This article is written by Pratyush Pandey, a student of NLU Delhi.
Fraud in relation to affairs of a company or any corporate body as defined in S.447 of Companies Act 2013 includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.
Companies Act 2013 lists down frauds and prescribes penalties and punishments for violations. The offences which are punishable under S.447 of this Act are cognizable and non-bailable.
FRAUDS COVERED UNDER THE ACT
| Section | Fraud | Defaulter |
| 7(5) | Furnishing false information or suppressing material information | Any person who does so |
| 8 | Affairs of the company conducted fraudulently | Every officer in default |
| 34 | Mis-statements in prospectus | Every person who authorizes the issue of prospectus |
| 36 | Fraudulently inducing persons to invest money | Any person who does so |
| 38 | Personation for acquisition, etc. of securities | Any person who does so |
| 46(5) | Issuance of duplicate certificate of shares | Every officer who defaults |
| 75(1) | Company fails to repay deposits/interests | Every officer of the company |
| 206 | Business being carried out for fraudulent or unlawful purpose | Every officer who defaults |
| 229 | Person required to provide an explanation or make a statement during an investigation furnishes false statement or destroys documents | Person who was required to provide the explanation or make the statement |
| 251 | Application is made for removal of name from register with the object of evading liabilities or deceiving or defrauding the creditors | Persons in charge of management of the company |
| 266 | If Tribunal concludes that an employee during the period of his employment with a company was guilty of any misfeasance, malfeasance or non-feasance in relation to the sick company | Any person who is found so guilty |
| 448 | A person who makes a false statement or omits a material fact in any return, report, certificate, financial statement, prospectus | Person who makes such statement |
An auditor shall also be liable for action if the Tribunal has passed final order against him.
A class action can be brought by members or depositors to claim damages or compensation or any other suitable action against the following:
(i) the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;
(ii) the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or
(iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part;
PENALTY OR PUNISHMENT
S.447 prescribes that the person who is guilty of fraud shall be punishable with imprisonment for a term not less than 6 months and up to 10 years and fine, which shall not be less than the amount involved in the fraud and may extend to thrice of such amount.
If the fraud involves public interest, the minimum imprisonment to be awarded shall be 3 years.
MECHANISMS
Central Government can order investigation into the affairs of a company on the receipt of a report of the Registrar or inspector; on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or in public interest.
1. SERIOUS FRAUD INVESTIGATION OFFICE
Section 211 empowers the Central Government to establish an office called Serious Fraud Investigation Office (SFIO) to investigate frauds relating to companies. No other investigating agency shall proceed with investigation in a case in respect of any offence under the Act, once the case has been assigned to SFIO. The SFIO has power to arrest individuals if it has reason to believe that he is guilty based on the material in possession. SFIO shall submit a report to the Central Government on conclusion of investigation. Central Government may direct SFIO to initiate prosecution against the company. SFIO shall share information they possess regarding a case being investigated by the latter and vice versa.
2. AUDITORS AND AUDIT COMMITTEE
Auditors shall report material fraud to the Central Government within 30 days. Immaterial fraud shall be reported to the board or the audit of the company.
Audit committee is required to monitor that every listed company shall establish a vigil mechanism for directors and employees to report genuine concerns. The vigil mechanism shall provide for adequate safeguards against victimization of persons who use such mechanism. It shall make provision for direct access to the chairperson of the Audit Committee in appropriate cases.
3. INDEPENDENT DIRECTORS
Independent directors shall report concerns about actual or suspected fraud. They must also ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use.
