Open Access Research Article
ROLE OF SERIOUS FRAUD INVESTIGATION OFFICE IN STRIVING WHITE COLLAR CRIMES AND ITS DEVELOPMENTS
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Article Details
“ROLE OF SERIOUS FRAUD INVESTIGATION OFFICE
IN STRIVING WHITE COLLAR CRIMES AND ITS DEVELOPMENTS”
International Conference on VIKSIT BHARAT:
INDIA @ 2047 - Challenges and Opportunities Ahead
Department of Accounting & Commerce (Sheth
N.K.T.T College of Commerce &
Sheth J.T.T College of Arts)
AUTHORED BY - YASH PALAN
I.
Declaration
I, Yash Palan, hereby declare that this dissertation titled “Role
of serious fraud investigation office in striving white collar crimes and its
developments” is towards International Conference on VIKSIT BHARAT:
INDIA @ 2047 - Challenges and Opportunities Ahead Organized by Department of
Accounting & Commerce (Sheth N.K.T.T College of Commerce & Sheth J.T.T
College of Arts) on Saturday,
February 8th, 2025I have duly adhered to the guidelines.
II.
Acknowledgement
I would
like to express
my heartfelt gratitude and appreciation to my supervisor Professor
Mukesh Arora for helping me all throughout the course of my dissertation work. Professor Mukesh Arora has enhanced my knowledge in
the subject of Company law by pushing me to put in extra efforts in learning
the nuances of the subject and the current regulatory framework in both India
and overseas. By sharing the vast practical
knowledge that Professor
Mukesh Arora has expanded
my knowledge beyond research literature by leaps and bounds. His valuable
feedback and suggestions have been helpful and encouraging.
I would like
to express my thank you to the Vice-Chancellor Prof (Dr.) C. Raj Kumar, entire
CPGLS office headed by Prof (Dr.) Sridhar Patnaik and now Prof (Dr.) Vishwas H
Deviah who continually pushed our LLM batch to make significant strides
in a brief period and arranged useful webinars (covid-19 situation) and
seminars/conferences (pre covid-19 situation) that have helped us to bring more
value to our respective dissertation work
III.
Abstract
Not only in the industrialised world,
but also in rising economies such as India, white-collar crime is rampant. White collar crime is
expanding as our economy advances. In recent years, starting from Satyam case
numerous cases of corporate fraud have been surfaced in India. The SFIO is a
federal law enforcement body created under the Companies Act, 2013 tasked with to investigate and prosecute white-collar
offences for the violation of the Corporate Laws. The Serious Fraud
Investigation Office (SFIO)
is a statutory corporate fraud
investigating agency in India, tasked
with investigating and prosecuting financial crimes. Its significance
has grown in recent years, necessitating a thorough examination. The
government, on its part, has initiated a variety of programmes aimed
at combating fraud,
bribery, corruption, and other white-collar crimes. Recent data reveal
a slowing of several sorts of crime
in recent years.
The primary challenge in eliminating
corporate fraud in our culture is having a legal structure that is acceptable. According to reports, the relationship
between auditors and management is the key basis for the company’s upward
progress. The introduction of the Serious Fraud Investigation Office, a
multidisciplinary investigative organisation tasked with the responsibility of
investigating large-scale and sophisticated frauds, transformed the
environment. This paper acknowledges
the entire history of corporate fraud, from the status
of corporate fraud investigation prior to the Companies Act, 2013,
to the emergence of SFIO via the Naresh Chandra Committee and its subsequent
development in combating white collar crimes, including the power to arrest,
the Companies (Arrests in Connection with Serious Fraud Investigation Office)
Rules, 2017, and the introduction of EWS (Early Warning System) for detecting
corporate fraud. Additionally, this
document discusses the proper steps to follow when submitting a case containing
Serious fraud. Numerous significant instances,
such as the Satyam Scandal
and the Deccan
Chronicle case, have been examined in the context of the SFIO’s role and
operation. The author expresses its viewpoints by addressing and providing
solutions to the technological and administrative challenges confronting SFIO.
This research will focus on the SFIO’s duties and functions. Additionally, it provides context for the
SFIO’s beginnings, formation, and investigative processes.
Keywords: Investigation, Corporate frauds, Companies, Complaints, Scandals, Scam, SFIO.
IV.
Introduction
The “Serious Fraud Investigation
Office (SFIO)” is a federal agency created under the administrative supervision
of “Ministry of Corporate Affairs (MCA)” with the responsibility of
investigating and prosecuting white-collar crimes. The Indian
government formed the
Committee on Corporate Governance, which is chaired by Shri Naresh Chandra, a
former Cabinet Secretary. Among other recommendations, the Naresh Chandra
Committee recommended “the establishment of a Corporate Serious
Fraud Office (SFIO), which would be headed by a Director nominated at the level
of Joint Secretary to the Government of India. Additional Directors, Joint
Directors, Deputy Directors, Senior Assistant Directors, Assistant Directors,
Prosecutors, and other secretarial professionals support the Director”. The
headquarters of the company are in New Delhi, and it maintains regional offices
in Mumbai, New Delhi, Chennai, Hyderabad, and Kolkata.
With the rise of corporate forms of commercial organisations in India,
notably in the late twentieth century, a larger emphasis
has been placed on the corporate governance framework. This was done
in order to streamline a business’s operations while maintaining legal
compliance and financial viability. The SFIO was designed to examine
large-scale frauds perpetrated by multinational corporate leaders
(often referred to as “white
collar crimes”). It is a multidisciplinary organisation that requires competence in a wide range of areas, including
corporate law, criminal
law, banking, accounting,
forensic auditing, capital markets, and taxation.
Additionally, the Naresh Chandra
Committee argued that the organisation charged with identifying and investigating fraud
should be granted legislative authority, akin to the UK’s Serious Fraud Office, which
was established in 1988 under
the 1987 UK Criminal Justice
Act. The SFIO operated
informally under the 1956 Companies Act (the “1956 Act”).
The Companies Act of 2013 granted statutory effect to the SFIO for the first time (the “2013 Act”). To address the growing incidence
of corporate fraud in India, Section 447 of the 2013 Act was amended for the first time to include
a definition of fraud and a penalty
for such an offence. Satyam and a few other business crises
that surfaced during
Parliament’s debate on the 2013 Act appear to have
served as the key impetus
for the inclusion of this extremely broad definition of fraud – which
is a synthesis of numerous parts of the Indian Penal Code (‘IPC’).
The MCA should
have autonomy to conduct suo moto investigations independently of police
investigations conducted pursuant
to the IPC. Section 447 has been invoked in a number of recent company-related investigations. Given the provision’s novelty, the NCLT, the HC, or the SC have not made direct pronouncements on it.
A. Literature Review
1. “Role of Serious Fraud Investigation Office
(SFIO) in Protection of Investor’s Interest: An Overview”, By Tabrez Ahmad
Investors are the ultimate owners of a company, and the Board of
Directors is responsible for managing day-to-day operations as well as ensuring
that everything runs smoothly and that investors make a profitable investment.
In order to protect investors' interests, numerous safeguards are included in the Companies
Act of 2013. In addition,
the Act supervises a company's
activities to ensure that they are successful, as well as ensuring that investors receive
a reasonable return on their
investments and that their rights and interests are adequately protected. While
we all recognise that good corporate governance and ethical
behaviour go hand in hand,
disagreements are inherent in the business
world. Companies that engage in corrupt business
practises reach new heights when corporate fraud is
unavoidable, as it was in the past. Because of this, it may be difficult to
prevent and detect white-collar criminal activity in the future. Public
confidence in corporate governance has been eroded as a result of multiple
highprofile incidents of corporate fraud. According
to the Companies Act, the Central
Government has the authority to investigate allegations of fraud or
mistreatment of minority shareholders. In the event that a central government
official considers that an investigation is needed as a result of the
conclusions of Registrars or Inspectors appointed pursuant to Section 208, or
if the investigation is in the public interest, that official may appoint inspectors on its own initiative. According to Section 213 of the Companies Act, 2013, a private sector firm may also request an inspector
based on an order from a court or tribunal, or on the request of members of the
company who own a specified number of shares
in the company. .. SFIO was founded
as a specialised, multidisciplinary organisation within the Ministry
of Corporate Affairs with the
mission of investigating and prosecuting high-profile incidents of corporate
fraud and corruption.
2. “Serious Fraud Investigation Office:
The White Collar
Crime Controller”, By Shruti Kulshreshtha
Building a strong legal framework to combat corporate fraud is the most
difficult component of removing corporate fraud from our culture. In this particular situation, it is believed that the source of
the problem is the interaction between auditors and management. Since the establishment of the Major Fraud
Investigation Office, a multidisciplinary investigative organisation tasked
with the responsibility of investigating serious and complex crimes, the
environment has undergone a significant transformation. Even though corporate
fraud has been around at least since 2013, this paper looks at how the SFIO has evolved
since then as a result of the Naresh Chandra
Committee, and how this has helped
curb white collar
crimes such as power of arrest. It also looks at how EWS
(Early Warning System) has been implemented to detect corporate fraud.
3. “Role of serious fraud investigation agency
in promoting corporate
governance: a need for more teeth”, By Dheerendra Kumar Baisla
Globally, corporate fraud
has increased significantly in recent decades,
with the most recent decade seeing the greatest increase. In the world of business,
embezzlement and fraud are both considered
white-collar crimes performed by powerful and influential executives. As a
result of the Enron crisis, the Sarbanes-Oxley Act was enacted in the United
States in 2002. Additionally, it was established that Indian corporate fraud
had taken on new dimensions as a result of the Satyam Scam, which resulted in
millions of dollars being lost by investors, shareholders, and other
stakeholders as a result. Corporate governance procedures that are both effective and efficient are required to protect against
corporate fraud. After
this happened, the Indian government constituted the Naresh Chandra
Committee in 2002 to look into the state of corporate governance in the nation. The committee was headed over by
Naresh Chandra. Committee members argued in favour of creating a
"Corporate Fraud Office," which would be established under the
Companies Act 2013 and tasked with
investigating instances of corporate criminal misbehaviour. The Financial Fraud
Enforcement Network (FFEN) was developed by the FBI in order to target
the most heinous
economic crimes (FINEN). It is only in terms of topic that this notion can be
considered wholly British, not in terms of practicality, that it can be
considered such.
B. Research Questions
Through the present
research work, the author aims to answer the following
research questions:
1.
What is Serious Fraud Investigation Office?
2.
What are the legal
powers and aspects
of SFIO?
3.
What is the role of
SFIO in investigating White Collar
Crimes?
C. Research Methodology
Open source publications were studied, analysed, and classified using a
content analysis as the methodology for gathering data for this research. Disparate
teams of researchers should be able to
come up with the same rating utilising
a different scoring
system and instructions assigned for the data
collected, since the rating is based on an objective component, not on subjective perceptions, views, or evaluations
D. Research Objectives
Through the present
research work, the author aims to cater the following research objectives:
1.
To determine
the meaning and concept of Serious Fraud
Investigation Office.
2.
To determine
the various legal powers and aspects of SFIO.
3.
To determine the role of SFIO in investigating White Collar Crimes.
4.
To determine the loopholes in the current
system of SFIO.
5.
To suggest
plausible solutions to cater the identified loopholes.
V.
ROLE OF SFIO
Over the last
few years, there have been numerous illegal mining, coal block allocation, FEMA
violations by Indian Premier League teams, and land denotification cases in
India, ranging from the mother of all scams involving the awarding of 2G
spectrum licences to the largest corporate frauds involving Satyam
Computers and Reebok. The prosecution, on the other hand, has thus far come up with nothing useful.
A company
member could request
an investigation of the operations of the firm under Section
235 of the 1956 Act, notwithstanding the fact that the 1956 Act did not
specifically permit the establishment of the SFIO. It is authorised to conduct
an investigation into the affairs of a corporation under Section 210 of the
2013 Act, which is substantially
identical to Section 335 of the 1956 Act.
Prior to 2003, when the SFIO was granted
legal existence, corporate
investigations were delegated to Sections 235–247 of the
Companies Act, 1956, which was
amended to include the SFIO. The Central Government, in the event that a Registrar’s report is produced,
has the authority to appoint one or more qualified persons to
serve as inspectors, who will conduct investigations and submit the necessary
reports. Moreover, these inspectors
may be hired if the Firm Law Board determines that the operations of a
company should be scrutinised because they are fraudulent or illegal in nature.
An investigation may only be authorised in the case of public/benefit shareholder unhappiness, not in the case of employee
dissatisfaction. When the inspector has obtained previous approval from the
government to serve notice on such a body corporate, he or she may, on behalf
of the Central Government, conduct an investigation into the affairs of linked
firms or individuals who are involved in the case under investigation.
Indian officials announced in August
2002 the formation
of a high-powered task force tasked with conducting an analysis and review of
their nation’s military organisation as well as its administrative structure in
order to make recommendations for improvements to the country’s critical defence
programmes. As a result of Mr Naresh
Chandra’s leadership, the committee is now
recognised as the Naresh Chandra Committee for Corporate Governance,
demonstrating the committee’s obvious contribution to the SFIO’s advancement.
The public became aware of this recommendation
of the Naresh Chandra Committee
during the 2000-02
stock market crises,
which also included the failure of financial institutions, the
kidnapping of a child, and the failure of plantation firms, and it was
subsequently made public by the government of India.
VI.
Recommendations of Shri Naresh Chandra
Committee
Among other
things, the committee recommended that the SFIO be established. A number of
recommendations were made, including the following ones: A Corporate
Serious Fraud Office
must be established by the Ministry of Corporate Affairs in order to combat
corporate fraud (CSFO). This body, which may be made up of professionals on transfer or deputation or on a term
contract, will be tasked with a wide range of tasks and responsibilities. It is required
to be capable of recognising fraud and, with the assistance of
authorised authorities, directing and supervising the prosecution of that fraud
in suitable courts of law. In each scenario, a Task Force should be formed, with the team leader serving
as the team leader. In order to preserve efficiency and control, a
committee chaired by the Cabinet Secretary shall oversee the office’s actions,
make appointments, and coordinate the work of numerous departments and departments of government.
An appropriate legal framework must next be established to allow the CSFO to
investigate and prosecute all types of fraud. This may be accomplished in the
same way as SFO is accomplished in the United Kingdom.
VII.
Recommendations of Shri Vepa Kamesam Committee
A committee chaired by “Shri Vepa Kamesam, former Deputy Governor of the RBI, was constituted to review the SFIO’s operations and recommend efficiency improvements. The panel recommended administrative, statutory, and organisational changes
in its April 29, 2009 report”.
Following the publishing of
this report, the SFIO was granted legal recognition, as were several other
modifications to the new Companies
Act of 2013, including provisions relating to the examination
of firms operating within and outside the country, as well as defining and penalising “fraud.”
(Press Information Bureau, 2011)
SFIO did not have statutory legal
standing until the Companies Act of 2013 took effect. It was founded by a
resolution dated July 2, 2003[1], and is subject to the Ministry of
Corporate Affairs’ jurisdiction. It
is a multifunctional organisation headquartered in New Delhi with field offices
located throughout the country’s major cities.
The SFIO’s
investigation cases exhibit
the following characteristics:
a) Complexity, with consequences for cross-departmental and cross-disciplinary collaboration.
b) Prominent involvement of the public interest
in terms of monetary misappropriation or number of impacted
individuals and
c) The
probability that investigations will result in or contribute to major improvements in systems, law, and
procedure[2].
The SFIO is led by a director with a rank equivalent to that of a Joint Secretary to the Government of India who possesses
expertise, skill, and commitment in resolving business
challenges, and it is
also comprised of professionals from several orders[3].
The remainder of the staff is drawn from a number of disciplines, including investigations, cyber forensics, financial accounting, management accounting, and cost
accounting, as well as any other professions
necessary to execute competent
investigative activities. This constitution is critical since conducting an investigation of a business requires not just investigative abilities but also capabilities and knowledge about how the business
operates and conducts its business.
According to the Companies Act of 2013, these individuals are responsible for obtaining all necessary information,
explanations, justifications, documents, and assistance for the Inquiry Officer
in order to finish the Company’s additional investigation[4].
Without
prejudice to Section 210 of the Act[5],
the Central Government may delegate the examination of a Company to the SFIO
only in the following circumstances:
Upon receipt
of a report from the Registrar or an inspector according to Section 208,
receipt of information that a firm’s affairs
must be investigated pursuant to the company’s
special resolution, in the
public interest or upon receipt of a request from any Central or State Government
Department.
Additionally, inspectors assigned to investigate can look into a business’s activity in the following
circumstances: at any point in time, any corporation that was a subsidiary,
holding company, or subsidiary of its holding company,
any corporation that is controlled by a managing
director of the company in question or by someone who is the managing
director or manager of the company in
question at any point in time, any corporation whose Board of Directors is
composed entirely of the company’s nominees or is accustomed to conducting its
operations in accordance with or pursuant to the firm’s
orders, any former Chief Executive
Officer, manager, or employee of the aforementioned
organisation[6].”
Whenever the Central Government refers a case for examination under this Act in order
to establish credibility and expedite the examination of serious frauds,
“no other investigating authority
of the Central Government or any state
government is obligated to continue examination in such case in
connection with any offence under this Act”, and any such examination that
has already been initiated will be terminated. According to the law, the
corporation, as well as its officers, employees, and representatives who are or
were employed by the organisation, are required to provide the investigating
officer with all of the data, clarification, documents, and coordination
necessary for the investigation to be conducted[7]. The inquiry will be carried
out in accordance with
Chapter XIV[8]
of the Companies Act, 2013, and the SFIO will submit a report to the Central
Government within the time frame specified in the order of the court8.
In Church of
South India v. Union of India[9],
the Madras High Court found that the phrase “is of the view” in Section 212
imposed a jurisdictional requirement on the Central Government to develop an
opinion on the necessity of an SFIO probe. The case
was decided by the Madras High Court. Every order
issued by the Central Government is null and void unless
and until a “opinion”
is formulated in accordance with Section 212 of the Constitution.
An
investigation will be conducted by the SFIO into any corporate organisation
that has been identified as committing one or more of the following offences, and that corporation may be subject
to a fraud penalty under Section 447 of the Act. There will be no surety or bond bail for anyone accused with this felony,
and no one will be freed pending
trial. However, the accused will only be granted bail when the Public
Prosecutor has been given a sufficient opportunity to dispute the motion and has demonstrated to the court that the accused is not guilty of the charge and is unlikely to commit it while out on bail
(see below). According to Section
212(6) of the Act, “bail may also be
granted if the defendant
is less than sixteen
years old, is a
woman, or is ill or infirm, and that only the Special
Court has the ability to give relief in these circumstances. Nonetheless, bail
limits are governed by the 1973 Code of Criminal Procedure or any other bail
statute in effect at the time of the arrest or detention”[10].
The Companies (Inspection,
Investigation, and Inquiry) Guidelines, 2014 comprise guidelines governing the
overall establishment, constitution, and functioning of the SFIO formed under
the Companies Act 2013 to conduct inter-departmental investigations into
white-collar crimes in corporations. It went into effect on April 1, 2014. The SFIO is led by a “director,” who must be “at least a Joint Secretary in the Government
of India and have knowledge and experience dealing with corporate concerns. It may hire experts in corporate law, criminal law, banking, accounting, forensic audits, financial
markets, taxation, and information technology as needed”.
Political
involvement stymies prosecution with a myriad of investigating agencies
beholden to a variety of ministries. Even if the perpetrator has no obvious
political ties, the wheels of justice grind to a halt. Consolidating agencies
or granting legislative authority to SIFO, as urged by the Naresh Chandra
committee, can help reduce political
influence while also transforming a toothless
tiger into a fierce beast capable of instilling terror in white collar
criminals[11].
While India has a plethora of laws, their implementation is haphazard, uneven,
and prone to political interference. Existing laws will only be enforced
consistently and aggressively if they are consistently and aggressively
enforced. Priority should
be given to modifying suffocating restrictions and deleting redundant laws. This would allow public prosecutors to file charges
as soon as possible, collect
evidence as quickly as possible, and bring persons
accused of wrongdoing before the court for their day in court as soon as possible.
A free market economy is built on the rule
of law and an equal playing field for all persons and enterprises. As India
transitions to a more typical capitalist society with a growing role for the
private sector, successful prosecution of white collar crimes is critical for
enhancing economic efficiency, eliminating corruption, and maintaining faith in
the free market system.
VIII. Power To Arrest
Despite the
fact that the SFIO was established by the Companies Act of 2013, it did not gain the right to arrest in connection
with a company investigation until August 24, 2017, when the Company (Arrest
in Connection with Serious Fraud
Investigation Office) Rules,
2017 were passed. The government has given the SFIO
jurisdiction to arrest directors, Key Management Personnel (KMPs), and anybody
else accused of breaking the Companies Act of 2013. According to the statement, the Director, Assistant Director, or Additional Director of the SFIO has the right
to arrest anyone they believe
is subject to prosecution under Section 212 of the Act, with the exception of any
government or foreign
corporation[12]. Before
the Additional or Assistant Director
executes such an arrest, the
rule now requires the Director’s written authorization. The Director of SFIO
makes the final decision on all arrests. The SFIO may only arrest government
officials and foreign enterprises with the prior permission of the Central
Government. As far as arrest of
government officials and person related to foreign enterprise are concerned the
prior permission of CG is required before making the arrest of such person.
In Rohtas Industries Ltd. v. SD Agarwal[13], the court held that a substantial fraud investigation can be tremendously damaging to a firm and
should be avoided in the absence of credible proof as given in Section 237(b)
Companies Act, 1956. Given the
gravity of the investigation and arrest, they should be given only on the basis
of substantial and convincing evidence.
The Bombay
High Court ruled in N. Sampath Ganesh v. Union of India[14] that a prosecution may be initiated based
on an interim report or an inquiry report if the report is sufficient to prove
a charge.
The SFIO
should keep in mind that its actions may have far-reaching repercussions for
corporate governance, compliance, risk management, and investor protection.
Despite the
elimination of a similar provision, Section 212(6) still prohibits the issue of
bail for Section 447 infractions. The Supreme Court reversed the Delhi High Court’s grant
of bail in SFIO v. Nitin Johari[15] on the grounds
that the twin pre-conditions given forth in Section 212(6) and the basic standards for grant of bail set
forth in Section 439 of the CrPC were not met.
Section 212(6)
of the Companies Act, 2013 applies to anyone suspected of committing an offence
described by Section 447 of the Act,
which criminalises fraud. According to Section 447 of the Companies Act, 2013, an arrested person must
demonstrate to the Court that: he has reasonable grounds to believe he is
innocent; and he is unlikely to commit any offence following his release on bail.
In complex cases
involving documented evidence
and paper trails,
the evidential value of
the prosecution's material may be disputed solely through cross-examination of
prosecution witnesses and the submission of defence evidence. When a charge is
being framed, the critical question is whether a case against the defendant has
been made. As a result, the identical data would be analysed and the identical
legal standards would be applied. Despite not being arrested and cooperating
fully with the investigating agency, a person accused of violating Section 447
of the Companies Act may be taken
into custody under Section 212(6) upon appearing before
the relevant court on a summons issued
by it, despite cooperating fully with
the investigation. This section was necessary in instances where the Inquiry
Agency took the prudent decision to arrest a suspect during the course of the
inquiry due to the possibility of evidence being tampered with or the suspect
being a flight risk.
IX.
Early Warning Systems (EWS)
The SFIO’s
goal is to remove any possibility of white collar
crime evasion, and they are currently
working on a technique for finding a needle in a haystack. One of the next
improvements being worked on behind the scenes is early warning systems. The
SFIO has established a consultancy firm solely committed to the development of
the system’s conceptual underpinnings. This is essentially an alarm system for
detecting corporate crimes early enough to prevent them from recurring, so
reducing not only investor losses but also the country’s overall economic
condition. The concept of establishing an EWS was first proposed
in 2009, following the Satyam debacle.
To assist in identifying potential frauds, the new framework would use the MCA 21 database, as well
as information gathered from other administrative associations and other
sources, such as online networking.
The system
would reduce disruptions caused by corporate fraud by actively monitoring
organisations’ behaviour using
statutory reporting components and other publicly available data.
The primary goal of the EWS system is
to eradicate shell companies. Shell firms typically lack visible economic
activity or assets
in their own right and are established for immoral purposes. In a slew of reports and studies, the issue of anonymous
corporations has been widely identified as critical for addressing a variety of
high-priority international issues, including “the drug trade, organised crime, terrorism, money laundering, tax
evasion, corruption, corporate crime, and systemic financial instability”.
“While it is now difficult to audit the
financial records of ROCregistered enterprises, EWS will be able to detect
artificial intelligence, hence improving corporate governance”.
X.
Procedure To Prosecute
and Secure Conviction
It is vital to file a complaint when a person knows or has reason
to believe that a substantial fraud has happened at a particular firm for the purpose of good
governance and the preservation of a vibrant securities market. The major goal
of uncovering corporate fraud is to safeguard not only investors’ interests, but also the interests of
consumers, global economic stability, and financial stability.
According to Section 436 of the Companies Act, 2013, a Special Court
may take cognizance of an offence under that section
based on a review of the police
report or a complaint filed in that regard,
without committing the offender to the court for trial notwithstanding anything
contained in the Code of Criminal Procedure, 1973.
Anyone who is
unsatisfied with the actions or conduct of a corporation or an investor may “file a complaint with the Registrar of
Companies (RoC) or the Ministry of Corporate Affairs”. Additionally, there
are no filing fees associated with a case alleging substantial fraud. To file
an online complaint, the following steps must be taken: Visit the official
website of the Ministry of Corporate Affairs at www.mca.gov.in. One of the prerequisites is that the corporation you are filing a complaint against has a CIN, or
Corporate Identity Number. When the cursor is hovered over ‘MCA Services’ on the MCA website, a big drop-down
menu containing all of the MCA’s services appears. There is a subcategory titled ‘Create Investor/Serious Fraud Complaint’ in the drop-down menu. Just click on it. On the
following page, you’ll see something similar to this: ‘To register a complaint,
please use either the Investor Complaint Form or the Serious Investor Complaint
Form, which are both available under Company Forms Download.’ The term
“Download Company Forms” will show in blue and will take you to the website’s whole collection
of online forms. Click on the blue
link. After downloading Company Forms,
the complainant can go down to the subheading ‘Investor Services.’ The
complainant may utilise the e-form and instruction package to complete the
‘SERIOUS COMPLAINT FORM.’
In K. Veeraswami v. Union of India[16], the Supreme Court held that a final inquiry report prepared
by an investigating officer pursuant
to Section 173 of the CrPC is merely an opinion and does not constitute legal evidence.
XI.
Deccan Chronicle Holding
Ltd.
The SFIO was conducting an inquiry into a corporation at the time of writing.
DCHL filed for bankruptcy in Hyderabad, where it is the owner of the English-language newspapers Deccan Chronicle and Asian Age, among other publications. They were
unable to service a debt of around Rs. 1,230 crores between 2009 and 2011, and
they also engaged in a number of financial irregularities during
this period. Furthermore, serious infractions of the 1956 Companies Act could
not be overlooked. Following an inquiry by the Securities and Futures Industry
Organization, the company generated funds through the sale of nonconverting debentures and other financial instruments by a number of
banks. Eventually, the Board of Financial Reconstructions (BIFR) ruled the corporation
to be unsound, but lenders filed a lawsuit against it under the SARFAESI Act.
XII.
Saradha Chit Fund
Following widespread public outrage over the duping
of certain gullible
investors through the use
of phoney cash pooling schemes
masquerading as chit reserves, the Ministry of Corporate Affairs launched the investigation in 2013. The SFIO is now examining around 60 organisations, the most of which are
located in the country’s eastern areas and are suspected of defrauding
unsuspecting citizens. Previously, the SFIO said that the firms under investigation had made legitimate financial errors rather than participating in money laundering
through exploited administrative flaws by promoters. As a result
of technological advancements and increased use of the internet to advertise
such commodities to speculators, the industry has seen an increase in the
number of unique monetary items available for purchase. The SFIO has been shown
to be incapable of resolving disputes on its own. This unit is responsible for
unpredictable forgeries that have cross- departmental, cross-disciplinary
implications. It also contributes considerably to fiscal theft and the number
of influenced employees through open enthusiasm. It provides the results and
investigation report to the Central Government for consideration once the
investigation is complete. Following a comprehensive assessment of the report,
the Central Government may provide additional directives to the states.
XIII. Suggestions
The SFIO has recently
handled a considerable number of investigations; the primary problem
is a lack of manpower to
handle such a large amount of investigations.
The headquarters of SFIO are in New Delhi, and the organisation has four subsidiaries in Mumbai,
Hyderabad, Kolkata, and Chennai. To improve the efficacy of the investigations,
the SFIO should expand its reach throughout India by increasing the number of
regional offices stationed around the country. This will make it easier
to cover a wide range
of businesses and give
better outcomes.
SFIO does not
prioritise the timely recruitment of office personnel. A sufficient
intellectual team is one of the SFIO's fundamental needs for effective
operation and inquiry.
Inadequate staffing results in increased payroll
costs, substandard work, increased employee
stress, and missed
growth prospects. This will not provide the expected results, and SFIO's
entire goal will be defeated.
The act anticipates and addresses every
possibility that could arise over the course
of a white collar crime
prosecution, which is notoriously difficult to complete successfully. Although committees have been constituted
in the past to make recommendations on a variety of issues, the Central
Government has failed to put those recommendations into effect. The complexity
of frauds rises over time, necessitating an increase in the level of attention
required on the part of the SFIO.
Even if the SFIO is recognised under the new Companies Act 2013, the organization's attitude
will remain unchanged. At the
moment, cases are allocated to the SFIO by the Central Government, which also prosecutes them. Both SFIO and this modification are required. However,
this authority may be
exercised only following the conclusion of an investigation into corporate
wrongdoing. This position should be examined as part of the SFIO system by an
independent committee, the Ombudsman Independent Committee.
In this day and age, any restriction imposed
on the general public may be accompanied with a plan. Despite the fact that SFIO has
previously announced the EWS’s launch, the system is still in its early phases
of development. The SFIO’s success in this area has been minimal and dismal.
The detection failed miserably, demonstrating the SFIO’s
lack of preparedness, and if immediate action is not done, people will find ways to escape the
restrictions that the EWS will apply in the near future, according to the EWS.
Essentially, this renders the revolutionary fraud detection system that is due
to be released obsolete.
The SFIO is
ultimately controlled by the Central Government, and it is possible that the
Central Government will refuse to authorise investigations and prosecutions,
allowing the accused corporation to destroy important evidence.
Each individual complaint should be dealt with according to the protocol
that has been established.
An open channel of communication exists between the SFO with individuals, whistleblowers, and others in the UK. Currently, there are no provisions in the Indian SFIO that address tactics
such as those described in Section 177, which mandates
the construction of an internal
and even an external
Vigil Mechanism for whistleblowers to protect their identities. What, if any, additional remedies
are available to whistleblowers who believe they have been treated unfairly? As a result,
the SFIO has established a
formal complaints mechanism.
Despite the fact that the
SFIO has legal standing under
the Companies Act of 2013,
the Central Government
continues to transfer investigation jurisdiction to the organisation. The
Central Government has far more influence over SFIO’s activities than is
necessary, restricting the organization’s capacity to thrive in the future. The SFIO should be given the ability to accept and review cases on its
own.
Bribery and Corruption involve
the majority of the elements
of fraud. SFIO must also be combined with investigation in these
instances. As of now, only cases brought
under the Companies
Act 2013 are filled, not
those brought under other statutes.
Government has
worked based on the Ninth Report of the Standing Committee on Finance on
‘Demands for Grants (2020-21) to accordingly make changes to the functioning of SFIO to increase efficiency[17].
In the SFIO, the working strength has been increased from 66 to 83 against the sanctioned strength of 133 and vacant posts are being filled by deputation and Direct Recruitment.
XIV. INJETI SRINIVAS
COMMITTEE FOR PREPARING
AN INVESTIGATION MANUAL FOR SFIO
On March 6,
2020, the Ministry of Corporate Affairs (MCA) formed a 12-member committee
chaired by “Mr. Injeti Srinivas, Secretary MCA, to prepare an Investigation
Manual for SFIO”.
The committee’s mandate included the following: increasing awareness
of relevant processes and statutes to ensure that Investigation
Officers adhere to the highest professional standards; developing a “all-encompassing Manual”
for conducting effective investigations in accordance with the Act; assessing and making
recommendations based on prior experience and cases; providing insight to
reviews of existing processes; and conducting comparative analysis on a variety
of variables.
XV.
Conclusion
Corporate fraud and financial frauds have widespread ramifications for a number of stakeholders,
the general public, and the economy. To advertise their success as a business,
firms frequently attempt to present a rosy picture of their financial health as
if it were all rainbows and unicorns. They conceal their financial statements
through a variety of fraudulent and unethical tactics in order to present a false picture
to shareholders. As a result,
it is important to reevaluate, reconsider, and enact stringent legislation to counteract fraudulent practises. White-collar crime is on the
rise in India, necessitating exceptional sanctions and effective legal
enforcement.
In order to
investigate complicated business issues involving a higher level of public
interest, the Serious Fraud Investigation Office (SFIO) was founded. There was a need for an agency dedicated
exclusively to the resolution of complex white-collar crimes, such as the Satyam
Computers case, because “it would have experts from various fields
handle such cases more efficiently and effectively, and it could coordinate
with other investigating agencies, such as the CBI, the Securities and Exchange Board of India
(SEBI), and other
organisations”. This goal was intended to be achieved through the
establishment of an SFIO under the Companies Act of 1956. SFIO records, on the
other hand, indicate that the situation has not improved.. According to the
organization’s website, the vast majority of complaints made against firms are
still pending in various stages before a variety of courts as a result of the
prolonged legal procedure. Additional
challenges that have hampered the effectiveness of the SFIO include a lack of
manpower, delays in obtaining permissions, and, in certain cases, the
involvement of various government organisations, all of which have contributed to the organization’s overall inefficiency. As a result, it is vital to address these
concerns and ensure the smooth operation of this special investigation agency
in order to punish those responsible for large-scale corporate frauds and to
defend the interests of investors and the general public, respectively. As a result, it is vital to address these
concerns and ensure the smooth operation of this special investigation agency in order to punish
those responsible for large-scale corporate frauds and to defend the interests
of investors and the general public, respectively.
The SFIO
concluded investigations in 12 cases involving 361 entities during fiscal year
2019-20. In FY 2018-19, by contrast, it had concluded investigations in 12
cases involving a total of 83 businesses. This
contrast indicates how the SFIO is becoming more active in its primary mission
of corporate fraud investigation. However, there are still a significant number
of active litigations
involving the SFIO, particularly where there has been a significant delay in
concluding the investigation and filing the report.
That the SFIO
is effective in combating corporate fraud is demonstrated by this. Because the
business sector has the potential to have large and far-reaching economic
implications, the government is attempting to instil a culture of sound corporate governance in the country through this initiative. With all of
its faults, SFIO operates at an impressively rapid pace. Although
still in its infancy, the
SFIO is steadily strengthening its capacity to compete with the performance of
severe fraud offices in other jurisdictions with each new step it takes. Corporate
fraud is becoming more frequent, and as a result,
the SFIO’s purpose is becoming increasingly important.
There are no
published statistics on the number of prosecutions that end in convictions, and
the lack of transparency exacerbates the problem. According to the MCA, only
six successful convictions have been achieved out of 162 completed
investigations, including the Reebok and Satyam instances[18]. According to the data, the strike rate in the United
States is on average 3.7 percent, whereas it is 85 percent in the United
Kingdom. One possible explanation is that SFIO lacks the authority to resolve disputes
on its own. Though it submits a comprehensive and complete
investigative report at the conclusion of the investigation, the Central
Government instructs the SFIO to initiate prosecution against a corporation
after examining the report. In comparison, the United Kingdom’s Serious Fraud
Office (“SFO”) is a “independent” entity charged with investigating and
prosecuting major and sophisticated fraud and corruption cases[19].
Its role in promoting good corporate governance in that country has become
increasingly important as the major enforcer. As a result,
a comparable model with equivalent capabilities may be
used to the SFIO as well, ensuring prompt relief to investors while also
alleviating part of the court’s workload. One reason is because MCA exerts direct
control over the agency, while another
is a manpower problem. Only 59 officers
were authorised to fill the 133 vacant
posts, according to the MCA[20]. The Agency
has had various difficulties as a result of a lack of proactive measures, a
staffing shortfall, limited financing, and reliance on the government for
permission to investigate suspects. The
recruitment process should be overhauled by way of deputation and increase
direct recruitment to circumvent this issue. Further,
the number of regional offices
can be increased with
permanent officers on standby. Some changes to SFIO functioning is required.
XVI. Bibliography
Articles
·
Anil
Sasi, Since inception, 6 probes by SFIO led to convictions The Indian Express (2015), https://indianexpress.com/article/business/business-others/since-inception-6probes-by- sfio-led-to-convictions/ (last visited Oct
16, 2021).
·
Bharat Vasani
& Esha Himadri,
SERIOUS FRAUD INVESTIGATION OFFICE – KEEPING
A
·
close watch on frauds in India Inc India Corporate Law (2021),
·
https://corporate.cyrilamarchandblogs.com/ (last visited Oct 27, 2021).
·
J. C Sharman, Shopping
for anonymous shell companies: An audit study of anonymity and crime in the International Financial System, 24 JOURNAL
OF ECONOMIC PERSPECTIVES 127– 140 (2010).
·
Power
of 'special court' to try any offence under companies act in 'Summary way',
TAXGURU, https://taxguru.in/company-law/power-special-court-offence-companies-
actsummary-way.html (last visited Oct 27, 2021).
·
Section 89 of CPC- A critical
analysis, LEGAL SERVICE
INDIA - LAW, LAWYERS AND LEGAL
RESOURCES, https://www.legalserviceindia.com/legal/article-385-section-89-ofcpc-a- critical-analysis.html (last visited
Oct 26, 2021).
Books
·
Ramaiya, Guide to
the Companies Act, 16th edn.
Case Laws
·
Church of South India
v. Union of India, W. P. Nos.25236
and 25419 of 2018 & 32587 of 2019, High Court of Madras, Decided on
February 01, 2021.
·
K. Veeraswami v. Union of India, (1991)
3 SCC 655.
·
N. Sampath
Ganesh v. Union of India, (2020) 222 CompCas 676 (Bom).
·
Rohtas Industries Ltd. v SD Agarwal, AIR 1969 SC 707.
·
SFIO v. Nitin Johari,
(2019) 9 SCC 165.
Reports
·
Government of India, 13th Report: Standing
Committee on finance
on Demands for Grants
(Ministry of Corporate Affairs 2015-16).
·
Government of India, 17th Report: Standing
Committee on Finance,
(Ministry of Corporate Affairs 2014-15).
·
Naresh Chandra,
REPORT OF THE CII TASK FORCE ON CORPORATE GOVERNANCE MINISTRY OF CORPORATE AFFAIRS (2009),
·
Ninth Report of the Standing Committee
on Finance on ‘Demands for Grants (2020-21), LOK SABHA (2020), http://164.100.47.193/lsscommittee/Finance/17_Finance_20.pdf.
Websites
[1] Resolution No. 45011/16/2003-Adm-I.
[2] Ramaiya, Guide to the Companies
Act, 16th edn. p. 2525.
[3] Section 211, The Companies Act,
2013.
[4] Section 212(5), Companies Act,
2013.
[5] Section 210: Investigation into the affairs of
Company.
[6] Section 212(1), The Companies
Act, 2013.
[7] Section 219, Companies Act, 2013: Power of Inspector
to conduct investigation into the affairs of the company. 8 Inspection, Inquiry
and investigation, Sections 206-229, Companies Act, 2013.
[8] Section 212(3), Companies Act,
2013.
[9] Writ Petition Nos.25236 and 25419 of 2018 & 32587
of 2019, High Court of Madras, Decided on February 01, 2021.
[10] Section 212(7), Companies Act, 2013.
[11] Naresh Chandra, Report of the CII Task Force on
Corporate Governance Ministry of Corporate Affairs (2009), https://www.mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf.
[12] Rule 2(1) of the Company (Arrest
in Connection with Serious Fraud Investigation Office) Rules, 2017.
[13] AIR 1969 SC 707.
[14] (2020) 222 CompCas 676 (Bom).
[15] (2019) 9 SCC 165.
[16] (1991) 3 SCC 655.=
[17] Action taken by the Government
on the recommendations contained in Ninth Report of the Standing Committee on
Finance on ‘Demands for Grants
(2020-21), Lok Sabha (2020),
http://164.100.47.193/lsscommittee/Finance/17_Finance_20.pdf.
[18] Anil Sasi, Since inception, 6
probes by SFIO led to convictions The Indian Express (2015),
https://indianexpress.com/article/business/business-others/since-inception-6-probes-by-sfio-led-to-convictions/
(last visited Oct 16, 2021).
[20] Vacancies, SERIOUS FRAUD INVESTIGATION OFFICE,
https://sfio.nic.in/vacancies (last visited Oct 27, 2021).
Article Information
ROLE OF SERIOUS FRAUD INVESTIGATION OFFICE IN STRIVING WHITE COLLAR CRIMES AND ITS DEVELOPMENTS
Authors: YASH PALAN
- Journal IJLRA
- ISSN 2582-6433
- Published 2025/03/04
- Issue 7
About Journal
International Journal for Legal Research and Analysis
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