Punishment for fraudulently inducing persons to invest money

Akash Sharma

Extract of Section  36 of the Companies Act, 2013

36. Punishment for fraudulently inducing persons to invest money.

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,—

(a) any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities; or

(b) any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities;or

(c) any agreement for, or with a view to obtaining credit facilities from any bank or financial institution,

shall be liable for action under section 447.

Section 36 of the new companies Act, 2013 is almost a replica of section 68 of the erstwhile Act of 1956 except sub-section (c) of section 36 is a new jurisprudence in company law which has not been discussed thoroughly. Here the banks and/or financial institutions are also clubbed with investors creating additional remedy for recovery of their dues from the companies along with existing remedies under THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 in the THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSESTS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002.

Punishment for fraud under section 447 has been made non-compoundable in case of companies in contrast to section 420 under IPC, 1860 applicable for all persons increasing the punishment from 7 to 10 years and penalty upto 3 times the amount due. One wonders whether we are reading a criminal Act or an economic Act into the Companies Act, 2013.

Extract of Section 447 of Companies Act, 2013

447. Punishment for fraud

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten 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 times the amount involved in the fraud:

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Explanation.—For the purposes of this section—

(i) “fraud” in relation to affairs of a company or any body corporate, 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;

(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled; 

(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

Lets see Section 420 of IPC and 628 of the Companies Act, 1956 as a matter of contrast.

Extract of Section 420 of IPC(Indian Penal Code)

420. Cheating and dishonestly inducing delivery of property.—Whoever cheats and thereby dishonestly induces the person de­ceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.

Extract of Section 628 of the Companies Act, 1956

628. Penalty for false statements. If in any return, report, certificate, balance sheet, prospectus, statement or other document required by or for the purposes of any of the provisions of this Act, any person makes a statement-

(a) which is false in any material particular, knowing it to be false; or

(b) which omits any material fact knowing it to be material; he shall, save as otherwise expressly provided in this Act, be punish- able with imprisonment for a term which may extend to two years, and shall also be liable to fine.

Now, we ponder with these queries,

1. In how many cases the SARFAESI Act has been invoked against big companies in India?

2. Now, RBI deputy Governor has stated on 17th November, 2013 that in the last 13 years, banks have written off 1 lakh crore and 95% of these are large loans. How can this happen with SARFAESI in place?

3. Can there be discrimination with respect to similar or identical offences in India providing for more severe punishment and also discriminating as to the compoundable or non-compoundable if one is a corporate executive (Companies registered under Companies Act) compared to a partners of a firm or an executive of a corporation, Bank, Financial Institutions, RBI, individual et al given the mandate of Article 14 of the Constitution?

4. If the Banks et al can pursue both under SARFAESI and RDDBFI simultaneously can they also invoke section 447 of the Companies Act, 2013 along with 420 of IPC, 1860 in a civil court?

5. In how many case they would be prompted to go against the big corporate executives?

If today the provisions of section 447 are invoked sincerely I am of the view that there would be more than 100 cases only against the executives of big  companies alone.