Corporate Fraud & Misconduct | Supreme Court of India
Corporate
Litigation on Fraud and Misconduct
A Comprehensive Guide to Corporate Fraud, Financial Misconduct, Breach of
Fiduciary Duties, Corporate Governance Failures and White-Collar Crimes in
India
Blog by:
Jayprakash B. Somani,
Advocate, Supreme Court of India & IP,
Cell: PA 9322188701
www.jayprakashsomani.com
www.supremecourtlawfirm.com
Corporate fraud and misconduct have emerged as one of
the most significant areas of commercial litigation in India. With increasing
corporate regulation, stricter governance norms, and greater investor
protection, fraud investigations today often involve multiple agencies such as
the Serious Fraud Investigation Office (SFIO), Registrar of Companies
(RoC), Securities regulator, Enforcement Directorate, Central Bureau of
Investigation, Income Tax authorities, and the National Company Law Tribunal
(NCLT). The SFIO, constituted under the Companies Act, 2013,
investigates serious and complex corporate frauds assigned by the Central
Government under Section 212.
I.
What is Corporate Fraud?
Corporate fraud refers to any dishonest, deceptive or
unlawful act committed by:
?
Directors
?
Promoters
?
Key Managerial Personnel
?
Employees
?
Auditors
?
Consultants
?
Company officers
with an intention to obtain unlawful gain or cause
wrongful loss to:
?
shareholders,
?
creditors,
?
investors,
?
banks,
?
government,
?
or the company itself.
II.
Common Types of Corporate Fraud
1. Financial Statement Fraud
?
Inflated profits
?
Fictitious sales
?
Concealed liabilities
?
False accounting entries
Example
Showing fictitious turnover to obtain higher bank
finance.
2. Accounting Fraud
Examples:
?
Fake invoices
?
Shell companies
?
Circular transactions
?
False GST claims
3. Corporate Governance Fraud
Examples:
?
Abuse of powers by directors
?
Conflict of interest
?
Diversion of funds
?
Related party abuse
4. Insider Trading
Trading using unpublished price sensitive information.
5. Loan Fraud
Obtaining bank finance through:
?
forged documents,
?
inflated assets,
?
fake collateral,
?
diversion of loan proceeds.
6. Siphoning of Funds
Promoters divert company funds to related entities.
7. Vendor Fraud
Examples:
?
Fake procurement
?
Inflated purchase orders
?
Commission kickbacks
8. Cyber Corporate Fraud
?
Business email compromise
?
ERP manipulation
?
Data theft
?
Digital payment fraud
III.
Governing Laws
A. Companies Act, 2013
Important Sections
|
Section |
Subject |
|
128 |
Books of Account |
|
129 |
True and Fair Financial Statements |
|
134 |
Directors' Responsibility Statement |
|
143 |
Duties of Auditor |
|
166 |
Duties of Directors |
|
177 |
Audit Committee |
|
184 |
Disclosure of Interest |
|
188 |
Related Party Transactions |
|
206 |
Inspection |
|
207 |
Inquiry |
|
208 |
Report of Registrar |
|
210 |
Investigation |
|
211 |
Constitution of SFIO |
|
212 |
Investigation by SFIO |
|
213 |
Investigation on Tribunal's Order |
|
241–242 |
Oppression & Mismanagement |
|
447 |
Punishment for Fraud |
|
448 |
False Statements |
|
449 |
False Evidence |
Section 447 – Punishment for Fraud
The principal penal provision.
Fraud includes any act, omission, concealment or abuse
of position committed with intent to deceive or obtain undue advantage.
Punishment may include imprisonment and substantial
fines depending on the nature and value of the fraud.
IV.
Other Important Laws
?
Bharatiya Nyaya Sanhita, 2023 (cheating,
forgery, criminal breach of trust, falsification of records, criminal
conspiracy)
?
Bharatiya Nagarik Suraksha Sanhita, 2023
(investigation and prosecution procedure)
?
Bharatiya Sakshya Adhiniyam, 2023 (rules of
evidence)
?
Prevention of Corruption Act, 1988 (public
sector cases)
?
Prevention of Money Laundering Act, 2002
?
Insolvency and Bankruptcy Code, 2016
?
Arbitration and Conciliation Act, 1996
?
Information Technology Act, 2000
?
Securities laws (for listed companies)
V.
Duties of Directors
Section 166
Every director must:
?
act in good faith,
?
avoid conflicts of interest,
?
exercise reasonable care,
?
protect shareholders' interests,
?
avoid unlawful gain.
Example
Director diverts a corporate opportunity to his own
company.
This may amount to breach of fiduciary duty.
VI.
Role of SFIO
Sections 211–212
SFIO is a multidisciplinary investigative agency under
the Ministry of Corporate Affairs.
It investigates:
?
accounting fraud,
?
complex corporate fraud,
?
financial manipulation,
?
large public interest cases,
?
multi-layered corporate scams.
VII.
Corporate Misconduct
Corporate misconduct includes:
?
falsification of accounts,
?
concealment of liabilities,
?
insider trading,
?
diversion of funds,
?
bribery,
?
corruption,
?
tax evasion,
?
manipulation of shareholders.
VIII.
Fraud in Financial Statements
Example
Actual turnover:
?50 crore
Books of account show:
?500 crore
Purpose:
?
obtain bank loans,
?
attract investors.
Possible violations:
?
Sections 128, 129, 134, 447, 448 Companies Act.
IX.
Oppression and Mismanagement
Sections 241–242
Minority shareholders may approach the NCLT.
Examples:
?
diversion of funds,
?
illegal allotment of shares,
?
removal of directors,
?
abuse of majority power.
Reliefs include regulation of company affairs,
replacement of directors, and other remedial orders.
X.
Related Party Transactions
Section 188
Example:
Company purchases machinery from promoter's company at
double market price without statutory compliance.
XI.
Auditor Misconduct
Section 143
Auditors must:
?
report fraud,
?
maintain independence,
?
verify accounts.
Failure may attract civil and criminal consequences.
XII.
Investigation Process
- Complaint.
- RoC inspection.
- Inquiry.
- Central Government order.
- SFIO investigation.
- Collection of electronic
and documentary evidence.
- Examination of directors
and officers.
- Investigation report.
- Prosecution
before the Special Court.
XIII.
Important Supreme Court Judgments
1. Serious Fraud Investigation Office v. Rahul Modi
Citation: (2019) 5 SCC 266
Facts
The case concerned arrest and bail in an SFIO
investigation under Section 212 of the Companies Act.
upcoming campaign
upcoming campaign
