Corporate Fraud under Section 447 of Companies Act (CA) 2013
1. Introduction on Imprisonment + financial penalty against Corporate Fraud
(i) Corporate frauds are increasing in India by person already directly + indirectly as connected + not–connected (both) with corporate.
(ii) Now corporates are required the high standards for corporate governance + strong legal provisions to be introduced by Govt. to stop + tackle the corporate fraud to be committed by Indian corporate.
(iii) Now tendency is increasing in corporates to manipulate the financial statements (Balance Sheet and Profit & Loss Account) commonly known as window dressing to demonstrate as healthy + wealthy financial statements (both) in front of Stakeholders + Public + Investors + Creditors + Employee + Govt. + banks + financial institution + Foreign Investors + any other person. This tendency is included under corporate Hence person as involved in corporate fraud is liable for imprisonment + financial penalty (both)
(iv) Now strong provisions are introduced in 2013 through introduction of section 447 under CA 2013 through increasing the roles + duties of independent directors + statutory auditors (both).
(v) Now section 447 under CA 2013 is more focusing on stopping + tackling of corporate fraud being committed by Indian corporate.
(vi) Now corporate fraud is including the financial + non–financial gains to corporate vice-versa financially + non–financially losses to victim are included in corporate fraud.
(vii) Now corporate fraud is treated a criminal liability. Hence person as committing Corporate fraud is liable for imprisonment + financial penalty (both)
2. Comparison between Robbery and Fraud
- Now 2 ways to get something from someone illegally like robbery and fraud (both)
(i) Word Robbery includes:
(a) Robbery is act where officer + any other person + group of persons (all) physically forcing someone by using a gun + any other weapon + brute force + trick someone (all) against snatching someone belonging is called a robbery.
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(b) Robbery is often more violent + traumatic than fraud + attracting more public attention. However total loss from fraud is much more higher than loss from robbery
(ii) Word Fraud includes:
(a) Fraud is intentional Act with deception + wilful misrepresentation of material facts + described as cheating + stealing (both)
(b) Fraud is coercing the other person to act against his best interest (wish).
(c) Fraud is intentional act to induce the other person to part with something as valuable + to surrender his legal rights (both).
(d) Fraud is deliberate misrepresentation + concealment of information’s to deceive + mislead the other person (both).
(e) Fraud can be from minor employee theft to large scale misappropriation of assets + manipulation of financial statements (both).
3. Main reasons for committing corporate fraud in India + outside India (both)
(i) Corporate fraud is generally being committed as due to external factors like economic + competitive + social + political + poor control mechanism (all).
(ii) Some persons are more prone to commit fraud rather than other persons.
(iii) Besides external + internal factors (both) nature of persons is more important against committing corporate fraud.
(iv) Normally Frauds are committed by white collar criminals.
(v) Generally Corporate is artificial juridical person + invisible + intangible as created by laws of country with discrete legal entity + perpetual succession + operated through common seal. Hence corporate is fraud prone entity.
(vi) Moreover Corporate is association of stakeholders as commonly known shareholders + public + investors + customers + employees (SPICE) + vendors + Govt. + any other person (all).
(vii) Hence stakeholders are expressed in 1 word like SPICE where :-
(a) S for shareholders
(b) P for public
(c) I for investors
(d) C for customers
(e) E for employees
- Hence company be fair + transparent with stakeholders.
4. Corporate fraud has certain reasons in India + outside India (both)
(i) Against economical accessing the global resources
(ii) Against attracting + retaining (both) best human capital globally
(iii) Against having partnership with vendors for collaboration + need to live in harmony with society.
(iv) Against having embraces + demonstrate (both) ethical conduct by corporate.
5. Concept of Corporate Fraud under CA 2013 in India
(i) Indian Corporate sector is regulated through CA 2013 under different provisions + rules (both) for regulating the affairs of corporate.
(ii) CA 2013 is first time defining about corporate fraud.
(iii) Definition of fraud is representing following actions:
(a) Misrepresentation of material facts
(b) Misrepresentation has made by person as knowingly + deliberately + intent to deceive other person (all).
(c) Victim of fraud has relied on misrepresentation
(d) Injury + damage (both) be result of reliance by victim against misrepresentation
6. Definition of Corporate fraud under CA 2013 in India
- Now definition of corporate fraud + punishments (both) against committing corporate fraud are incorporated under section 447 of CA 2013
7. Imprisonment + financial penalty (both) against committing corporate fraud
- Now officer + any other person (both) guilty against committing corporate fraud are liable for imprisonment + financial penalty (both) under section 447
8. Quantification for Imprisonment + financial penalty (both) against corporate fraud
(i) (a) CA 2013 is providing an imprisonment for minimum 6 month + maximum 10 year where corporate fraud is minimum INR 10 lac or 1% of turnover whichever lower
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(b) Financial penalty is minimum @100% + maximum @300% of amount of corporate fraud where fraud is not involving the public
(ii) (a) CA 2013 is providing an imprisonment for minimum 3 year + maximum 10 year where corporate fraud is minimum INR 10 lac or 1% of turnover whichever
+
(b) Financial penalty is minimum @100% + maximum @300% of amount of corporate fraud where fraud is involving the public.
(iii) (a) CA 2013 is providing an imprisonment for maximum 5 year where corporate fraud is not exceeding INR 10 lac or 1% of turnover whichever lower
or
(b) Financial penalty is maximum INR 20 Lac or both where fraud is not involving the
9. Non-compoundable offence against committing corporate fraud
- Punishment against corporate fraud like imprisonment + financial penalty (both) non–compoundable offences. Hence non compoundable offences having serious consequence against person committing corporate fraud.
10. Special Features of Corporate Fraud in India + outside India (both)
(i) (a) Now corporate fraud is treated as criminal liability under Section 447 of CA 2013.
(b) Hence person as involved in corporate fraud is liable for imprisonment + financial penalty (both) under Section 447 of CA 2013.
(ii) Now Inflating + deflating of purchase + expense + income + diversion of fund to related party as directly + indirectly (both) + misappropriation of fund through any other mode are known as corporate fraud. Hence liable for imprisonment + financial penalty (both)
(iii) Now Debiting any personal expense of director + promoter in company’s books of accounts are known as corporate fraud. Hence liable for imprisonment + financial penalty (both)
(iv) Now Reducing the tax liability under head direct tax + indirect tax (both) are known as corporate fraud through inflating purchase + direct + indirect expense. Hence liable for imprisonment + financial penalty (both)
(v) Now claiming of non–allowable allowance + exemption under direct tax + indirect tax with intention to reduce tax liability are known as corporate fraud as directly + indirectly (both) effecting the welfare scheme of public. Hence liable for imprisonment + financial penalty (both)
(vi) Now Manipulation through related party transaction without matching with Arm Length Price (ALP) principle + taking personal benefit of company’s income + asset are known as corporate fraud. Hence liable for imprisonment + financial penalty (both)
(vii) Now directly + indirectly involvement of promoter + director + CEO + CFO + Company Secretary + independent director (any) for personal benefit is known as corporate fraud. Hence liable for imprisonment + financial penalty (both)
11. Imprisonment + Financial Penalty under PMLA, 2002 for corporate fraud
(i) Now corporate fraud is included in list of 29 schedule offences under Prevention of Money Laundering Act (PMLA), 2002.
(ii) Hence person as involved in corporate fraud is liable for imprisonment + financial penalty under PMLA, 2002 + imprisonment + financial penalty under Section 447 of CA 2013 (both) acts.
12. Role of Serious Corporate fraud Investigation Office (SFIO) in India
(i) Now of India has established the SFIO to investigate the corporate fraud in scientific + systematic manner (both).
(ii) Now experts from different areas + experience (both) are included in forming of team of SFIO as below:-
(a) With Banking experience
(b) With Corporate affairs experience
(c) With Direct + Indirect Taxes experience
(d) With Forensic audit experience
(e) With Capital market experience
(f) With Information technology (IT) experience
(g) With legal experience
(iii) Now During investigation by SFIO the other investigating agencies like Govt. + police + Income tax authority (all) are not permitted to proceed with ongoing investigation + other investigating agencies are required to transfer 100% documents + records (both) to SFIO.
(iv) SFIO is required to submit the report to govt. of India on investigation against corporate fraud.
13. Role of Statutory Auditors of corporate in India
(i) Now statutory auditors are required to report to govt. of India against corporate fraud.
(ii) (a) Now Partner + firm of statutory auditors (both) are personally + jointly liable against corporate fraud through abetting + colluding (both) in corporate fraud
(b) However court to conclude the involvement of statutory auditors in corporate fraud.
14. Role of corporate in India
(i) Now corporate is required to recover the amount as paid in excess of 11% of profits from MD + WTD + Manager + CEO (all) where financial statements are revised (re-stated) due to accounting fraud like happened in Satyam Computers Limited (SCL).
(ii) Now corporate is required to recover the asset + property + cash (all) from Director + KMP’s + any other officer or person as derived undue advantage + benefit through corporate fraud.
15. Conclusion on corporate fraud in India + outside India (both)
(i) Now corporate fraud is treated as criminal liability. Hence person as involved in corporate fraud is liable for imprisonment + financial penalty (both)
(ii) Now Introduction of section 447 against corporate fraud is providing stringent provision to show the seriousness of of India in tackling the problem of corporate fraud.
(iii) Now Provisions of section 447 to be tested for unearthing the corporate fraud as leading towards scams by Indian corporate.
(iv) Now SPICE include list of main stakeholders like shareholders + public + investors + customers + employees (all 5 together).
(v) Now Directly + indirectly as involvement of promoter + director + CEO + CFO + Company Secretary + independent director (any) for personal benefit + advantage (both) are known as corporate fraud. Hence liable for imprisonment + financial penalty (both)
(vi) Now courts to decide that anyone is actually involved in corporate fraud. Hence liable for imprisonment + financial penalty (both).
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