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INTRODUCTION
Governments must act to stop corporate and financial fraud, which misuses taxpayer money and is on the rise. Severe sanctions, strong law enforcement, and high fines are necessary. High-profile cases like the Satyam crisis, the Sahara scam, and the 2G spectrum scam highlight the need to establish a mechanism to combat this fraud, due to this the Naresh Chandra Committee on Corporate Governance recommended establishing a Corporate Serious Fraud Office, which led to the creation of the Serious Fraud Investigation Office (SFIO). The Companies Act of 2013 gave SFIO legislative status and introduced Section 447, defining and punishing fraud. The Ministry of Corporate Affairs now has the authority to investigate significant frauds independently of police investigations. Section 447 has been applied in recent cases, but no direct judicial statements have been made about it yet.
SFIO UNDER THE COMPANIES ACT 2013
A multidisciplinary body called the Serious Fraud Investigation Office (SFIO) in India looks into significant fraud cases. It works with professionals from a range of fields, including finance, accounting, forensic auditing, law, taxes, information technology, company law, customs, and investigation, and is governed by the Ministry of Corporate Affairs. Together with its headquarters in New Delhi, the SFIO maintains regional offices in Hyderabad, Mumbai, Kolkata, and Chennai.
The SFIO is led by a director who is at least a Joint Secretary to the Government of India and has expertise and experience handling corporate affairs-related issues.
In accordance with Indian law, the Central Government may ask for an inquiry of a company’s commercial operations if it determines that it is warranted based on a number of grounds. Receiving a report from the Registrar or an inspector according to Section 208, discovering that the firm has adopted a special resolution requesting an investigation into its operations, or acting in the public interest are a few examples of these. The term “may” suggest that the authority has discretionary power.
In accordance with Section 210 of the Act, the Central Government is required to order an inquiry into a company’s operations if a court or tribunal rules that it is necessary to look into its business practises. The term “shall” suggest that it is mandatory.
Offences under Companies Act, 2013 investigated by SFIO
Section 447 of the Companies Act defines fraud involving a company or corporate entity, encompassing acts, omissions, concealments, and abuses of position. This includes deliberate deception, falsification of documents, and misuse of authority. Offenses under this section are cognizable and non-bailable.
Section 448 prescribes penalties for false representations. A person violates this section by knowingly submitting false documents or omitting material facts in required submissions. The penalty ranges from a minimum sentence of six months to a maximum of ten years, and fines can be up to the greater of three times the involved amount or 25 crore rupees. The term “person” broadly includes directors, officers, employees, and others with knowledge of the fraudulent activity involved in the company’s operations.
Investigation of a Company’s Affairs By the SFIO In India
SFIO may undertake the following three different sorts of investigations, as specified by the Act of 2013:
- an examination of the business operations of the corporation.
- an examination of the company’s commercial actions in a certain situation.
- an examination of the business’s ownership.
Procedure for Investigation
According to Section 212(1) of the Act, the Central Government may request an inquiry into the business activities of a firm in one of two situations:
- If it receives a report based on Section 208 of the Act from an inspector or the Registrar.
- If the Central Government learns that a business has adopted a special resolution calling for an inquiry into its operations.
Such investigations are conducted to find any potential fraud or improper behaviour within the organisation and to take the necessary legal steps to rectify it.
According to the Act, the SFIO may be tasked with looking into a company’s operations under the following circumstances:
- If it is in the best interests of the public, in response to a request from any agency of the federal or state governments.
- If the Central Government “of the view” that the SFIO has to initiate an investigation into a company’s operations.
Under these circumstances, a specific order from the Central Government instructing the SFIO to conduct the inquiry is required. The Director of the SFIO may designate the number of inspectors needed for the inquiry upon obtaining the order, and they will have the authority granted under Section 217 of the Act.
The SFIO will be tasked with conducting an investigation into the company’s operations in order to find any potential fraud or wrongdoing and take the necessary legal steps to solve it.
In a recent ruling by the Madras High Court in the case of Church of South India V. Union Of India, it was held that the phrase “is of the opinion” under Section 212 imposes a jurisdictional duty on the Central Government to form an opinion on the need for an SFIO investigation. The court also stated that any order by the Central Government without forming such an opinion in compliance with Section 212 would be invalid.
According to Section 212(5) of the Act, any individual, including former officials, employees, and agents of a corporation under investigation, may be subject to an oath examination by an inspector appointed under to this Act. The statement of such examination shall be set down in writing, shall be read by the person being examined, shall be signed, and shall be admissible in evidence against such person. A legal adviser is not obligated to reveal any protected communications made to them in their official role, with the exception of the identity and address of their client, in accordance with Section 227 of the Act.
According to Section 212(2) of the Act no other investigating agency may continue an investigation into any Act violation after a matter is assigned to the SFIO.
Powers to Arrest
The SFIO was granted power to arrest by the Central Government’s notification to Section 212’s subsections (8), (9) and (10) on August 24, 2017. On the same day, the Act’s Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 were also published by the Central Government.
- If the Director, Additional Director, or Assistant Director of the SFIO has grounds to think that someone has broken Section 447 of the Act, they have the authority to make an arrest. The SFIO must keep an arrest register that contains pertinent information about the person arrested, the date and time of the arrest, and other related information. Nevertheless, prior written authorization from the Central Government is necessary for the arrest of foreign or government enterprises.
- The arrested person shall be brought before the appropriate Judicial Magistrate or Metropolitan Magistrate within 24 hours, excluding the time required to travel from the place of arrest to the court;
- The Director, Additional Director, or Assistant Director shall send a copy of the arrest warrant, together with all relevant documents, including the personal search memo, to the office of the Director, SFIO;
- The arrest-related provisions of the CrPC, apply in such cases.
Bail
According to Section 212(6) of the Act, a defendant cannot be granted bail unless the court finds that there are good reasons to think that they are innocent of the allegations brought against them and that they are unlikely to commit any crimes while out on bail. Also, the Public
Prosecutor will have the chance to object to the bail request. In addition to the limitations listed in the 1973 CrPC, this restriction exists.
Notwithstanding the repeal of a similar clause, Section 212(6) still prevents the granting of bail for offences under Section 447. The Delhi High Court’ revoked the bail in SFIO V. Nitin Johari on the grounds that the dual prerequisites outlined in Section 212(6) and the basic criteria for granting relief under Section 439 of the CrPC were not met.
Cognizance
According to Section 212(5) of the Act, the SFIO must send its findings to the Ministry of Corporate Affairs after completing its inquiry. The Ministry may then instruct the SFIO to prosecute and penalize the involved directors and corporate individuals. Only the Director of the SFIO or an authorized Central Government official can file a written complaint for the Special Court to recognize an offense. Both the investigation report and the complaint submitted to the Special Court are considered police reports under Section 173 of the CrPC, 1973.
CONCLUSION
As of FY 2019–20, the SFIO completed investigations in 12 instances involving 361 firms, compared to 83 entities in FY 2018–19, showing increased efforts in tackling corporate fraud.
A former MCA Secretary highlighted the SFIO’s struggle to find qualified personnel for complex fraud investigations. Increasing resources and staff is urgently needed for effective enforcement of Section 212.
The SFIO collaborates with other agencies, such as the Income Tax Department, CBI, Enforcement Directorate, and State Police Economic Offences Wings, to enhance corporate fraud detection and investigation, similar to the UK’s Serious Fraud Office.
BY PARV BAKLIWAL
A Legal Intern @ Singhania & Co.
