Corporate Fraud in India & Outside India under Companies Act, 2013

Corporate fraud is defined as unlawful, misleading activities conducted by a company or a person using highly trained accounting practices to inflate a company’s apparent earnings, which can take years to identify. Furthermore, this article seeks to analyze the causes and impacts of fraud on corporate stakeholders. This article informs us about Corporate Fraud in India.

Quick Look

Corporate fraud-related provisions are covered under the Companies Act, 2013(“Act”). Section 447 of the Companies Act, 2013 states that anyone found guilty of fraud faces a sentence of imprisonment for a term that must not be less than six months but may reach ten years, as well as a fine that must not be less than the amount involved in the fraud but may go as high as three times that amount.

Corporate fraud refers to unethical actions committed by a company or an individual in order to significantly increase their profits and gain an advantage over rivals. Corporate fraud causes significant losses to public monies that were given to the corporation for improved operation.

Corporate Fraud in India under the Companies Act, 2013

Corporate fraud is the term used to describe any unlawful or unethical behavior by a company, an individual, or both that is typically done to obtain a competitive edge over other companies in the same industry. This might also be done to present a stronger market identity for the business and draw in more qualified investors.

White-collar crimes are criminal actions carried out by wealthy men in society in an effort to make money the wrong way. This can take many different forms, including professional crime, fraud, tax evasion, bribery, counterfeiting, forging, and ad hoc crimes.

This seeks to expand beyond the purview of a worker, extending to complicated and economic effects on the company, as well as on workers and other outside parties. These dishonest practices result in revenue losses due to asset theft, fictitious expenses, corruption, information theft, fraudulent applications, asset abuse, dishonest business partners, and fraudulent billings.

Different Types of Corporate Frauds in India

Corporate fraud comes in a variety of forms:

• Misappropriation of Funds: Payment fraud, accounting fraud, and deceiving investors into investing by sharply boosting the share price.

• Assets taken without Authorization: Theft of physical goods, intellectual property rights, and Dummy payments that exploit an entity’s assets for one’s own benefit.

• Corruption: Making or accepting fraudulent payments, giving bribes to public or private authorities, aiding and abetting, and obtaining political backing to conduct fraud are all prohibited.

However, among these, Financial Fraud, Asset Misappropriation, Employee Fraud, Vendor Fraud, Customer Fraud, and Investment Scams are the most prevalent forms.

Theft of money, tangible assets, or sensitive information, account misuse, procurement fraud, payroll fraud, financial accounting misstatements, inappropriate journal vouchers, suspense accounting fraud, fraudulent expense claims, false expense claims, false employment credentials, and bribery and corruption are some other types of fraud.

The Biggest Corporate Frauds in India

The following are the biggest corporate frauds in India:

• The Mundhra Scam was the first corporate scam that occurred in independent India. An entrepreneur named Haridas Mundhra invested Rs. 1.24 crores in government-owned LIC insurance from six different businesses in 1957. He committed this crime as a result of undue government pressure, and the LIC suffered significant financial loss. When Feroze Gandhi launched an anti-corruption drive and the Parliament approved the Life Insurance of India Act, nationalizing and consolidating businesses, the controversy took a bizarre turn. After the Parliament raised the Mundhra issue, Feroze Gandhi confronted Pt. Jawaharlal Nehru, who was India’s then-prime minister.
  He questioned if the LIC had utilized policyholder premiums to purchase shares of these Mundhra-controlled enterprises beyond their market value. A former Bombay High Court judge named M.C. Chagla J. was asked to investigate the claims in order to corroborate them. Several stockbrokers testified during a public investigation that Mundhra’s falsification would have been taken into account if the LIC investing committee had been contacted. The investigation of the finance secretary and two other officials were then decided to be necessary. However, despite his best efforts to avoid the situation, the previous financial minister was ultimately forced to retire from his position. This event resulted in significant losses for the Nehru government. As a result, Haridas Mundhra, who was also charged with additional offenses like failing to pay income tax on time, was taken into custody.

• In March 2019, the PMC Crisis occurred after the HDIL company missed a payment of 25 crore rupees or 30% of the total debt borrowed. The bank disregarded RBI instructions to designate these loans of the HDIL group as non-performing assets in 2017–18. The bank provided HDIL with a new loan of 96.5 crore rupees in August 2019 as a result of the Bank of India taking HDIL to NCLT for repayment. An executive director who served on the HDIL board from 2009 to 2015 held a 1.91% share in the company but then sold it all and resigned, committing fraud. After then, HDIL received a loan from PMC and delivered it to the Reserve Bank of India. Since the RBI’s rules were disregarded, collaterals were used to cover the entire 258 crore loan. Since it involved public funds, the RBI retained 1,000 rupees that might be withdrawn after six months. However, a withdrawal of 10,000 rupees was permitted after more persuasion.
• The most significant of them is the PNB Crisis, in which Neerav Modi obtained a loan from a foreign bank using a forged letter of understanding from PNB and promised to pay it back if he missed the payment. There were 8 separate fraudulent and deceptive Letters of Understanding used. There were 11 crores of rupees worth of loans obtained between 2011 and 2017. These foreign banks were in fact branches of Indian banks that had expanded abroad. These banks then turned to PNB for reimbursement, but PNB informed them that all of the Letters of Understanding were bogus. Fraud was perpetrated, and CBI was notified of the situation. In this fraud, counterfeit letters of the agreement also included bank employees. In this instance, two officials and their families were involved. Neerav Modi, therefore, traveled abroad when the scandal occurred.

Vijay Mallya fled the country as well after being charged with fraud and money laundering. In order to prevent the collapse of his Kingfisher airlines, he accepted loans totaling Rs. 9,000 crores. The Fugitive Economic Offenders Act also applies to him.

Opinion of the Judiciary upon Corporate Frauds in India

The following are the Opinion of the Judiciary over Corporate Fraud in India:

• The Supreme Court stated in Vimla v. State of NCT, Delhi that the concept of deception is a crucial component of fraud, although it did not go into great detail. Deception and harm to the individual who was duped are two components of the term “defraud.” Injury includes any harm committed to a person’s health, intellect, reputation, or any aspects of their personhood other than economic loss, which is the deprivation of property, whether it be mobile or immovable, or of money. A gain or advantage for the deceiver nearly always results in a loss or disadvantage for the victim. The second requirement is met even in uncommon situations where the misled receives a profit or advantage without also suffering a comparable loss.
• The petitioner in Vikas Agarwal v. Serious Fraud Investigation Office was called to court on charges of criminal conspiracy and violating Section 447 of the Companies Act, 2013. It was claimed that the company’s mining operations were unlawful. It was also given an unsecured loan through trust. In this case, the Supreme Court said that the definition of fraud given in the explanation section 447 of the Companies Act, 2013 makes it apparent that the instance and also to other people who have in any way participated in the conduct of the offense to obtain an unfair advantage.

Most recent developments regarding Corporate Fraud in India

With effect from October 8, 2020, SEBI has revised the SEBI (LODR) Regulations, 2015 to stipulate that in the event that a forensic audit is initiated, listed businesses must make the following disclosures to stock exchanges:

• The fact that a forensic audit was initiated, the identity of the originating organization, and any available justifications;
• Final forensic audit report (apart from those that were requested by regulatory or enforcement authorities), upon receipt by the listed business, together with any management comments.

The Audit Committee and Boards may experience considerable concern as a result of this new reporting requirement’s lack of any materiality standards because any such disclosure might have a significant impact on the company’s stock price. Additionally, speculative media coverage might incite fear within the financial community.

Concluding Remark

Lawmakers and regulators appear to be concerned about a number of recent business scams. The Audit Committees and the Corporate Boards are concerned about the tightening of Sections 447 and 212 of the Act as well as the addition of fraud to the list of crimes covered by the PMLA. Independent directors’ already frazzled nerves have been exacerbated by strict bail terms, asset forfeiture clauses, provisions for compensation, and limitless personal culpability for directors. The attention of regulators and law enforcement authorities is shifting more and more toward criminal prosecution. Every time the Audit Committee receives a whistle-blower complaint, SEBI’s new reporting to stock exchange requirement, even the start of a forensic audit, may cause further issues.
Before accepting new board posts, independent directors now want to do an extensive due diligence investigation into the compliance and governance requirements of a company. India Inc. is gradually becoming accustomed to the new standard.

Legal Window has highly qualified Company Secretaries and Chartered Accountants, you can also connect with them in case you want assistance and want to know more about Corporate Fraud in India.