt. Therefore the mere fact that the co-accused cashier was acquitted was not
sufficient to acquit accused in the absence of any proof that he had discharged the trust expected of
him. As such the accused was liable under section 409 of Indian Penal Code,1860.

25
2008(1) RCR (Criminal) 336
26
Section 409 of the Indian Penal Code, 1860.
27
1996 Cri LJ 2883 (SC).

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CHEATING
According to Oxford Advanced Learner's Dictionary28:
“Cheating means to trick somebody or make them believe something which is not true or to act in a
dishonest way in order to gain an advantage, especially in a game, a competition, an exam, etc.”
Sections 415 to 420 of Indian Penal Code, 1860 deals with the offence of cheating. In most of the
offences relating to property the accused merely got possession of thing in question, but in case of
cheating he obtains possession plus property in it.
Section 415 of Indian Penal Code defines the offence of cheating. The main ingredients of cheating
areas under-
(i) deception of person
(ii) fraudulent or dishonest inducement of any person to deliver any property to any person.
(iii) to consent to the retention thereof by any person or to intentionally induce that person to do or
omit to do if he was not so deceived.
The Supreme Court of India in Iridium India Telecom Ltd. v. Motorola Incorporated and
Ors.,29has held that deception is necessary ingredient under both parts of section. Complainant must
prove that inducement has been caused by deception exercised by accused. It was held that non-
disclosure of relevant information would also be treated a misappropriation of facts leading to
deception

PUNISHMENT FOR CHEATING

Section 417 of the Code provides punishment for the offence of cheating which reads as under:
“Whoever cheats shall be punished with imprisonment of either description for a term which may
extend to one year, or with fine, or with both”
This section punishes simple cases of cheating.
The Supreme Court in M.N. Ojha & Ors v. Alok Kumar Srivastva & Anr.,30has held that where the
intention on the part of the accused is to retain wrongfully the excise duty which the State is
empowered under law to recover from another person who has removed non-duty paid tobacco from
one bonded warehouse to another, they are held guilty under this section.

CONCLUSION
The forgoing discussion makes it clear that due to the advancement of science and technology newer
form of criminality known as white collar crime has arisen. The concept of white collar crime
introduced in the field of ‘Criminology’ by Edwin H. Sutherland in 1939. Many of the present day
28
Turnbull, Joanna, Oxford Advanced Learner’s Dictionary234 (2010)

29
2011(1) SCC 74
30
AIR 2010 SC 201

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laws were enacted prior to the coining of the word “white collar crime”. But the dimensions of white
collar crimes being so wide that subsequent to analyzing the provisions of above mentioned statutes,
we may conclude that certain offences under each of them are closely linked with white collar crimes
such as corruption, bribery, among others, having regard to the special circumstances under which
they are committed and which have now become dominant feature of certain powerful sections of
modern society. The punishment prescribed for white collar crimes under these laws have proven to
be inadequate on certain occasions. The specific Acts dealing with white collar crimes and the
provisions of other laws should be harmoniously interpreted to control the crisis posed by white collar
crimes.

BIBLIOGRAPHY

1. https://indiankanoon.org/
2. http://legalpundits.indiatimes.com/_nl_january_2006.html
3. http://shodhganga.inflibnet.ac.in
4. www.thehindu.com
5. http://lawcommissionofindia.nic.in/1-50/report47.pdf
6. www.caclubindia.com

7. Dr.C.P.S. Nayar, “Chit Finance and Explorative Study on the Working of Chit Funds”, Vora
and Co.Publishers Pvt Ltd. (1973)

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