In this article, Pallav Gupta pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata gives a glimpse about the working of the SFIO.

Introduction

The financial scams and corporate frauds saw a huge rise after the liberalisation of the economy and it was time for the lawmakers to deter such frauds which were causing a loss of government and public money. It became necessary to re-evaluate and implement stringent provisions to tackle Corporate Fraud. The increasing rate of white-collar crimes required stiff penalties, exemplary punishments and effective enforcement of the law with the right spirit. Some of the examples of corporate frauds include Satyam scam, Sahara scam, Bofors scam, 2G spectrum scam and many more which are still sub-judice in the different courts of our country or are under the process of investigation by different agencies. 

Legal framework – Definition of Serious Fraud

The legislation in India which contains provisions with respect to corporate frauds is the Companies Act, 2013.

Section 447 of the Companies Act 2013, includes any concealment of any fact, omission, act or abuse of position committed by any person with the connivance in any manner, with intent to gain undue advantage from, or to injure its shareholders or the interests of the company or any other person, whether or not there is any wrongful gain or wrongful loss. A wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled whereas a wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled.

An act would amount to fraud when act committed by one party in a contract with any other party with an intention to dupe or deceive the other party to enter into that contract. The acts of the parties to the contract should amount to fraud which could potentially vitiate the contract. If a person has his own committed a fraud, then he will be punished. Here, person means himself or his agent. The acts which include fraud are concealment of facts or wrong suggestions or any fraudulent act to deceive other or false promises.

Serious Fraud Investigation Office (SFIO)

The Indian Government under Mr. Naresh Chandra (former cabinet secretary) set up a Committee on Corporate Governance. The Committee inter-alia recommended setting up of the Corporate Serious Fraud Office. Thereafter, considering the recommendation of the committee in the backdrop of the failure of non-banking companies resulting in a huge financial loss to the public, the Cabinet decided to set up a Serious Fraud Investigation Office (SFIO).

Consequent to the decisions of the Cabinet, the Central Government issued a resolution constituting this organisation in 2003. In continuation of the aforesaid Resolution, charter of Serious Fraud Investigation Office stated that the responsibilities and functions of the SFIO. It is a multi-disciplinary organisation consisting of experts in the field of, forensic auditing, accountancy, company law, information technology, law, investigation, taxation and capital market for prosecuting or recommending prosecuting or detecting any frauds or white collar crimes.

Functioning of SFIO

• The SFIO is to be headed a director who should not be below the rank of a Joint Secretary to the Government of India having expertise in dealing with the matters relating to company frauds.

• Central Government has the power to appoint other experts as members from those who have experience in the field of Corporate  Affairs, Banking, Taxation,  Capital Market, Forensic audit, law and Information Technology amongst other fields as required. 

The Act empowers the Central Government with the right to investigate the affairs of the company, especially in cases of an alleged fraud or even in the oppression of the minority shareholders.

When a case has already been assigned to the SFIO no other agency of the government has the authority to proceed to investigate an offence which is committed under this Act and the same is to be transferred to the SFIO. The company and its officers and employees, who are or have been in the employment of the company, shall be responsible to provide all information, explanation, documents and assistance to the investigating officer as he may require for the conduct of the investigation

Powers to Arrest

As per the notification by the Ministry of Corporate Affairs (MCA) in August 2017 powers of arrest have also been bestowed upon by the government. Although the powers of arrest have been made limited to the Director, Additional Director and Assistant Director who during the investigation of a serious fraud have a reason to believe that a person has committed an offence under Section 212, he may arrest shall person on the prior written approval of the Director of SFIO.

In a case of investigation of a foreign company or a government company, the Director has a reason to believe to arrest a person, a prior approval of the Central Government is necessary. When a person of a government company is to be arrested, the Managing Director or the person in charge of the affairs of that company is required to be intimated. In cases where a Managing Director/Head of state of affairs is to be arrested, the secretary of that administrative ministry is required to be intimated.

On completion of the investigation, SFIO has to submit the investigation report to the Central Government and the copy of the report shall be sent to any person who demands the same. On receipt of the report, the Govt. may direct the SFIO to initiate prosecution against the company, employees or officers or any person connected with the affairs of the company. 

Limitations Faced By SFIO

Despite giving so many powers by the Act, SFIO still has to face a lot of hurdles and challenges while performing their functions some of them are:-

• Measures not pre-emptive in nature
• Dependence on Central Government for accountability and intimation of an investigation.
• The inadequacy of resources and manpower.

Cases Investigated by SFIO

Satyam Scam

SFIO investigated the Satyam scam and had opined in their report that the directors of the organisation were not involved in the accounting fraud in the company. The SFIO had a 14,000-page report submitted to the government, marking the end of a three-month-long investigation. SFIO had investigated and interrogated the directors and opined that the fraud was done allegedly by the chairman and other top executives of the company. The Central Government after it was admitted by the chairman that there is a fraud of around 7,000crores at the company, probe by SFIO was ordered into the scam. The independent directors came under scanner when Satyam had said that the proposal of taking over two firms was taken unanimously, though the independent directors had given their disclosure before the SFIO that they had no knowledge of the same.

Deccan Chronicle Holding Ltd (DCHL)

This Hyderabad based company which owns two English daily newspapers namely Asian Age and Deccan Chronicle came under the scanner of SFIO which found it to be running in contravention of about 20 sections of The Companies Act which included those provisions having a punishment of imprisonment. The Deccan Chronicle later on registered with BIFR. But it did not the lenders to take action against the company.

Conclusion

The Act uses the term “person” which has not only extended the applicability of it to the directors, officers, employees but any other person who is into the affairs of a company. Under any other person, it includes consultants, advisors, auditors, independent directors or any key managerial person can be held liable if the said acts are done within their knowledge. The data of the SFIO shows that they have probed nearly 200 cases in the last few years and nearly 100 of the cases came under the scanner. Considering the latest scam in our country, the MCA has ordered 110 companies to be investigated through SFIO and some of the companies are also listed ones and linked to Mr.Nirav Modi and Mr.Mehul Choksi. Although it has been opined by many industry experts supporting the SFIO as an organisation acting as a watchdog for the Indian Corporate the Central Government itself does not take it seriously.