This article is written by Himanshu Mahamuni, a student of Government Law College, Mumbai. This article analyzes the grievous business crimes of non-compoundable nature in India and provisions for their penalties.
A corporate sentence or white-collar crimes become more prevalent in any jurisdiction when the laws are incompetent or have lots of loopholes to evade. These crimes are committed by the elite or educated class of people who have money, power and good knowledge of the law. E.H. Sutherland defines these crimes as committed by people of socio-economic groups because committing such crime directly or indirectly has an effect on society at large. These are targeted mainly because of greed but it does not affect only those people, but thousands of people or the society as a whole. Some of the infamous corporate crimes committed in India were the Harshad Mehta scam, Satyam scam, Fodder scam, etc. which have shrunken the country’s economy to shambles and directly affected the pockets of common people, who are the taxpayers of the country.
Governments being hit by these crimes have framed various legislations for the purpose of enumerating the sentence for such crimes. Some of these are the Companies Act, 2013, Income Tax Act, 1961, etc. As the crimes here affect the innocent people at large, punishments for the same are made rigorous for the compensation to the people, which include civil and criminal punishments both. In this article, we will discuss those crimes, the crimes given under the Companies Act as the corporate sector is governed by the same, conviction of the culprit and punishment provisions.
Business crimes in India
A corporate entity has a status of separate legal entity from that of its promoters or directors. A person can’t claim the assets, profits or any money of the business as its own because the entity has its rights to own it. However, people misuse this concept to commit business crimes by hiding behind the veil. In such instances, the government deems it necessary to lift the corporate veil to catch the real perpetrators. Some of the business crimes that emerged in recent times are:
Frauds are aimed to mislead and gain an inappropriate advantage. These usually include financial frauds against the banks. These crimes affect both the public who keep their money in the bank and the government. Frauds emerge because of misuse of technological resources and misuse of money for unauthorized purposes. Frauds also discourage foreign investors from investing in the domestic market. The prominent frauds in the corporate sentences are the following
- Securities Fraud
Fraud in securities may include contravention of any provisions of Securities and Exchange Board of India Act(SEBI), 1992 in issue, purchase or sale of securities. The SEBI Act contains provisions that prohibit fraudulent or unfair trade practices in the securities market and punishment for offences like failure to furnish information, redress investor’s grievance, etc which is usually a hefty penalty.
- Accounting Fraud
The Companies Act, 2013 deals with any accounting fraud committed by companies such as disclosing material facts in financial statements, professional misconduct, etc. The Central Government is empowered to direct necessary investigation against such companies where they can inspect books of account, direct special audit and any other necessary procedure which is punished by the provisions of forgery under IPC.
Money Laundering Act, 2002 administers the crime committed under the same. This method is used to convert black money into white by showing illegal money as legal through legitimate means. This makes it difficult for the investigation agencies to trace the source of money when invested in the market which is eventually used to spend and bring into the financial system.
Tax evasion is done with the intention to not reveal one’s real taxable income and honest taxpayers. The tax crimes may consist of various tax-related crimes such as tax evasion, smuggling, customs duty evasion, value-added tax evasion, and tax fraud. The Chapter XXII of the Tax Act, 1961, deals with the offences related to tax evasion which may result from fine to imprisonment.
Insider Trading is the trading done by a person in securities of a listed company based on Unpublished Price-Sensitive Information(UPSI) which will give an unfair advantage compared to ordinary investors of the company. The SEBI Act prohibits insider trading and passed a regulation SEBI (Prohibition of Insider trading Regulations), 2015 to introduce strict norms and prosecute the offenders of laws regarding insider trading.
Bribery can be termed as money paid to the authority in exchange for a favour to do or not to do something which would not have been possible through legitimate means. It can be termed as the most common type of white-collar crime amongst the high ranking officials in business. This type of income goes unreported and does not form part of a financial statement. The Prevention of Corruption Act (PMLA), 2002 deals with the offences related to bribery against any person contrary to the provisions of the Act and attracts heavy penalties. Such other acts dealing with the prosecution of offenders in bribery are IPC, Benami Transaction (Prohibition) Act, 1988 to punish the offenders.
In the digital age of computers, cybercrimes have emerged as the leading type of crime in the country. These crimes are committed by the people who are well versed with the technology and fraud the innocent individual and are a threat to the security of the nation. Damages due to this may range from damage to reputation to huge financial losses. Businesses commit cybercrimes to usually cause harm to rivals and stop them from progressing. Such offences are dealt with under the Information technology (IT) Act, 2000 which prescribes punishment for crimes in the field of e-commerce, e-governance and cybercrimes. This act extends outside India too where offence committed involves a computer, computer system or any computer network located in India.
Law enforcement authorities for corporate sentences
Ordinarily, the law enforcement at the state level is investigated by the Police force where the crime has been committed. The law enforcement authority for the investigation of crimes at the central level is the Central Investigation Bureau (CBI). The unified legislation for the whole country for criminal offences is Criminal Procedure Code (CrPC),1973 and for civil offences is ruled by the Code of Civil Procedure (CPC), 1908. For specialised offences for determining corporate sentences, specialised authorities are delegated with required power and CBI can assist such specialised authorities in particular serious offences. The CBI shall investigate the crimes of a particular state either by prior consent of the state or without consent through direction of the High Court or the Supreme Court. Such authorities are formed under the Ministry of Corporate Affairs (MCA) who specialise in the field of tax, company law, securities law, information technology and any such other required qualifications as prescribed by the ministry for detection of white-collar offenders.
Some of the important specialized authorities set up by the government under various departments of ministry are:
- The Central Economic Intelligence Bureau (CEIB);
- The Directorate of Enforcement (DOE);
The DOE department works against foreign exchange and money laundering offences, and implementation of the Federal Emergency Management Agency and Prevention of Money Laundering Act, 2002 (PMLA);
- The Securities and Exchange Board of India (SEBI);
SEBI works towards protecting the interests of investors in securities and promoting their development, and regulating the securities market and matters connected therewith;
- The Directorate General of Income Tax;
This Department works to Investigate offences relating to tax;
- The Financial Intelligence Unit, India (FIU-IND);
FIU-IND works for the collection of financial intelligence to combat money laundering and related crimes;
- The Competition Commission of India (CCI);
CCI works to curb unfair trade practices and anti-competitive trade practices.
Judicial authorities for the disposal of corporate cases
The structure of courts in India dealing with criminal offences is of federal structure which gives authority to resolve cases in their jurisdiction as allowed by law. Districts within the states have Session courts to adjudicate cases in the districts which further have courts of Judicial Magistrate first class and Judicial Magistrate second class which deals with the cases within the prescribed jurisdiction. The cases in session court can be appealed in the High Court of the state and further in the Supreme Court.
Like the specialized law enforcement authorities, the government has formed special courts or tribunals to adjudicate white-collar crimes with the delegation of power. For instance, National Company Law Tribunal (NCLT) deals with the offences related to any provision of Company law which are further appealable in the National Company Law Appellate Tribunal (NCLAT).
Non-compoundable offences under the Companies Act
Crimes done by business entities are punished by the provisions given under the Companies Act, 2013. Companies Act gives a chance to compound the offence under Section 441 to avoid long legal proceedings in the form of payment of a fine. The Act lays down various offences and their punishments. Non-compoundable offences are offences that can’t be settled by paying money and shall be punished with imprisonment or imprisonment and fine. These offences are serious and threaten the interest of the public. Some of these offences are:
Refusal to register the transfer of securities (Section 58)
- If a private company limited by shares refuses to register the transfer of securities or interest of a member of the company, then the company needs to send a notice with reasons of such refusal to the transferee and transferor or give intimation of such transmission within 30 days from which the instrument of transfer or intimation of transmission was delivered to the company:
The transferee may appeal to tribunal within 30 days from the notice or 60 days in case no notice was sent regarding refusal to transfer with reasons from the instrument of transfer or intimation of transmission.
- If a public company refuses to register the transfer of securities, the company must send a notice within a period of 30 days with sufficient cause for such refusal from the date of the instrument of transfer or intimation of transmission.
The transferee may appeal to the tribunal within 60 days from the notice or 90 days from the delivery of an instrument of transfer or intimation of transmission of the securities where no notice with reasons was received.
The tribunal may dismiss the appeal after hearing both sides or order to direct to:
- Transfer or transmission to be registered by the company within 10 days; or
- Rectify the register and pay any damages suffered, if any, to the company.
If a person contravenes with the orders of the tribunal, he shall be punishable with imprisonment of not less than 1 year which may extend to 3 years and with a fine, not less than Rs. 1 lakh which may extend to Rs. 5 lakh.
Tampering with the minutes (Section 118)
The minutes are a written record of the meeting of the company concerning any business transaction. It shall be prepared, signed and kept at every general meeting of the company as these are the evidence of the proceedings recorded in a meeting to give a fair and correct summary of the proceedings. The chairman of the meeting has discretion over inclusion or non-inclusion of the matters which may be of the nature as defamatory of any person, irrelevant or detrimental to the interest of the company in the minutes. Tampering with the minutes to not show a fair and correct summary is strictly punishable.
If any person is found guilty of tampering with the minutes of the proceedings of any meeting, he shall be punishable with imprisonment which may extend to 2 years and a fine which shall not be less than Rs. 25 thousand and may extend to Rs. 1 lakh.
Failure to distribute dividends (Section 127)
Once a dividend is declared by a company it becomes debt and compulsorily to be paid. The declared dividend is to be paid or warrants in respect thereof within 30 days of the declaration to any shareholder entitled to it.
If a company fails to distribute the dividends then every director, who is knowingly a part of the default, shall be punishable with imprisonment which may extend to 2 years and with a fine which shall not be less than Rs. 1 thousand for each day during which the default continues and the company shall be liable to pay simple interest at the rate of 18% p.a. during which such default continues.
Prohibition and restriction on political contribution (Section 182)
A company that is a government company and a company that has been in existence for less than 3 financial years shall not contribute any money directly or indirectly to any political party.
If a company other than above makes a contribution of any percentage to a political party, it shall be by an account payee cheque or an account payee bank draft or electronic system through a bank account. Such companies are required to disclose the contribution through their profit and loss account during the financial year.
If a company contributes anything contravening the provisions of Section 182, the company shall be punishable with a fine which may extend to 5 times to the amount of contribution made and every officer who is in default shall be punishable with imprisonment for a term which may extend to 6 months and fine which may extend to 5 times to the amount of contribution made.
Loans and investment of companies (Section 186)
A company is allowed to invest in only up to two layers of investment companies. The companies are required to follow the procedure involved in taking loans by giving guarantees and providing security. No company shall directly or indirectly give a loan to any person or body corporate, give guarantee or security and acquire by way of subscription exceeding 60% of its paid-up share capital and free reserves and securities premium account.
If a company contravenes with the provisions of this Section 186, the company shall be punishable with fines which shall be not less than Rs. 25 thousand and may extend to Rs. 5 lakh and every officer who is in default shall be punishable with imprisonment which may extend to 2 years and with fine which shall not be less than 25 thousand and may extend to Rs. 1 lakh. The above mentioned are some of the non-compoundable offences which are serious in the eyes of the law. However, fraud is one of the most serious and prevalent offences committed by a business.
False statements (Section 448)
If the company in its report, return, certificate, financial statement, prospectus, statement or other documents which are required has made any statement that is:
- False in any material particular, knowing that it is false; or
- Omits any material fact; knowing that it is false
The person shall be liable for fraud under Section 448 under provisions of fraud.
Limitation for the provisions of corporate sentences
There are certain limitation periods for the provisions to convict an accused for the offences in certain situations. These provisions are given in Section 468 of CrPC where no court can take cognisance of the offence after the expiry of,
- Six months where accused is punishable with fine,
- One year where accused is punishable with imprisonment of one year,
- Three years where the accused is punishable with imprisonment of one to three years.
The Economic Offences (Inapplicability of Limitation) Act, 1974 provides for certain offences committed under all the Tax related Acts, where the provisions of CrPC of limitations shall not apply.
An offence committing in continued nature shall be given a fresh period of limitation at every moment the offence continues to be committed.
Investigation procedure in cases of corporate crimes
- The first step to investigation is the First Information Report(FIR) filed with the police. The police initiate investigation based on the procedure described in the CrPC.
- The authorities have the power to furnish any records and documents from banks related to the transaction related to the criminal offence involved of the accused. Further, an order under PMLA can be passed to freeze any property in possession of the accused.
- Any kind of electronic document or evidence required in the proceeding can be requested under the IT Act from any computer situated outside or inside India for the investigation of the case. The government also has the power to intercept any information transmitted through computers in the interest of the sovereignty of the state, public order, etc.
- The Enforcement Directorate is enforced to conduct raids if any person is under suspicion to be involved in any kind of prohibited transaction.
- Certain information which falls under privileged communication cannot be requested to be presented as evidence, such as communication between husband and wife, lawyer and client. However, such confidential information can be demanded by the court after scrutiny of relevance or admissibility of the document ordered to be produced.
- The authorities are empowered to investigate any individual authority based on the circumstances and relevancy of such individuals to the case under the CrPC. Such admissions usually take place at the office of the authorities under oath.
- Any confession given to police is inadmissible as evidence and any coerced admission is not allowed in the course of an investigation. The individual during questioning is entitled to an advocate and not to be present the whole time.
- The person can choose to be silent except during interrogation. Any person accused is innocent until proven guilty.
National Company Law Tribunal (NCLT)
NCLT is a quasi-judicial authority set up by recommendation of the Eradi Committee which hears the civil proceedings of companies. This body was introduced after an extensive debate of 10 years in the Companies Act, 2013. NCLT is empowered to order an investigation of the affairs of the company on an application of 100 members. NCLT can freeze the assets of the company on an order of investigation or scrutiny by members. Conversion of a company from a public limited company into a private limited company has to be undergone through the confirmation of NCLT. It can cancel the registration or deregister any company which contravenes the provisions of the Companies Act. People aggrieved by the conduct of business or misconduct can complain against the company in the NCLT. NCLT has jurisdiction over insolvency proceedings and complaints of LLP. People not satisfied with the order of NCLT can appeal in National Company Law Appellate Tribunal (NCLAT) and further in the Supreme Court to seek justice.
The elements of sentences in the corporate sector to punish white-collar crime are rigorous. There are combinations of fine and imprisonment provisions depending on the severity of the crime. However, these strict laws disrupt the ease of doing business and discourage people from entering because of compliances. In a move to give relief to businesses, the Ministry of Corporate Affairs has released a report to decriminalise and re-categorisation of certain offences. The MCA has re-categorized 16 out of 81 compoundable offences to an in-house adjudication framework wherein defaults would be subject to a penalty levied by adjudicating officers. Whereas no non-compoundable offences were re-categorized. This move to decriminalise the technical and procedural compoundable offences is beneficial to the company for a smooth and worry-free business.
Whereas non-decriminalisation of non-compoundable offences which affect the public is a necessary omission because it strengthens the governance framework and assures security to the investors and members of the company. Tribunals such as NCLT have given all the necessary powers to deal with the matters related to companies and it further should expand more to relieve the overburdened judiciary.
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