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This article is written by Harsh Jain. Along with holding degrees in LLB, and LLM, Harsh is NET, JRF qualified. Harsh has successfully cleared Rajasthan Judicial Services, Mains Examination, Gujarat Judicial Services pre, SBI specialist officer scale II online exam and many other competitive examinations. Many of his students are posted as ADJs, JMs, MMs, Lecturers, APPs etc. Also, Harsh is pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata. This article is about what lessons we can take from Nirav Modi case.

What are the risks that directors can face in case of fraud or other wrongdoings that are occurring in the company on their watch?  

Show-cause notices from regulators

Most statutes specify monetary penalties, fines or imprisonment for statutory violations. In case a violation attracts a statutory penalty, proceedings are initiated by a regulator by issuing a ‘show-cause’ notice, demanding the company to explain how and why proceedings must not be initiated against them. These notices are served on the directors or CEO of the company.

Most commonly used provisions for issuing show-cause notices are:

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Act Provision Tittle Grounds for the issue of show-cause notice
Income Tax Act,1961 Section 142(1), Inquiry before assessment If you have not filed a return within time prescribed or furnished documents or accounts required to be submitted or provided information required to be submitted in writing by you, assessing officer may make an inquiry or may issue a notice to you to get your accounts audited. On the basis of any information obtained through such inquiry or audit, assessing officer may issue a notice asking
Section 143(2) Assessment When assessing officer believes that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, he may serve a notice on you to appear on a specified date and specifying its details and require you to produce any evidence or particulars on which you may rely in support of such claim.
GST Act,2017 Section 73 (when there is no fraud) Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any Proper officer may issue a show cause notice to you asking you why you should not pay tax and interest specified in the notice. He may do so when it appears to him that some tax has not been paid or partially paid or refund was erroneously made to you or you have availed input credit wrongly or it has been utilized for a purpose other than fraud.
Section 74 (when there is a fraud) Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud If proper officer has reason to believe that you have done so by fraud or wilful-misrepresentation or suppression of facts to evade tax he may issue a show cause notice asking why tax and penalty specified in notice must not be imposed on you.
Section 127 Imposing of penalty When the proper officer is of opinion that you are liable for a penalty, he may issue you a notice asking why it should not be imposed on you.
Shops and Establishments Act State specific Act will apply. In this case Section 8 of Maharashtra Shops and Establishments Act, 2017 Cancellation of registration When a facilitator finds that you have obtained registration of your establishment by fraud or misrepresentation or by suppression of material facts or by submitting false or forged documents or false declaration, he may issue a show cause notice asking you that why your registration must not be cancelled and why your establishment must not be removed from register of establishment. You will have to satisfy him that you have not committed any fraud or misrepresentation or any other such activity to avoid such cancellation.
Employees Provident Fund Act,1952 Section 7A The Employee’s Provident Funds and Miscellaneous Provisions Act, 1952 If a dispute will arise regarding applicability of this act to your establishment or regarding any amount due from you under the provisions of this act or pension scheme or insurance scheme etc., the Central Provident fund commissioner or additional Central Fund Commissioner or Deputy/ Regional/ Assistant  Provident Fund Commissioner may, conduct an inquiry. If you fail to produce evidence or other documents required for the inquiry they may decide the applicability of the act or determine the amount due from you to your employees. on the basis of the evidence and other documents available on record. If you fail to appear before the authority on the given date and time, they may also proceed ex-parte against you.
SEBI Act,1992 Section 11 Functions of Board Board may conduct an investigation or inquiry regarding and inspect any books, registers, records or other documents of your company if it is a listed public company or a company which intends to get its securities listed on any recognized stock exchange.

If the Board finds that your company is indulging in insider trading or fraudulent and unfair trade practices relating to the securities market, it may during pending inquiry or on its completion either suspend trading of security in security market or restrain you from accessing securities market and prohibit you buy, sell or deal in the security market.

If you are an office bearer of any stock exchange or self-regulatory organization, you may be prohibited from holding such position.

They may also impound or retain proceeds or securities in respect of any transaction which is under investigation.

One or more of your bank accounts may be attached after taking necessary order from Judicial Magistrate of first class.

You may be directed, not to dispose of or alienate an asset which is part of any transaction which is under investigation.

Section 11B Power to issue directions If the board is satisfied after the inquiry that it is necessary in the interest of the investors or orderly development of security market or to prevent your affairs or affairs of your intermediary which are conducted in a manner which is detrimental to the interest of investors or securities market or to secure proper management of your intermediary,

They may issue directions to you or your company to disgorge an amount equivalent to the wrongful gain made or loss averted by you by indulging in any transactions or activities in contravention of the provisions or regulations of this act.

As a director you will need to respond to such notices, explaining compliance and create systems that ensure in future such violations do not occur.  

FIR and arrest

FIRs can be filed by customers, shareholders or regulators in case a fraud has been committed.
Where a statute stipulates a fine or imprisonment, the direction to file an FIR is issued by the regulator to the police, and the police file an FIR. For example, under the Companies Act, the ROC, shareholder or a person authorized by central government can file a complaint against the company under Section 439 for violation of provisions of the Companies Act.

Banks can file a complaint against directors under section 420 read with section 120B of Indian Penal Code.

Franchisees can also lodge FIR against them under section 120B and 420 Indian Penal Code.

In the Saradha Chit fund scam case, FIRs were filed by CBI under section 406, 420 and 120B, Indian Penal Code, who were asked to deposit funds with the Saradha group companies.

Conspiracy charges and Cheating

Most corporate frauds involve multiple people. Even if you have not been actively involved in a fraud, your passive assistance or non-involvement can lead to a conspiracy charge or an abetment charge.

As per Section 120A of the Indian Penal Code, conspiracy refers to:

Any agreement to do an illegal act or a legal act in an illegal manner by two or more persons.

Punishment for conspiracy to commit a certain offense is 6 months if the offense for which conspiracy was done is punishable with less than 2 years. But if the offense conspired for is punishable with more than 2 years he will be punished in a manner similar to an abetter.

An abettor is punished in the same way as the person who commits the offense (subject to provisions of section 107 to 117 Indian Penal Code).

Similarly, section 420 Indian Penal Code provides punishment for cheating and dishonestly inducing delivery of the property up to 7 years.

Cheating is defined under section 415 Indian Penal Code as :

Dishonestly or fraudulently inducing someone to deliver any property or to give consent to retain any property or intentionally inducing someone to do or omit to do an act which he would not have done or omitted in absence of such inducement and such act or omission will cause him harm in his mind, body, reputation or property.

In this particular case it is alleged that, directors including (Nirav Modi and Mehul Choksi) of Gitanjali Gems, Gilli India, Nakshatra Brands and Firestar Diamond companies entered into a criminal conspiracy with few employees of Punjab National Bank pursuant to which bank was cheated for thousands of crores of rupees which is an offence under section 120B read with section 420 Indian Penal Code, for which they can be convicted up to 7 years and also be fined. Similar FIRs were lodged by franchisees of Nirav Modi against him under section 420 and 120B Indian Penal Code.   

Thus, you can see that active participation in the specific fraudulent act is not necessary. You need to ensure that none of your acts are construed as your participation in the conspiracy or abetment of the offense.

Therefore, if you are aware of a wrongdoing that is happening, not speaking up or recording your dissent (say, in a board or committee meeting, or not informing a regulator where it is required) can make you liable, even if your dissent cannot alter the course of events.

Investigation and raids

  • CBI Raids:

CBI derives power to raid and seize properties as per Section 3 of Delhi Special Police Act,1946. As per section 5 and 6 of the act, they have to take permission from Central and State government, as the case may be before doing so.But, central government and almost all state governments have already given standing permission to CBI to use these powers without asking for permission in each individual case. For example, MP government gave the permission to CBI to conduct search and seizure within Madhya Pradesh without permission of MP government if the matters are related to employees of central government excluding certain officials like IPS.

They can enter any premises and search and seize properties, bank accounts, jewelry, cars and other valuable articles of person and other valuable things of such directors under section 93 of criminal procedure code with a warrant and under section 165 Criminal procedure code without a warrant. It may also summon them to produce certain documents or other thing required for investigation under Section 91 Criminal Procedure Code. All the powers of CBI are restricted to the territories of India.

Search and seizure by police

Police have similar kind of powers to enter, search and seize a person’s property in the course of an investigation as per Section 93 and 165 Criminal Procedure Code, within their jurisdiction. Company offices, offices of consultants, advisors and personal residence of directors are likely places for the police to search for documents in case of an alleged corporate fraud.  

If any of your property or palace is outside the territorial jurisdiction of the investigation officer, he can request officer-in-charge of the police station having jurisdiction over the place where your property in which search and seizure are to be conducted, is located. Officer having jurisdiction over such area will conduct a search in your property according to provisions of Section 165 Criminal Procedure Code and will forward anything found during such search to the investigating officer who has requested the search.

Where an investigating officer has reason to believe that it may cause delay if he will request to officer-in-charge of the police station having jurisdiction over the area where your property is located  and you can cause disappearance of evidence in that duration, he can conduct a search in the same manner as he could have done in his own jurisdiction.

If such search is being conducted at your place you can check that police is having a search warrant from a court or not. You must ensure that investigating officer gets free ingress into your premises. They will conduct the search according to provisions of Section 100 by ensuring the presence of 2 respectable neighbors. They must provide you a signed copy of (signed by investigating officer, you and 2 neighbors as a witness) list of all the documents and things which are seized by them. If they are conducting the search after sunset they cannot do it without a warrant. If they suspect you to hide something in your person then they can search you, but women must be searched only by women officers. If you do not provide free access to them they can even break open any door or window for the purpose of the search.

If the place to be searched lies outside their territorial jurisdiction, they can request the officer-in-charge of the relevant jurisdiction, in which case search and seizure might be conducted. Officer-in-charge of the police station having jurisdiction over such area, shall conduct a search according to provisions of section 165 Criminal Procedure Code and will forward anything found in such search to investigating officer who has requested the search.

But, where an investigating officer has reason to believe that following this procedure may cause delay and such delay may cause the disappearance of evidence, he can conduct a search, in the same manner, he could have done in his own jurisdiction.

  • Income tax surveys (Raids)

Under section 133A and 133B Income Tax Authorities may conduct a survey of your place. They can make an inventory of all of your cash, jewelry, cars, properties etc. They can place identification mars on the account books etc inspected by them. They may also take statements of any person which may be important regarding the matter.

If they find any unaccounted income they may impose a penalty of not less than 100% and up to 300% of the undisclosed income under section 158 BFA(2) and 271(1) (c), and you may also be imprisoned for up to 7 years under section 276 C(1) and (2) Income Tax Act.

  • For competition law violations,

the Competition Commission can undertake a dawn-raid, that is a surprise event which doesn’t give you any time to hide or delete information. A dawn raid has been committed in case of JCB India Limited (JCB India) on 22 September 2014. More recently, the DG carried out a dawn raid on the premises of Eveready Industries Limited (Eveready), a leading dry cell manufacturer.

Ban from accessing securities market

Under Section 11(4)(b) of the SEBI Act, the SEBI can ban you from accessing securities market and from buying, selling or dealing in securities, if according to them it is necessary in the interest of investors or security market. They must record reasons for doing so in writing.

Ban from contesting elections

Under Section 8 of Representation of the People Act, if you are convicted of having committed a crime for a period of 2 years or above, you cannot stand for election as Prime Minister, President, Member of Parliament or Legislative Assembly of a state. They are disqualified for 6 years from the date of the conviction. Earlier the prohibition from contesting elections was applicable to undertrials as well but it has been removed by an amendment under Section 62(2) Representation of People Act, through The Representation of the People (Amendment and Validation) Bill, 2013 in September 2013 which was made effective from July 10, 2013. Thus, a conviction is critical for the prohibition to apply – if you are only an accused and a trial is underway but there is no conviction or acquittal, this provision is not applicable.

Disqualification from being a director of a company

Under Section 164(1)(d) of the Companies Act, if a person is convicted by a court for any offense for 6 months or more he will not be eligible to be appointed as director of a company for 5 years from the expiry of the sentence. For example, if you are sentenced for 3 years’ imprisonment, the bar will apply for 5 years after expiry of the sentence, that is, 8 years from the date of sentence.

Many corporate frauds have led to corporate insolvency, and directors frequently apply to the court for insolvency in case of a fraud. This happened in case of Nirav Modi. As per Section 164(1)(b) and (c) of the Companies Act, any person who is an undischarged insolvent or who has applied to get himself declared as an insolvent cannot be appointed as director of a company.

Passport can be confiscated  

Your passport can be confiscated as per Section Section 10(3)(e) of the Indian Passports Act if you are accused of having committed any offense, irrespective of how serious the offense is and irrespective of the quantum of punishment.

Similarly according to Section 10(7) If a court in India has convicted the passport holder under the Passports Act, or under any rules made thereunder he his passport can be confiscated.

In such cases, you cannot travel outside India to escape from law enforcement authorities, once your passport is confiscated. If you are outside India you cannot pass through immigration. You will not be treated as a citizen of India.

Extradition proceedings can be initiated against the person to bring him back to India and face the trail before Indian courts (these proceedings depends on extradition treaties between India and country in which person to be extradited has gone).

In the Kingfisher situation, Vijay Mallya had already left the country, hence in respect of him, extradition proceedings were initiated so that he could be extradited for trial to India from the UK.

  • Note: Indian passport is the property of Indian government (section 17). It cannot be canceled without the permission of the government of India. [section 10(2)] and no prosecution can be initiated against a person under this act without permission of Government of India (section 15).

Declaring Absconder

Directors may also be declared absconder by Indian courts under section 82 Criminal procedure code. If you do not appear before the courts even when the court has issued summons and warrants, courts may issue a proclamation under section 82 Cr.P.C. giving at least 30 days time to them to appear before the court and if they do not appear even after that, the court can declare you an absconder.

Attachment of offshore assets and properties through a letter of request (Letter Rogatory)

Investigating officer/agencies may have grounds to believe that some evidence is available in a foreign country regarding the matter. They may apply to the courts in India under Section 166A Criminal Procedure Code, to issue a letter of request to a court in a foreign country to collect evidence in the foreign country, either by examining a person in that foreign country or by asking for submission of necessary documents.

Such letter of request is sent by the criminal court to the High Court which in turn sends it to Ministry Of External Affairs/The International Police cooperation cell/Crime Investigation Department/Central Bureau of Investigation. Ministry or the such other agency to whom it is sent will sends it to its embassy in that foreign country or Foreign ministry of that country or Interpol or may apply directly to the legal authorities or police of that country (It will depend on the treaties of Indian government with the country in which such letter of request is to be sent). They send this letter to the competent court which after doing the needful forward all the evidence taken, statement recorded and documents taken in the same manner back to the court issuing letter of request. The detailed guidelines regarding Investigating abroad and issue of letter rogatory and also the procedure for extradition request and contact with foreign police and legal bodies are given in following guidelines issued by the central government of India: No. 25016/14/2007-Legal Cell, Government of India, Ministry of Home Affairs, Internal Security Division.

In this matter, such letter was sent to at least 6 countries where it is suspected that these directors have their properties.

This procedure exists so that you cannot merely acquire and park properties overseas under the assumption that Indian law enforcement authorities cannot reach you. Through the above process, such letters can be issued to find out your properties in other countries and seized.

Proceedings may be initiated by banks, against you under SARFAESI Act, The Recovery Of Debt Due To Banks And Financial Institutions Act,1993

If you do not pay your secured debts which are due to bank, on time, and your account converts to Non Performing Asset than an authorised officer of bank send you a demand notice under section 13(2) read with Rule 2(b) SARFAESI Act 2002, to discharge your debt within 60 days. If you will avoid its service then it may be served on you by affixing it at a conspicuous place of your house or business and publishing it in 2 newspaper circulating in your area.

You can make your representation and objections before the bank as per Section 13(3A) SARFAESI Act 2002, which will be adequately decided by the courts. If you fail to discharge your liability, the bank will take physical possession of your property with permission of Chief Judicial Magistrate/Chief Metropolitan Magistrate or District Magistrate under Section 14(1) SARFAESI Act 2002.

Now bank will initiate auction proceeding for your property under Rule 8 and will serve a 30 days notice of sale upon you. The minimum reserve price for your property will be determined and your property will be sold to the highest bidder. With your permission, it can be sold at a price lower than the minimum reserve price.

Once all the formalities of auction sale are complete, certificate of sale will be issued to the buyer and physical possession will be given to him. If the debts due to banks are not discharged fully even after this process, they may apply to Debt Recovery Tribunal for recovery of balance amount by selling your other properties as per Section 13(10) read with Rule 11 SARFAESI Act 2002.

If you do not pay your debts on time to the bank and your account converts into a Non Performing Asset, they may give a power of attorney to concerned official [Bank Manager (law)]to take steps under the act under Section 13(12) read with Rule 2(a) SARFAESI Act 2002, against you.

Such officer will send a demand notice to you under Section 13(2) read with Rule 2(b) and 3 SARFAESI Act 2002, asking you to discharge full of your liabilities within 60 days from the date of the notice. On your failure, they will be entitled to exercise any rights provided to them. Such notice can be sent by registered post or speed post or courier or e-mail to you by them. If you will avoid service of the notice, it shall be made by affixing the notice to a conspicuous part of your house/place of business and by publishing it in two newspapers which are circulated in your area. An individual notice must be sent to each borrower if there are more than one.

You can make representation and file your objections under Section 13(3A) SARFAESI Act 2002. Bank will have to suitably adjudicate and decide upon your objections. If you fail to discharge full of your liabilities within the time specified bank will issue notice for taking possession of your assets kept as securities with them under Section 13(4) and take its symbolic possession under Section 13(4) SARFAESI Act 2002. After this bank will file an application before the Chief Judicial Magistrate/Chief Metropolitan Magistrate or District Magistrate for taking actual possession of the property under Section 14(1) SARFAESI Act 2002 and comply with the orders given by them.

After the possession is taken by the bank, a notice (performa in Appendix IV) will be sent to you and will also be affixed on your property under Rule 8(1) SARFAESI Act 2002 and it will also be published in two leading newspapers within 7 days under rule 8(2). Name of the bank will be displayed on the property as per Rule 8(1). Bank will also arrange for insurance cover, deploy security guards at the site, get valuation of your property from an approved valuer, serve on you a 30 days notice for sale, obtain quotations/ invite tenders from public or hold an public auction of your property (public notice must be published by bank in 2 leading newspapers of the area where property to be sold is situated) under provisions of Rule 8.

As per Rule 9, the sale must be confirmed only to the highest bidder unless he fails to fulfill other conditions of the auction. Bank cannot sell your property at a price which is less than the reserved price without your consent. Which means that you can give consent to the bank to sell your property at a lesser price. Buyer will have to deposit at least 25% of the sale price immediately and remaining amount within 15 days from winning the auction bid. If the buyer fails to deposit the balance within 15 days, the amount already deposited will be forfeited and property will be auctioned. Such sale will be considered as effective from the date of sale deed. If the buyer fulfills all the conditions of sale, the bank will issue a certificate of sale in his favor.After all this process, the bank will transfer possession of your property to the buyer and will take an undertaking from him that he has taken physical possession of such property.

If the debts due to banks are not discharged fully even after this process, they may apply to Debt Recovery Tribunal for recovery of balance amount by selling your other properties as per Section 13(10) read with Rule 11 SARFAESI Act 2002.




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  2. criminalisation of civil disputes how far it effects to the separation between these two main streams? Because of this practice it easy to frame some for criminal strata like happened in stayzella case, the case still pending but incidents happened as per his wife’s blog indicates he had been targeted.


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