Investigation – SFIO – Arrest

Short Summary:

The Ministry of Corporate Affairs by Notification NO. S.O. 2751(E) Dated: 24^th August, 2017 has notified that Section 212 sub-section (8), (9) and (10) shall come into force w.e.f. 24.08.2017.

MCA further vide [2]notification no. G.S.R. 1062(E) Dated: 24^th August, 2017 has published rules called the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017.

In this editorial the author shall discuss the provisions of Section 212 Investigation into affairs of Company by Serious Fraud Investigation Office along with rules relating to Arrest.

INTRODUCTION:

Section 211 & 212 are new sections under Companies Act. 2013. There is No Corresponding Provision in Companies Act 1956. The Companies Act, 2013 provides statutory backing to the SFIO u/s 211 for the purpose of investigating the affairs/ frauds relating to Company.

What is SFIO?

The Serious Fraud Investigation Office (SFIO) is an organization working under Ministry of Corporate Affairs. The office was established by the Government of India Resolution dated 2^nd July, 2003 to investigate corporate frauds. At that time SFIO didn’t enjoy a formal legal status. It carried out investigations within the existing legal framework under Section 235 to 247 of the erstwhile Companies Act, 1956.

Section 211 of The Companies Act, 2013 has accorded statutory status to the Serious Fraud Investigation Office (SFIO). By virtue of various other provision of the Companies Act, 2013, SFIO is vested with the requisite legal authority to conduct investigation. (SFIO) established by the Central Government with the object of investigating frauds relating to a company.

The Serious Fraud Investigation Office (“SFIO”) is a Fraud investigation agency in India. The SFIO is a multi-disciplinary organization under Ministry of Corporate Affairs, consisting of experts in the field of accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds

Responsibility of SFIO:

The SFIO will normally take up for investigation only such cases, which are characterized by:

• complexity and having inter-departmental and multi-disciplinary ramifications;
• substantial involvement of public interest to be judged by size, either in terms of monetary ;
• misappropriation or in terms of persons affected, and;
• The possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures. The SFIO shall investigate serious cases of fraud received from Department of company Affairs.

History

SFIO was set up in the backdrop of stock market scams of 2000-02, failure of non financial banking companies, phenomena of vanishing companies and plantation companies. The Government approved setting up of this organization on 9th January 2003 on the basis of the recommendations made by the Naresh Chandra Committee which was set up by the government on 21st August 2002 on corporate governance. SFIO started functioning from 1st October 2003.

Pursuant to directions issued by the Government, the Serious Fraud Investigation Office had set up Market Research and Analysis Unit (MRAU) on 20.08.09 for collection of background information with a view to look for early signs of corporate fraud and to analyze and imbibe the best procedures and systems followed in other countries.

A. Investigation into Affairs of the Company:

Where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company,—

a) on the receipt of a report of the Registrar or inspector under section 208;

b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or

c) in public interest,

It may order an investigation into the affairs of the company.

B. Investigation by SFIO into Affairs of the Company:

An investigation into the affairs of a company can be initiated by the Central Government and entrusted to the Serious Fraud Investigation Office under the following circumstances:-

a) On receipt of a report of the Registrar or inspector under section 208

b) On intimation of a special resolution passed by a company that its affairs are required to be investigated

c) In public interest

d) On request from any Department of the Central Government or a State Government

C. Cognizable & Non – Bailable Offence:

The offence contained under the Companies Act, 2013 which attract punishment for fraud under Section 447 of the Act, shall be cognizable and non-Bailable.

Special Court shall not take cognizance of any offence referred to this sub-section except upon a complaint in writing made by—

a) The Director, Serious Fraud Investigation Office; or

b) Any officer of the Central Government authorised, by a general or special order in writing in this behalf by that Government.

Arrest in connection with Investigation of SFIO:

Companies other than Government and Foreign Company:

The Director, Additional Director or Assistant Director may arrest a person, on the basis of material in his possession, reason to believe that such person has been guilty of any offence punishable u/s 447 (‘Fraud’).

• If arrest is made by additional Director or assistant Director, the prior approval of the ‘Director SFIO’ shall be obtained.
• Director SFIO shall be the Competent Authority for all decisions pertaining to arrest.

Government and Foreign Company:

• Whether an arrest of a person is to be made in connection with a Government Company or a foreign company under investigation, such arrest shall be made with prior written approval of the Central Government.
• The intimation of such arrest shall also be given to the Managing Director or the person in-charge of the affairs of the Government Company.
• Where the person arrested is MD or person in-charge of the Govt Company, to the secretary of the administrative Ministry concerned, by the arresting officer.

I. Service to the Arrestee:

The Director, Additional/ Assistant Director shall sign the arrest order together with personal search memo in the form prescribed in the rules and shall serve it on the arrestee and obtain written acknowledgement of service.

II. Service to Office of Director SFIO:

The Director, Additional Director or Assistant Director shall forward a

• copy of the arrest order
• along with the material in his possession and
• all the other documents including personal search memo

to the office of Director, SFIO in a sealed envelope with a forwarding letter after signing on each page of these documents, so as to reach the office of the Director, SFIO within twenty four hours through the quickest possible means

III. Maintenance of Arrest Register:

Place of Maintenance: An arrest register shall be maintained in the office of Director, SFIO.

Responsibility of Maintenance: The Director or any officer nominated by Director shall ensure that entries with regard to particulars of the arrestee, date and time of arrest and other relevant information pertaining to the arrest are made in the arrest register in respect of all arrests made by the arresting officers

Time period of Entry into Register: The entry regarding arrest of the person and information given to such person shall be made in the arrest register immediately on receipt of the documents as specified above in point (II) in the arrest register maintained by the SFIO office.

IV. Preservation of Documents:

The office of Director, SFIO shall preserve the copy of arrest order together with supporting materials for a period of Five years.

a) from the date of judgment or final order of the Trial Court, in cases where the said judgment has not been impugned in the appellate court; or

b) From the date of disposal of the matter before the final appellate court, in cases where the said judgment or final order has been impugned, whichever is later.

The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to arrest shall be applied mutatis mutandis to every arrest made under this Act.

[1] Investigation into affairs of Company by Serious Fraud Investigation Office

[2] http://www.mca.gov.in/Ministry/pdf/companiesArrestsconnectionSFIORule_25082017.pdf

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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