1. Introduction on the Imprisonment + Fine (both) for Corporate Fraud under Section 447 of the Companies Act, 2013 (Act).
(a) Corporate frauds are increasing in India by the person(s) those are directly or indirectly connected or even not-connected to the corporate.
(b) It’s required that high standards for corporate governance and strong legal provisions should be introduced to stop and tackle the corporate fraud to be committed by the Indian corporate.
(c) Now day’s a growing tendency in corporate to manipulate the financial statements (Balance Sheet and Profit & Loss Account) commonly known as window dressing to demonstrate as healthy and wealthy financial statements in front of the Stakeholders, Public, Investors, Creditors and Employee along with the , banks, financial institution, Foreign Investors and any other person. This tendency is also included under the head corporate fraud and liable for imprisonment + fine (both)
(i) In 2013 strong provisions are introduced under section 447 of the Act by way of increasing the roles and duties of independent directors and statutory auditors (both)
(ii) The act is more focusing on stopping and tackling of the corporate fraud as to be committed by the Indian corporate.
(iii) Corporate fraud is including the financial and non financial gain or loss to a corporate and correspondingly financially and non financially loss or gain respectively to the victim of corporate fraud
(iv) Corporate fraud is treated a criminal liability. Hence person committing Corporate fraud is liable for imprisonment + fine (both)
(v) Robbery Vs Fraud
There are 2 ways to get something from someone illegally like robbery and fraud
(a) Robbery includes:
(aa) Robbery is an act where an officer(s) or any other person or group of the persons are physically forcing someone by using a gun or any other weapon or a brute force and also to trick someone out of his belongings is called a robbery.
(ab) Robbery is often more violent and traumatic than a fraud and it’s attracts more public attention. However the total loss from a fraud is much exceeding than a loss from a robbery.
(b) Fraud includes:
(ba) Fraud is an intentional with a deception or a willful misrepresentation of the material facts and is to be described by way of cheating and stealing.
(bb) Fraud is consisting of coercing the other person to act against his own best interest / wish.
(bc) Fraud is an intentional act to induce another person to part with something of valuable or to surrender his legal right.
(bd) Fraud is a deliberate misrepresentation or concealment of the information’s in order to deceive or mislead someone.
(be) Fraud can be within a range from minor employee theft to large scale misappropriation of assets and manipulation of financial statements etc.
(vi) Main reasons for committing a corporate fraud
(a) Corporate fraud is generally being committed due to an external factor like economic, competitive, social, political and poor control mechanism.
(b) Some persons are more prone to commit fraud rather than others.
(c) Besides the external and internal environmental factors the nature of people is also more important for committing the corporate fraud.
(d) Fraud is being committed by the white-collar criminals.
(e) Corporate is an artificial juridical person, invisible and intangible as created by law with a discrete legal entity, perpetual succession and being operated with the common seal. Hence corporate is more fraud prone entit
(f) Corporate is an association of various stakeholders which are commonly known as shareholders, public, investors, customers, and employees (SPICE) vendors, and any other person.
(g) Major stakeholders can be expressed in one word like is SPICE where :-
S for shareholders
P for public
I for investors
C for customers
E for employees
- And along with Govt. and any other person. Hence a company must be fair and transparent with the stakeholders.
(h) Corporate fraud is a globalised scenario due to the followings reasons:
(ha) For economical accessing the global resources
(hb) For attracting and retaining the best human capital globally
(hc) For having partnership with the vendors for collaborations and also need to live in harmony with the society.
(hd) For having embraces and demonstrates the ethical conduct by the corporate.
(vii) Concept of Corporate Fraud under the Act
(a) Corporate sector is mainly regulated by the Act through different provisions in Act and correspondingly in rules for regulating the affairs of corporate.
(b) The Act is first time properly defining about the corporate fraud.
(c) The definition of fraud is generally represent the following acts:
(ca) Misrepresentation of the material facts
(cb) Misrepresentation must be made by a person(s) knowingly and deliberately with intent to deceive another person.
(cc) Victim of fraud must have relied on the misrepresentation
(cd) Injury or damage must be a result due to reliance by the victim on the misrepresentation
2. Imprisonment + Fine (both) for Corporate Fraud
(i) Definition of the Corporate fraud
- Now detailed definition of the corporate fraud and punishments for committing the corporate fraud are properly incorporated under section 447 of the Act.
(ii) Imprisonment + fine (both) for committing corporate fraud
- Now an officer(s) or any other person as guilty for committing corporate fraud is liable for an imprisonment + fine (both) under section 447
(iii) Quantification for Imprisonment + fine (both) for corporate fraud
(a) Act is providing an imprisonment for a minimum period of 6 months and maximum period of 10 years where corporate fraud is minimum for Rs. 10 lac or 1% of the turnover whichever is lower
- And also a fine minimum @100% and maximum @300% of the amount of corporate fraud where fraud is not involving public
(b) Act is providing an imprisonment for a minimum period of 3 years and maximum period of 10 years where corporate fraud is minimum for Rs. 10 lac or 1% of the turnover whichever is lower
- And also a fine minimum @100% and maximum @300% of the amount of corporate fraud where fraud is involving public.
(b) Act is providing an imprisonment for a maximum period of 5 years where corporate fraud is less than for Rs. 10 lac or 1% of the turnover whichever is lower or a fine for maximum of Rs.20 Lac or both where fraud is not involving public.
(c) Non-compoundable offence for committing the corporate fraud
- The punishment for the corporate fraud likes imprisonment + fine (both) are non-compoundable offences. Hence non compoundable of offences are a serious consequence for a person(s) committing corporate fraud.
3. Specimen for the corporate frauds
- The term corporate fraud is covered under section 447 and also includes under the different provisions at 17 places under the Act. Some of specimen is as followings:-
(i) Incorporation of company based on the false and incorrect information’s, like name of first directors, first subscribers and also name of the professional who has certified the declaration.
(ii) Inducing fraudulently to any other person to invest any money in the company
(iii) Personating in acquisition of securities, etc.
(iv) Acceptance of deposits with intent to commit fraud with the depositor or any other person for the fraudulent purpose
(v) Statutory Auditors as acting in a fraudulent manner through abetting or colluding in any corporate fraud if approved by the Indian courts in favor of victim
(vi) Business of a company is being carried on for a fraudulent and unlawful purpose with intent to commit fraud with the stakeholders like, shareholders, Public Investors, Creditors and Employees along with and any other person.
(vii) Filling of application fraudulently for removal of name of company or directors
(viii) Furnishing of any false statement, mutilation, destruction of document during any inspection, inquiry or investigation.
(ix) Acting, omitting or concealing of the facts or abusing the position for the purpose of committing a fraud
(x) Filling of any return with the Govt. dept. and banks etc.
(xi) Submitting a report to the Govt. dept. and banks etc,
(xii) Issuing any certificate to the Govt. dept. and banks etc.
(xiii) Submitting financial statements to stakeholder, dept. and banks etc.
(xiv) Issuing of prospectus to stakeholders, the Govt. dept. like SEBI and ROC
(xv) Submitting of any other statement to the Govt. dept and banks etc.
4. Role of Serious Corporate fraud Investigation Office (SFIO)
(i) Govt. of India has established the SFIO to investigate the corporate fraud in more scientific and systematical manner.
(ii) The experts from different areas along with experiences are to be included for forming a team of the SFIO as below:-
(a) With Banking experience
(b) With Corporate affairs experience
(c) With Direct and Indirect Taxation experience
(d) With Forensic audit experience
(e) With Capital market experience
(f) With Information technology (IT) experience
(g) With legal experience
(iii) During investigation by the SFIO other investigating agencies like Govt., police authority, Income tax authorities are not permitted to proceed with their ongoing investigation and also other investigation agencies are required to transfer all the relevant documents and records to the SFIO.
(iv) The SFIO is required to submit its report to the central govt. against the investigation for committing a corporate fraud.
5. Role of the Statutory Auditors
(i) The statutory auditors are required to report to the central govt. against a corporate fraud.
(ii) The partners and firm of statutory auditors are personally and jointly liable for committing a corporate fraud through abetting or colluding in fraud and also the Indian courts has approved in favor of victim.
6. Role of corporate
(i) The corporate is required to recover back the amount as paid in excess of 11% of the profits from the MD / WTD/ Manager/ CEO where the financial statements are revised/re-stated due to accounting fraud like as happened in Satyam Computers Limited
(ii) The corporate is also required to recover back the assets, properties or cash from the Directors, KMP’s or any other officer / person who have already derived any undue advantage or benefit through a corporate fraud.
7. Conclusion
(i) Now corporate fraud is treated as criminal liability. Hence any person(s) as involved in corporate fraud is liable for imprisonment + fine (both)
(ii) Introduction of section 447 for corporate fraud is providing very stringent provisions to show the seriousness of of India in tackling the problem of corporate fraud.
(iii) Provisions of section 447 will also be tested for unearthing the corporate fraud which is leading towards the scams by the Indian corporate.
(iv) The word SPICE includes list of main stakeholders like shareholders, public, investors, customers and employees along with Govt. and any other person.
(v) Inflating or deflating of purchases, expenses and also incomes along with diversion of funds to the related parties directly or indirectly and misappropriation of funds through any other mode are also known as corporate fraud. Hence liable for imprisonment + fine (both)
(vi) Debiting any personal expense of the director(s) and promoter(s) in company’s books of accounts are also known as corporate fraud. Hence liable for imprisonment + fine (both)
(vii) Reducing the tax liability under the head direct tax and indirect tax are also known as corporate fraud through inflating purchases and direct or indirect expenses and misappropriation of funds. Hence liable for imprisonment + fine (both)
(viii) Claiming of non allowable allowances and exemptions under direct tax and indirect tax with intention to reduce the tax liability is also known as a corporate fraud as directly or indirectly affecting the welfare of the Hence liable for imprisonment + fine (both)
(ix) Manipulation through related party transactions without matching with Arm Length Price (ALP) and taking personal benefit of the company’s income and assets are known as corporate fraud. Hence liable for imprisonment + fine (both)
(x) Directly and indirectly involvement of the promoter(s), director(s), CEO, CFO and Company Secretary, independent director(s) for any personal benefits are known as corporate fraud. Hence liable for imprisonment + fine (both)
(xi) Indian courts are to approve that anyone out of above mentioned is actually involved in corporate fraud. Hence liable for imprisonment + fine (both)
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