investigating agency
Image Source: http://sfio.nic.in/images/right1.jpg

In this article, Animesh Tiwary, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata gives a glimpse into the working of the Serious Fraud Investigation Office, an investigating agency for white collar crimes.

Introduction

Serious Fraud Investigation Office (SFIO),  has been formed under the Companies Act, 2013 to investigate serious fraudulent crimes committed by senior executives of large organizations (generally known as “white collar crimes”). It is a multi-disciplinary organization having requirement of experts from various fields such as corporate law, criminal law, banking, accounting, forensic audit, capital markets, taxation, etc. It was set up on the recommendation of a committee headed by Naresh Chandra, a former Cabinet Secretary on corporate governance in order to tackle serious crimes related to corporate financial fraud.

Historical Background

With the evolution of a corporate form of business organizations in India, especially in the late 20th century, the emphasis was now given more and more to the idea of corporate governance framework in the organization. This was done to streamline the functioning of a corporate organization, thereby, ensuring its good legal compliance and financial health. Various committees were constituted with the help of Securities and Exchange Board of India (SEBI), industry associations like Confederation of Indian Industries (CII) and Association Chambers of Commerce and Industry (ASSOCHAM) in order to recommend a standard corporate governance framework. One of the important committees was Naresh Chandra Committee formed in 2002 after instances like a failure of non-financial banking institutions, fraud in the stock market, falsification of books of account, etc. It proposed the formation of a statutory body in the form of SFIO on the lines of SFO in the UK, in order to investigate into all aspects of fraud and launch the prosecution in appropriate courts. However, the then central government did not find it necessary to create a separate statute for its working framework. According to some observers, this has affected the efficiency and effectiveness of SFIO negatively.

Need for SFIO

The sole purpose of the establishment of SFIO was the protection of the interest of investors as they are the ones who invest their money and bear actual risks. They may be regarded as the real owner of the company. However, the management of the company may be under the Board of Directors. These directors may commit fraud.

Recommendations of Naresh Chandra Committee

The committee suggested the formation of SFIO, inter-alia. Some of the recommendations made have been mentioned below: (Chandra, 2002)

  1. A Corporate Serious Fraud Office (CSFO) is needed to be set up under the Ministry of Corporate Affairs which would deal with corporate frauds. This body may comprise of experts on basis of transfer/deputation or term contract.
  2. Its duty will be multidisciplinary. It must be able to uncover fraud, direct and supervise its prosecution with the help of relevant agencies before appropriate courts.
  3. It should have a Task Force for each case under a designated team leader.
  4. A committee headed by a Cabinet Secretary should oversee the functioning of the office, appointments made and coordinate the work of various departments in order to maintain efficiency and control.
  5. A legislative framework must be set up later to enable CSFO to investigate all aspects of fraud and lead prosecution in appropriate forums. This can be done on the lines of SFO in the UK.

Improvements recommended by Shri Vepa Kamesam Committee

A committee under the chairmanship of Shri Vepa Kamesam, former Deputy Governor of RBI, was constituted in order to review the functioning of SFIO and suggest changes to make it more effective. The committee suggested certain administrative, statutory and organizational changes in its report on 29.04.2009. After this report, the SFIO attained a statutory recognition and various other changes related to the investigation of companies operating inside or outside the country and defining the term ‘fraud’ along with proposing the punishment for same was done in the new Companies Act of 2013. (Press Information Bureau, 2011)

Sections Related To SFIO Under Companies Act (2013)

Section 211 – Establishment of SFIO

SFIO is a multi-disciplinary organization having the primary task of investigating white-collar crimes in the companies. It has requirement of experts from various fields such as corporate law, criminal law, banking, accounting, forensic audit, capital markets, taxation, information technology, etc. It was established after receiving approval from the central government on 09.01.2003 under the jurisdiction of Ministry of Corporate Affairs.

It has its headquarters in New Delhi. However, it also has regional offices in Mumbai, Hyderabad, Kolkata and Chennai.

Section 212 – Investigation by SFIO

According to this section, any matter may be referred to SFIO by the Central Government if it is of the opinion that such investigation into affairs of the company is necessary on basis of:

  1. Where the Registrar of Companies or an inspector sends a report to the MCA under section 208 and further investigation into affairs of the company is necessary in such cases.
  2. Where the resolution passed by a company demands that such investigation needs to be performed.
  3. Where it appears to be in the greater public interest.
  4. Where there has been a request made by the Central Government or the State Government for the same.

However, there are some basic guidelines laid on which SFIO normally take up the cases:

  1. If the case is complex in nature and has inter-departmental and multi-disciplinary ramifications.
  2. If there is substantial involvement of public interest which may be measured either in terms of monetary misappropriation or number of persons affected,
  3. If there is a possibility that the investigation may lead to improvement in the system of law and procedure.

According to Section 212(2) of the Act, in case of the Central Government assigning a case to SFIO for investigation, no other investigating agency shall have the right to investigate in respect of any offence under the Act in such assigned case, irrespective of operating under the Central or State Government. Moreover, all existing cases will be transferred to SFIO.

Section 217 of the Act grants power of an inspector to the investigating officer of SFIO. Moreover, the officials and employees of the company, who are presently working or previously worked in the company, shall be responsible to provide all information, documents and assistance as required by the investigating officer. This section also prescribes the manner set forth by Ministry of Corporate Affairs in which the letter of request for investigation may be transmitted.

Companies (Inspection, Investigation and Inquiry) Rules, 2014 contains rules for the overall establishment, constitution, working of SFIO under the Companies Act 2013 for the inter-departmental investigation of white-collar crimes in the company. It came into force on 01.04.2014.

These rules contain provisions for appointment of experts having expertise in various fields such as cyber forensics, management accounting, financial accounting, cost accounting, etc. required for efficient working of SFIO. (TG Team, 2014)

Constitution Of SFIO

  • The SFIO is headed by a ‘director’ which must not be below the rank of a Joint Secretary to the Government of India having knowledge and experience in dealing with the matters relating to corporate affairs.
  • It may appoint experts from various fields such as corporate law, criminal law, banking, accounting, forensic audit, capital markets, taxation, information technology, etc. and other fields as may be required.

Terms and Conditions of service

The terms and condition of service of directors, inspectors or other employees of SFIO has been mentioned under Section 211(5) of the Act which states that terms and conditions of appointment of director, experts and other officials must be carried out as per recruitment rules notified by Government of India according to Article 309 of the Indian Constitution. Moreover, experts or professionals may be appointed on the contractual basis as may be approved by Ministry of Corporate Affairs. (Gorsia, 2017)

An applicant requesting for investigation through SFIO may be required to deposit some amount as security for payment of costs and expenses for investigation before the appointment of inspector by the government under Section 210(3). This amount is decided based on turnover as per previous year balance sheet.

  1. Turnover up to ₹ 50 crore – ₹ 10,000 as security
  2. Between ₹ 50 crore to ₹ 200 crore – ₹ 15,000 as security
  3. More than ₹ 200 crore – ₹25,000 as security

However, this amount is refundable in case the investigation results in prosecution.

Amendments introduced with respect to Power to Arrest of SFIO

Certain amendments were introduced by the Ministry of Corporate Affairs recently through a notification issued on 24.08.2017 in the form of Companies (Arrest in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 introduced under subsection (8) to (10) of Section 212 of the Companies Act in order to increase the working efficiency of SFIO. This notification lays down that in cases of other than government companies, an arrest can be made on basis of material information possessed by Director or Additional Director or Assistant Director of SFIO by a general or special order if he believes that the person under investigation is liable to be arrested under Section 212(6) and must inform the reason for the same to that person. Further, the Sections 212(9) and 212(10) lays down the procedure for making such an arrest. (Wadhera, 2017)

In case, the matter is involving a government or foreign company, such an arrest must be made with prior approval of Government of India and managing director of that company must be informed of such an arrest.

After the arrest, the procedure followed is similar to that of C.r.P.C i.e. producing the arrested person before a judicial or metropolitan magistrate within 24 hours of such arrest.

Conclusion  

Serious Fraud Investigation Office (SFIO) was formed in order to tackle such corporate cases which were complex in nature and involved a larger public interest. A need was felt for an agency which would be dedicated solely to solving complex white-collar cases such as ‘Satyam Computers’ case as it would have experts of various fields dealing with such cases more efficiently and effectively and could coordinate with other investigating agencies like CBI, SEBI and others. It was believed that establishment of SFIO under Companies Act would meet this purpose. However, looking into the records of SFIO, the situation has hardly improved. According to its website, most of the cases filed against companies are pending at various stages before different courts due to lengthy legal process. Moreover, SFIO has been constantly struggling from problems like insufficient manpower, delay in getting approvals and involvement of multiple agencies in some cases, thus, bringing down its overall efficiency. Therefore, there is a need to cater to these problems and ensure smooth functioning of this special investigation agency so that perpetrators of large corporate frauds can be prosecuted and investor’s, as well as public interest, can be protected.      

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