Corporate frauds are the growing concern in India for shareholders as well as for the government. After the Satyam and Saradha scams, the government made the stringent changes in the corporate Laws. Under the new Act, the companies placed higher punishment for the officers who are involved in the frauds.
Fraud under the companies act is dealt under section 447. This section has been worded so stringently that the minimum imprisonment for the period of 3 years can be awarded in case of fraud.
Following are some of the instances which are considered to be frauds:
- If the persons manage the affairs of the company in frequent manner.
- If you state any false statement while issuing prospectus.
- If you induce other persons to invest his money into the company.
- Issuance of duplicate shares certificates.
- If the company fails to repay the deposits or interest on deposits.
- Business is carried on with false motive.
- If an application is filed for the removal of the name of the company to evade the liabilities or deceiving the creditors.
This is the first time a special section has been introduced in the act itself otherwise in the earlier act the penalty provision was codified in the relevant section and there was no such separate section which deals with severe frauds.
Protection mechanism under the companies Act
- Reporting by shareholders or ROC:
The Company can be investigated on the order of the Central Government if the ROC or inspector submits the report to the Central Government, or a special resolution is passed by the shareholders that company should be checked thoroughly.
- SFIO (Serious Fraud Investigation Offices):
SFIO is a special investigation wing to investigate frauds related to the companies. The special power vested in SFIO is that once the SFIO starts the investigation then no other agency can interrupt the proceeding of the investigation.
- The onus is also placed on the auditor of the company to report the frauds which involve the amount of Rs. 1 Crore. An auditor is the only outsider who has almost every detail about financials of the company. As a learned Professional, he has the acumen to unearth the frauds and other financial irregularities. If the auditor fails to report the frauds then he can be held liable for fine.
- Independent Director:
Under the new companies act, 2013, Independent director is the key person in fostering the good corporate governance practices in the company and detect the frauds which could harm the shareholders’ wealth.
- Class Action Suit:
First, understand class action suit. Class action suit is a lawsuit in which one or group of a person on behalf of a larger group (referred as the class) file a case against the other party (accused party). This concept was already prevalent in all the developed economies and even under Indian laws, Consumer Protection Act also provides this kind of remedy to the injured party. But in India, this has been introduced first time in India.
This is more beneficial for those shareholders who have a small holding of shares in the company because now they can collectively file a class action suit against the company in case of any wrong doing.
As a conclusion, one thing which I want to add that ethics of the person can be the first wall of defence to stop any kinds of frauds because once the fraud is done, the actions taken after that are the only remedial actions which take time. The law can not stop the fraud to happen, it can only provide the remedies to the affected parties.
Therefore, the focus must be on following the intention of law in its letter and spirits, not just to comply the law by making a checklist. Abidance of law should not be considered as a burden or extra cost, rather it is a proactive approach to build the long-term reputation of the business. In a short run, businessmen may find cumbersome to follow the law but at the end, they always find themselves in a beneficial position.