27 April 2018

Corporate Frauds: An Analysis

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White Collar Crimes are the type of crimes that are committed by respectable persons, holding enviable positions, either in public or private entities.
India Criminal Law
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White Collar Crimes are the type of crimes that are committed by respectable persons, holding enviable positions, either in public or private entities. It is practically very difficult for the bureaucratic agencies to track and detect such frauds and probably because such activities are carried out in much secrecy and goes un-notified. Such crimes are defined by the Federal Bureau of Investigation as, "Illegal acts characterized by deceit, concealment or violation of trust, which are not dependent upon the application or threat of physical force or violence". The FBI says that in cases of white collar crime, "Individuals and organizations commit these acts to obtain money, property or services; to avoid the payment or loss of money or services; or to secure personal or business advantage". Today, the focus of white collar crimes has moved from the individuals to the organization, where individuals alone or in collaboration with others commit criminal acts. One such white-collar crime is the Corporate Fraud.

In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another person/ entity. 'Fraus Omnia Vitiate' - Fraud vitiates everything. Corporate fraud takes place when a corporation purposefully provides dishonest information with the purpose of obscuring truth and deceiving the recipient of the data with the intent to gain an advantage.


A corporate fraud occurs when a company or an entity deliberately changes and conceals sensitive information which then apparently makes it look healthier. Companies adopt various modus-operandi to commit such corporate frauds, which may include miss-information in the prospectus, manipulation of accounting records, debt hiding etc. The aspect of falsification of financial information includes false accounting entries, false trades for inflation of profits, disclosure of price sensitive information which comes under the ambit of insider trading and showing false transactions which result in attracting more investors and lenders for funding.

There can be several reasons cited for which companies commit such frauds like making more falsified money, creating a false image of the company for the market scenario and misguiding Governmental authorities for tax evasion. In India, the Commission on 'Prevention of Corruption', in its report, observed, "The advancement of technological and scientific development is contributing to the emergence of mass society with a large rank in file and a small controlling elite, encouraging the growth of monopolies, the rise of a managerial class and intricate institutional mechanisms. There is a necessity for a strict adherence to high standards of ethical behavior for even the honest functioning of the new social, political and economic processes. The report of the Vivian Bose Commission inquiring into the affairs of the Dalmia Jain group of companies in 1963, highlighted as to how the big industries indulge in frauds, falsification of accounts and record tampering for personal gains and tax evasion etc.

The first successful trial of a financial scandal in independent India was the Mundhra Scam, in which Hon'ble Justice M.C. Chagla made certain critical observations about the big business magnate Mundhra who wanted to build an industrial empire entirely out of dubious means.


There are many types of frauds like Fraudulent Financial Statements, Employee Fraud, Vendor Fraud, Customer Fraud, Investment Scams, Bankruptcy frauds and miscellaneous. Some of the common types of frauds are:

  1. Financial frauds - Manipulation, falsification, alteration of accounting records, misrepresentation or intentional omission of amounts, misapplication of accounting principles, intentionally false, misleading or omitted disclosures.
  2. Misappropriation of Assets - Theft of tangible assets by internal or external parties, sale of proprietary information, causing improper payments.
  3. Corruption - making or receiving improper payments, offering bribes to public or private officials, receiving bribes, kickbacks or other payments, aiding and abetting fraud by others.

The financial and corporate frauds or scams like Harshad Mehta case, Satyam fiasco, Sahara case required the attention of law makers. Such frauds made it imperative to evaluate the standards set in corporate governance and stringent methods were needed to be implemented to tackle corporate frauds.


The Companies Act, 2013, is the legislation which focusses on issues related to corporate frauds. Fraud in relation to affairs of a company or any corporate body as defined in S.447 of the Companies Act 2013, 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.

In order to amount to Fraud, an act must be confined to acts committed by a party to contract with an intention to deceive another party or his agent or to induce him to enter into a contract. Fraud, which vitiates the contract, must have a nexus with the acts of the parties entering into the contract. This definition highlights the precondition to prove the intention of the person who has committed fraud. If that person has willingly committed a fraud, then he will be punished. Here the person means himself or his agent. The acts which include fraud are wrong suggestions or concealment of facts or false promises or any fraudulent act to deceive others.


Any person who is found guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six (06) months but which may extend to ten (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 three (03) times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three (03) years.


If in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement —

  • which is false in any material particulars, knowing it to be false; or
  • which omits any material fact, knowing it to be material


If any person intentionally gives false evidence –

  • upon any examination on oath or solemn affirmation; or
  • in any affidavit, deposition or solemn affirmation in or about winding up of any company under this Act, or otherwise in or about any matter arising under this Act,
  • he shall be punishable with imprisonment for a term which shall not be less than three (03) years but which may extend to seven years (07) and with fine which may extend to ten lakh rupees (Rs. 10 Lacs).


If a company or any officer of a company or any other person contravenes any of the provisions of this Act, or the rules made thereunder and for which no penalty or punishment is provided elsewhere in the Act, they shall be punishable with fine which may extend to ten thousand rupees (Rs. 10,000) and where the contravention is continuing one, with a further fine which may extend to one thousand rupees (Rs. 1,000) for every day after the first during which the contravention continues.


If a company or an officer of a company commits an offence punishable either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three (03) years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence. This section is not applicable to the offence repeated after a period of three (03) years from the commitment of first offence.


The Central Government, may by an order published in the official gazette appoint adjudicating officers for adjudicating penalty under this Act. The Central Government shall also specify their jurisdiction. The adjudicating officer may, by an order, impose penalties on the company and the officer who is in default, stating any non – compliance of default under the relevant provision of the Act. Any person aggrieved by an order made by the adjudicating officer may prefer an appeal to the regional director having jurisdiction in the matter.


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 about 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 it 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:

Section Fraud Defaulter
7(5) Furnishing false information or suppressing material information Any person who does so
8 Affairs of the company conducted fraudulently Every officer in default
34 Mis-statements in prospectus Every person who authorizes the issue of prospectus
36 Fraudulently inducing persons to invest money Any person who does so
38 Personation for acquisition, etc. of securities Any person who does so
46(5) Issuance of duplicate certificate of shares Every officer who defaults
75(1) Company fails to repay deposits/ interests Every officer of the company
206 Business  being carried out for fraudulent or unlawful purpose Every officer who defaults
229 Person required to provide an explanation or make a statement during an investigation furnishes false statement or destroys documents Person who was required to provide the explanation or make the statement
251 Application is made for removal of name from register with the object of evading liabilities or deceiving or defrauding the creditors Persons in charge of management of the company
266 If Tribunal concludes that an employee during the period of his employment with a company was guilty of any misfeasance, malfeasance or non-feasance in relation to the sick company Any person who is found so guilty
448 A person who makes a false statement or omits a material fact in any return, report, certificate,   financial statement, prospectus Person who makes such statement


There are certain mechanisms that have been cited by the Government by which the frauds can be prevented under the Companies Act 2013.

Section 211 empowers the Central Government to establish an office called Serious Fraud Investigation Office (SFIO) to investigate frauds relating to companies. No other investigating agency shall proceed with investigation in a case in respect of any offence under the Act, once the case has been assigned to SFIO. The SFIO has power to arrest individuals if it has reason to believe that he is guilty based on the material in possession. SFIO shall submit a report to the Central Government on conclusion of investigation. Central Government may direct SFIO to initiate prosecution against the company. SFIO shall share information they possess regarding a case being investigated by the latter and vice versa.

Auditors shall report material fraud to the Central Government within 30 days. Immaterial fraud shall be reported to the board or the auditor of the company. Audit committee is required to monitor that every listed company shall establish a vigilance mechanism for directors and employees to report genuine concerns. The vigilance mechanism shall provide for adequate safeguards against victimization of persons who use such mechanism. It shall make provision for direct access to the Chairperson of the Audit Committee in appropriate cases.

Independent directors shall report concerns about actual or suspected fraud. They must also ascertain and ensure that the company has an adequate and functional vigilance mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use.

Central Government can order investigation into the affairs of a company on the receipt of a report of the Registrar or inspector; on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or in public interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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