Even the most well-intentioned of legislations can be quite
ineffective in providing succour to honest investors, protecting
innocent employees and safeguarding interests of the company.
Whether it was a case of corporate fraud in Satyam and Enron, or
even the case of product negligence in cases such as General Motors
and Ranbaxy, criminal prosecution of the perpetrators does not
provide monetary compensation for the erosion in investments and
damage to credibility.
The failings of the law include the failure of regulators to
distinguish between criminals who are employees and the company
itself, recovery of proceeds from fraud, and balancing the rights
of the company and shareholders.
A recent report by Economist Intelligence Unit and Kroll, a US
risk consultancy, has found that 69 per cent of India's
companies were affected by fraud in the last year. The most
chilling aspect was that 89 per cent of the respondents surveyed
indicated that the perpetrator was an insider.
We see companies being prosecuted and investigated when some of
its employees engineer a scheme to commit a fraud. Since the law
itself sometimes fails to recognise the distinction between the
perpetrators and the company, aggrieved shareholders have no choice
but to prosecute the company.
The new companies law seeks to strengthen shareholders'
action against a company and, in future, this would only increase
liability of the company and its directors for the unauthorised,
illegal and criminal acts of some employees.
This incongruity is not restricted to scenarios under company
law — fraudulent employees colluding with employees of
PSUs/PSEs who embezzle funds in public contracts can also cause the
company to be blacklisted from participating in government
In such cases, it is imperative for directors and employees of
the company to demonstrate that the company's decisions were in
good faith and the actions of the fraudsters were unauthorised.
Ironically, while the company is forced to compensate its
shareholders for the actions of the fraudsters, the prosecution of
the company affects the value of investments of the
Given that instances of corporate fraud are on the rise, the
board of directors of a company must ensure that actions of
employees and directors are adequately documented. For their part,
shareholders must also show greater participation in the
decision-making process and in enforcing their rights. Shares are
not a secured investment — every shareholder accepts certain
risks and is therefore bound to exercise care and caution while
attending shareholder meetings. With shareholders and employees
keeping a watch, it would be easier for a regulator to prosecute
the real culprits rather than prosecute the company – itself
a victim of fraud.
The protection of shareholders' interests could have been
addressed by incorporating in the new act a principle commonly
referred to as 'proceeds from crime'. In the context of
corporate fraud, proceeds from crime would be monetary benefit that
has been appropriated by the perpetrator.
Under India's current law, regulators and enforcement
agencies cannot attach proceeds from crime. While imprisonment may
offer retributive justice to aggrieved shareholders, it does not
compensate for the financial loss. Burdening the company with the
financial obligation is an uneconomical apportionment of risk that
only emboldens brazen criminals.
Innovative legislative measures of attaching properties acquired
by fraudsters would ensure that proceeds from crime are restored to
the rightful owners.
This article was published in The Hindu Business Line
dated July 15, 2014. The same can be accessed from thelink.
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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