Hidden within the intricate landscape of the Companies Act 2013 is a small yet incredibly captivating portion known as Chapter XIV, Inspection, Inquiry, and Investigation. This segment not only boasts intrinsic significance but also wields substantial sway as a formidable deterrent for the accountable stakeholders of a company. Unfolding from the depths of Section 206 and journeying up to the vantage of Section 229, this chapter showcases a web of interconnectedness with various sections strewn across disparate chapters within the Companies Act 2013. The sanctified orchestration of authority cascades from the hallowed chambers of the Central Government to an array of sundry regulatory bodies and vigilant investigation agencies. All are endowed and entrusted with multifarious responsibilities, meticulously doled out through the pages of this unassuming yet immensely influential chapter of the Companies Act 2013.
In an epoch characterized by labyrinthine financial transactions and elaborate corporate architectures, the imperative of upholding transparency, answerability, and the safeguarding of public welfare within the domain of commerce has ascended to the highest echelons of importance. The Companies Act of 2013, a momentous legislative landmark within the Indian legal framework, stands resolutely as an embodiment of the nation's unwavering dedication to nurturing virtuous business conduct. At the heart of this steadfast commitment lies the inception of the Serious Fraud Investigation Office (SFIO) and the advent of the special court, which cohesively endeavour to confront deceitful endeavours, shield public welfare, and perpetuate the unassailability of the corporate sphere's probity.
Corporate India witnessed a series of Corporate frauds in the recent past, For example YES Bank crisis, the Punjab National Bank Scam, IL&FS, (a systemically important Core Investment Company ), and its irregularities in corporate conduct, DHFL case. Observing and analyzing the above cases it is diagnosed that the following failures resulted in the failures of these Companies.
Improper NPA Classification and Disclosure
Improper NPA Management
Shadow Banking and NBFC crisis (an unprofessional nexus between commercial Banks and NBFC)
Issues in Corporate Governance
Less than optimum asset liability management
The criminal nexus between some bank employees and the high net-worth Bank customer
Inadequate disclosures supported by statutory audit firms
Insufficient Internal Control
Auditors partnering with the crime
Less than adequate regulatory control (Quasi regulation)
The use of shell Companies as a tool for facilitating scams is also widely used in the above cases. This shows the importance of Company Secretaries diligently acting as the extended arm of the regulator.
To plug all these loopholes, the Government of India came out with a multi-pronged approach by enacting new legislation, creating regulatory bodies and empowering other Government agencies. The following are some such initiatives.
1. Fugitive Economic Offenders Act, 2018
This legislation has been brought into force as a direct consequence of investigations into significant high-value crimes that hold public interest, which unfortunately faced disruptions due to the perpetrators evading justice by turning into fugitives. A fugitive economic offender is an individual for whom an arrest warrant has been issued due to a scheduled offence valued at more than 100 Crores. Additionally, this individual has departed from India with the intention of evading criminal prosecution.
2. Prevention of Corruption Act 1988 (PCA)
3. The Benami Transactions (Prohibition) Act 1988 (amended in August 2016)
4. Prevention of Money Laundering Act 2002
By implementing strict measures to prevent money laundering, governments aim to choke off the financial resources that support criminal and illegal activities.
5. Lokpal and Lok Ayukta Act 2013
6. Foreign Contribution Regulation Act 2010 (FCRA) (amended in 2016)
7. The Black Money (Undisclosed) Foreign Income and Assets and Imposition of Tax
8. Companies Act, 2013
9. Right to Information Act 2005 (RTI)
10. Indian Penal Code 1860 (IPC)
The Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA) stand as the pivotal regulatory entities overseeing India's financial landscape. Through a plethora of strategies, these regulatory bodies meticulously institute preventive and punitive protocols to combat and eliminate fraudulent practices within the realms of banking, securities markets, insurance companies, and pension funds. Proactive approaches encompass rigorous Know Your Customer (KYC) requisites, regular disclosures, imposition of restrictions and benchmarks on fund investments, and an array of corporate governance provisions. Conversely, punitive actions, which vary across regulators, span from financial penalties to the full spectrum of legal consequences, culminating in imprisonment. This process is complemented by enlisting the aid of other governmental investigative agencies and the judicial apparatus.
Role of other Government agencies in the Prevention, Detection and Punishment of Fraud.
Section 211 of the Companies Act 2013 confers authority upon the Central Government to institute a specialized entity known as the Serious Fraud Investigation Office (SFIO), entrusted with the mandate to probe instances of corporate malfeasance following the provisions outlined in Chapter XIV of the Companies Act 2013. Once a case has been assigned to the Serious Fraud Investigation Office (SFIO), as per the stipulations of the Companies Act 2013, no other investigative agency shall pursue an inquiry into an offence falling under the purview of the Act.
The Central Bureau of Investigation, Anti-Corruption Bureau, Enforcement Directorate, Central Level Lokpal, State Level Lok Ayukta, Comptroller and Auditor General of India, and Central Vigilance Commission (CVC), among others, play diverse roles that collectively aid in preventing, detecting, and penalizing corporate and other fraudulent activities.
Relevance of Chapter XIV of the Companies Act 2013 in empowering governmental agencies.
Enshrined within Chapter XIV of the Companies Act 2013, an array of distinct sections confers upon governmental bodies the authority to intercede in the operational matters of a company through initiating inquiries, conducting inspections, and launching investigations.
Section 206: Power to Call for Information, Inspect Books, and Conduct Inquiries.
This section empowers the Central Government to call for information, inspect books and records, and conduct inquiries into the affairs of a company. The Registrar of Companies (RoC) also holds the authority to inspect and investigate the company's books, documents, and registers.
Section 207: Conduct of inspection and inquiry.
This section provides the procedure for conducting inspections and inquiries. It outlines the powers of the inspectors appointed by the Central Government and specifies the actions they can take during their investigations.
Section 208: Report on Inspection Made.
After conducting an inspection or inquiry, the inspector is required to submit a report to the Central Government, providing details of their findings and observations. This report can lead to further actions based on the identified violations.
Section 209: Search and Seizure.
This section empowers the inspector to conduct search and seizure operations if they have reasonable grounds to believe that documents or records related to the company's affairs are being concealed, suppressed, or tampered with.
Section 210: Investigation into Affairs of the Company.
This section allows the Central Government to order an investigation into the affairs of a company if there is sufficient cause to believe that the company's operations are not being conducted in accordance with legal requirements or are prejudicial to the public interest.
Section 211: Establishment of SFIO.
This section provides the legal framework for the establishment of the Serious Fraud Investigation Office, detailing its composition, functions, and powers. The SFIO is responsible for investigating cases involving fraud and other misconduct.
Section 212: Investigation into Affairs of Company by Serious Fraud Investigation Office (SFIO).
This section establishes the SFIO and grants it the power to investigate serious fraud cases. The SFIO operates as an expert body with the authority to probe complex financial irregularities and corporate frauds.
Section 213: Investigation into Affairs of Company by Tribunal.
The National Company Law Tribunal (NCLT) can initiate an investigation into the affairs of a company based on an application made by the Central Government, RoC, or any shareholder or creditor.
Section 216: Investigation of Ownership of Company.
The NCLT can investigate the ownership of a company if it believes that the ownership or control is not as represented or that a person's name is wrongly entered in the register of members.
Section 217: Procedure, Powers, etc., of Inspectors.
This section outlines the procedure and powers of inspectors during an investigation, including the authority to examine individuals under oath.
Section 218: Lays down the protection available for the employees during the time of investigation
Section 219: Prescribes Power of Inspector to Conduct Investigation into Affairs of Related Companies
This chapter also empowers the inspector or the investing agencies to cease the document, freezing the assets of the Company and impose restrictions upon securities through sections 220,221,222, respectively.
The interim and final report of the investigation need to be submitted to the Central Government as per section 223
Section 227: Imposses restrictions on legal advisers and bankers on disclosing certain information otherwise than on legal requirement
Section 228: Deals with the provisions of investigation of Foreign Companies
Section 229: Lays down the penalty for Penalty for Furnishing False Statements, Mutilation, and Destruction of Documents by the wrongdoer to frustrate the inspection inquiry and investigation process.
Correlation of Companies Act 2013 sections 211 and 212 with section 447.
The correlation between these sections lies in their collective aim to address fraudulent activities within the corporate sector and hold individuals accountable for such actions. Here's how they are connected:
Section 211 (Financial Reporting) mandates accurate and transparent financial reporting by companies. It requires them to prepare financial statements that provide a true and fair view of their financial position. Accurate financial reporting is essential to prevent the manipulation of financial information that could potentially lead to fraudulent activities.
Section 212 (Fraud Investigation) When there is suspicion of fraud or other serious misconduct related to company affairs, Section 212 empowers the SFIO to investigate the matter thoroughly. This includes cases where financial statements might have been manipulated to misrepresent the company's financial health. The investigation under this section aims to unearth fraudulent activities and hold the perpetrators accountable.
Section 447 (Penalties for Fraud) defines the offense of fraud and outlines the penalties for those found guilty. Individuals involved in fraudulent activities, which could include manipulation of financial statements, can face imprisonment and fines. This section serves as a deterrent against engaging in fraudulent actions and reinforces the importance of maintaining the integrity of financial reporting.
In summary, Sections 211, 212, and 447 of the Companies Act 2013 collectively work to ensure accurate financial reporting, investigate fraudulent activities, and impose penalties for such actions. These provisions are interconnected as they contribute to creating a transparent and accountable corporate environment while deterring fraudulent practices.
Conclusion
In the era of Liberalisation, Globalisation, and Liberalization, India is more or less marching towards capitalism; the complexities of our country permits mindless free trade for those industrialist who possess the muscle for that. The Govt of India should not sit like a spectator, allowing this exploitative tendency to flourish, which is against the public interest. The govt should be a potent watchdog acting as a deterrent against these exploitative forces. This can be done through empowering govt agencies and regulatory bodies.
Mercy Daviz
Company Secretary Licentiate