Explore the role of directors in cases of financial frauds in India, covering legal frameworks, liabilities, and proactive measures to avoid legal consequences. Understand the complex landscape and safeguard your interests.

In recent years, India has witnessed an alarming rise in financial frauds involving companies and their directors. These frauds have not only impacted the companies and financial institutions involved but also eroded public trust in the country’s financial systems. This article discusses the role of directors in such cases, the legal framework governing their actions, and the measures they can take to protect themselves from liability and safeguard the interests of their companies and stakeholders.

White-Collar Crimes and Financial Frauds

White-collar crimes are non-violent offenses committed by individuals or organizations for financial gain. These crimes can have far-reaching consequences, including the destruction of companies, wiping out people’s life savings, and costing investors billions of dollars. In India, financial frauds have often been perpetrated by exploiting weaknesses in the banking and regulatory systems, leading to significant losses for financial institutions and their customers.

The CBI’s Focus on White-Collar Crimes

The Central Bureau of Investigation (CBI) has a dedicated white-collar crime program focused on analyzing intelligence and solving complex investigations, often with connections to organized crime activities. The CBI works closely with partner law enforcement and regulatory agencies like the Securities and Exchange Board of India (SEBI), the Director Revenue Inteligence  (DRI) and the Commodity Futures Trading Commission, among others.

Examples of white-collar crimes include:

  • Health care fraud
  • Corporate fraud
  • Money laundering
  • Securities and commodities fraud
  • Mortgage and financial institution fraud
  • Intellectual property theft and piracy

The Securities and Exchange Board of India (SEBI)

SEBI is the regulatory body responsible for overseeing the functioning of the Indian securities market, detecting malpractices, and protecting the interests of investors. SEBI operates within the legal framework of the SEBI Act and is responsible for investigating and prosecuting cases of insider trading and market abuse in India.

Vicarious Liability of Directors and Officials in Cases of Fraud

When can directors and other officials of a company be held vicariously liable for the actions of the company? In the case of Sunil Bharti Mittal v. CBI, the Supreme Court of India held that an individual can be held liable for an offense by the company (i) if there is sufficient evidence of the individual’s active role coupled with criminal intent, or (ii) where the statute itself stipulates the liability of directors and other officials, such as under the Prevention of Money Laundering Act (PMLA).

Financial Institutions in India

Liability under the Companies Act

Under the Companies Act, an exception has been specifically carved out for independent and non-executive directors, ensuring that they are liable only in cases where their knowledge and involvement can be established or where they, despite having knowledge, failed to act diligently. However, such exceptions are generally not prevalent in other statutes like the PMLA.

The Central Bureau of Investigation (CBI) and Financial Fraud Cases

In recent times, the CBI has registered cases against multiple companies and their officials for bank frauds, such as Gitanjali Gems and Simbhaoli Sugars. The government has also asked public sector banks to evaluate potential frauds in all bad loans above Rs 50 crore, leading to increased scrutiny by banks and investigative authorities like the CBI, Enforcement Directorate (ED), and Serious Fraud Investigation Office (SFIO).

Amendments to the Prevention of Money Laundering Act (PMLA)

The Finance Bill, 2018, amended the PMLA to include the handling of proceeds from corporate frauds as a money-laundering offense. This amendment empowers the ED to attach and confiscate property determined to be proceeds of crime, helping authorities prevent the dissipation of proceeds from corporate frauds. However, this may also result in innocent parties being questioned about their dealings with a company where fraud is discovered and potentially having their assets seized or directors arrested.

Measures for Directors and Officials to Avoid Liability

Given the increasing scrutiny and regulatory environment in India, it is crucial for directors and officials of companies to maintain high vigilance and take necessary precautions to avoid liability. Some of the measures that can be taken include:

Early Warning Signals

The Reserve Bank of India’s master directions on fraud (July 2017) identify certain early warning signals for the identification of fraud. Directors and officials should be cautious of such signals to avoid being caught unaware.

Diligence in Reviewing Business Plans and Accounts

As business plans and accounts are usually placed before the board of directors, it is essential to ask appropriate questions about the plans and obtain confirmations from audit committees, internal auditors, and external auditors.

Pre-Investment Financial and Forensic Diligence

Heightened pre-investment financial and forensic diligence is necessary, particularly in the case of companies with large outstanding debts.

Director and Officer Liability Insurance or Indemnity Agreements

These insurance policies or indemnity agreements can provide additional protection for directors and officials in the event of fraud.

Resignation as a Safeguard

Tendering a resignation is traditionally viewed as a good way of safeguarding against liability, but it does not provide complete cover. Stepping down may also have unwanted consequences, such as disabling an investor from exercising contractual rights like reserve matter rights.

Dealing with Different Investigative Authorities

Different authorities investigate different types of offenses, and the powers of these authorities, like the CBI, ED, and SFIO, also differ. The nature of the investigation may vary, requiring different approaches while dealing with different authorities.

The Importance of Proactive Measures

Failure to act may result in investors and foreign partners being identified with fraudsters, leading to the risk of imprisonment and reputational damage. It is imperative that directors take necessary steps to avoid liability and protect their companies and stakeholders.

In conclusion, the role of directors in cases of financial fraud in India is complex and subject to various legal provisions and regulatory oversight. By adopting proactive measures and diligently fulfilling their responsibilities, directors can mitigate their risks and contribute to a more transparent and secure financial system in the country.


(Author can be reached at email address casharma.sharad2000@gmail.com or on Mobile No. 9990365673)

Disclaimer:  “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “

Author Bio

Qualification: CA in Practice
Location: New Delhi, Delhi, India
Member Since: 04 Jan 2022 | Total Posts: 160
I have started my journey from a small city Saharanpur, starting a business or profession in India without God father is not possible. But after getting a good team you can do anything in this world. So we know the pain of startups and we start consulting to startups we are associated with 150+ star View Full Profile

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February 2024