With a clear view to give serious powers to the SFIO to investigate cases of corporate fraud, including those relating to loan defaults, the Central Government has given the SFIO the green signal to make arrests of Key Managerial Personnel (KMPs), directors or any other person reasonably believed to be guilty of an offence under the Companies Act, 2013 (the Act). This will have far reaching consequences for companies in terms of their governance models, preparedness, risk assessment and compliance. The statutory mechanism to deal with fraud in/ by companies especially in relation to the discovery of fraud, disclosure to the Central Government or stock exchanges and the role of auditors and independent directors is bound to get even more serious consideration with the SFIO now being able to arrest.
On 24 August, 2017, the Central Government notified sub-sections (8), (9) and (10) of Section 212 of the Act, which confer powers of arrest on the SFIO. The Central Government also notified the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 (Rules) under the Act on the same day. The key takeaways are:
- The Director, Additional Director or Assistant Director of the SFIO on the basis of material in his possession can arrest any person in case he has reason to believe (the reason for such belief to be recorded in writing) that the person is guilty of an offence of corporate fraud covered under Section 447 of the Act.
- In case of foreign companies and government companies, prior written approval of the Central Government for arrest would be required.
- The SFIO is required to maintain an arrest register with relevant details of the arrestee, the date and time of arrest, and various other particulars.
- The provisions of the Code of Criminal procedure, 1973 relating to arrest shall be applicable.
Under the Act, corporate fraud under Section 447 has been defined broadly to include "any act, omission, concealment of any fact or abuse of position ... with intent to deceive, to gain undue advantage ... whether or not there is any wrongful gain or wrongful loss". The offence covered under Section 447 is a cognizable offence. The SFIO, charged with the power to investigate fraud, has experts from the fields of banking, corporate affairs, taxation, forensic audit, capital markets, information technology and law to conduct investigations into allegations of fraud. The Central Government may require the SFIO to investigate cases in public interest or on requests from government departments, Tribunal/ Courts, or intimation of a special resolution by companies, etc.
Although, the SFIO has been conferred exclusive powers to investigate instances of fraud under the Act, other investigating agencies, like the Central Bureau of Investigation (CBI) or the Directorate of Enforcement (ED), may also carry out investigations in respect of other offences (like bribery, money laundering, etc.) arising out of the same facts and circumstances.
The workload of the SFIO has been on the rise for the past couple of years. According to its own data, SFIO probed 186 cases in the last three financial years, with 87 of them coming under the scanner in 2016-17.
Though the power to arrest has now been finally conferred on the SFIO, one would expect that arrests would be done sparingly, only to aid investigation, preserve evidence and in compliance with due process. The usual safeguards in the event of arrests, provided under the law of criminal procedure continue to apply. Companies, directors and KMPs, though are well advised to offer prompt, complete and meaningful cooperation to the SFIO to aid the investigation process. Also, companies should have response mechanisms in place to effectively address the impact of SFIO investigations or arrests.
One hopes that the SFIO, in relation to the exercise of its powers, will have due regard to the potential impact of arrests of KMPs on the operations of companies and the interests of the community of stakeholders (of employees, creditors, investors, etc.) associated with it. The SFIO hopefully would also give due regard to the governance mechanisms and measures put in place by Boards/ Committees.
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